Tuesday, September 28, 2010

Confidence remains low, and that's good for investors


The September reading from this measure of confidence fell, and that spooked the market temporarily this mornign. In my view, this is old news, and it simply validates what I have been saying for a long time: the market is priced to very pessimistic assumptions. Optimism is hard to come by, and consumers especially are still quite concerned about what's going on in Washington and the lack of a meaningful recovery. But when the majority of people are very worried, that gives optimists some attractive odds to bet against the prevailing mood. If there is just a little bit of improvement going forward, this could be good for prices of risky assets. Investors should worry when confidence is high, as it was before every recession in the past.

3 comments:

brodero said...

“Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” – Sir John Templeton

I know one thing we sure haven't
hit euphoria....

John said...

Bro,

It is an interesting puzzle as to where we are in the investment sentiment cycle. I think it would make a good post topic for Scott.

Don said...

Scott,
I mentioned in a comment some weeks ago that I thought this was perhaps the best investment climate I have seen in 25 years. An important contributing factor to that view is the overall sense of pessimism among the investor class. I don't think that typical sentiment indicators are a particularly accurate measure of the profound sense or fear and hopelessness out there among potential investors. Traditional sentiment surveys gauge only the views of either possessional investors or active individual punters like myself. My theory is that investors have abandoned markets in a meaningful way just as they did in the mid-late seventies. The flow of funds back into stocks didn't turn positive until the very end of the 1980s. My mentor was a follow named I.W."Tubby"Burnham. Tubby used to tell us that the easiest money was always made in the dark when no one was looking. As long as potential investors stay away from the markets that markets will offer opportunities.

Don