"Water shapes its course according to the nature of the ground over which it flows; the soldier works out his victory in relation to the foe whom he is facing. Therefore, just as water retains no constant shape, so in warfare there are no constant conditions."
Sun Tzu

Sunday, February 3, 2013

What If Individual Investors Are Actually Not That Dumb?

Results of the AAII sentiment survey are often taken as a contrarian signal: if individual investors get too bullish, stocks should decline. Interpreting AAII results is not that straight forward, though.

In fact, data of the last years even suggests that individual investors might be not that dumb. Major tops were preceded by a drop in sentiment in 2011 and 2012, so individuals as a group acted quite smart. Also note that sentiment remained quite elevated in 2010 for several months.
Therefore, the latest bullish readings itself should not be cause for concern: