360° Coverage : Investor Expectations Also Need Tapering As We Enter 2014

2 Updates

Investor Expectations Also Need Tapering As We Enter 2014

Dec 28 2013, 12:08am CST | by

Psychologists say much of the reason investors have such a dismal record of buying high and selling low, of being excited and buying enthusiastically at market tops and then bailing out in disgust...

Filed under: news

 
 
 

37 weeks ago

Investor Expectations Also Need Tapering As We Enter 2014

Dec 28 2013, 12:08am CST | by

Psychologists say much of the reason investors have such a dismal record of buying high and selling low, of being excited and buying enthusiastically at market tops and then bailing out in disgust at market bottoms, can be explained by the ‘recency bias’ of the human brain.

That is we expect whatever happened most recently to continue, even though facts tell us it is unlikely. When a severe hurricane strikes in an area where such catastrophes are rare, even though experts describe it as a once in a hundred year event, we strengthen our preparedness on expectation of more such storms the next year. When those health warnings we had a month ago recede we forget about seeing a doctor since more recent experience is not alarming. When the stock market has been going up for several years, that recency has us forget the longer-term memory of severe declines.

Warren Buffett explained recency bias in investing in his warning in 1999 that the market was near a serious top saying, “Investors project out into the future what they have most recently been seeing. That is their unshakable habit, looking in the rear-view mirror instead of through the windshield.”

In 1999, they were looking back at the powerful bull market of the late 1990’s and projecting it to continue endlessly into the future. Instead, the severe 2000-2002 bear market took place, which those like Buffett who were looking through the windshield saw coming. After the bear market ended, it was still the scene in the rear view mirror for quite some time. And with fear having replaced greed, investors then extended its trend endlessly into the future even though the 2002-2007 bull market was underway.

Currently, seeing the wonderfully one-directional market of 2013 in the rear view mirror, and the five-year bull market beyond that, investors are obviously extending those trends in a straight line into the future.

Investor sentiment as measured by the Investors Intelligence poll of newsletter writers is at 59.6% bullish and 14.3% bearish. That spread between bulls and bears is an extreme ratio often seen near serious market tops.

This week’s poll of its members by the American Association of Individual Investors (AAII) shows investors are 55.1% bullish, only 18.5% bearish, and have 64% of their portfolios in stocks, just below the 69% stock allocation reached near the 2007 market peak.

The respected Ned Davis Research Crowd Sentiment Poll, a proprietary composite of numerous sentiment surveys, recently broke out above 70. That rivals some of its extreme readings of the past, and has Ned Davis Research Inc. expecting a 20% market decline sometime in the next 12 months.

Investors need to keep recency bias in mind as we enter 2014, since what is showing up through the windshield may be at odds now with the scene in the rear view mirror.

For instance, for the past five years the Federal Reserve has continuously increased its monetary QE stimulus. Beginning next month it will reverse the process to continuously decrease its stimulus.

For five years Washington has increased its fiscal stimulus, running the national debt into record territory in order to provide more spending, more support for the unemployed, more incentives for businesses to expand.

Washington is now also reversing that process. An estimated 1.3 million Americans will lose unemployment benefits Saturday when that emergency relief program expires. At the same time, the accelerated depreciation program that has allowed businesses to depreciate 50% to 100% of the cost of equipment purchases in the year of purchase rather than over 20 years, will expire.

Meanwhile, the additional market spike of the last year has stocks much closer to, if not already at, over-valuation levels. The average lifespan of the 11 bull markets since 1950 was 53 months. The current bull market is now 57 months old.

None of these observations, differing markedly through the windshield from what is seen in the rear view mirror, constitute sell signals. Nor can they predict when a market might top out.

But they do indicate the changed risk as we enter 2014, and how the ‘recency bias’ that has investors so enthralled now may become a problem.

Sy is president of StreetSmartReport.com and editor of the free market blog Street Smart Post. Follow him on twitter @streetsmartpost. He was the Timer Digest #1 Gold Timer for 2012 (Gold Timer of the Year), as well as the #2 Long-Term Stock Market Timer.

Source: Forbes Business

 
Update
2

2 weeks ago

Khazanah throws MAS RM6b lifeline

Aug 29 2014 5:01pm CDT | Source: Business Times Singapore

August 30, 2014 1:15 AMKHAZANAH Nasional will inject RM6 billion (SS$2.4 billion) over three years to resuscitate loss-making Malaysia Airlines (MAS) under a recovery plan that includes even an Act of Parliament. Other key moves are migrating its operations, assets and liabilities to a new company (NewCo) and slashing the workforce of 20,000 by 30 pe ...
Source: Business Times Singapore   Full article at: Business Times Singapore
 

 
Update
1

2 weeks ago

MAS posts loss of RM307m for Q2

Aug 28 2014 5:00pm CDT | Source: Business Times Singapore

August 29, 2014 1:13 AMMALAYSIA Airlines (MAS) registered a loss of RM307 million (S$122 million) for the second quarter to end-June, but warned of worse to come in the second half when the "full financial impact of the double tragedies of MH370 and MH17 ...
Source: Business Times Singapore   Full article at: Business Times Singapore
 

 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

Medical irregularities found in Joan Rivers' death: Report
Los Angeles, Sep 17 (IANS/EFE) The personal doctor of Joan Rivers is being investigated for the death of the popular American comedian and television host who died a week after undergoing a minor throat operation.
 
 
Ukraine unveils roadmap to implement EU deal
Kiev, Sep 17 (IANS) The Ukrainian government has approved a plan to implement the Association Agreement with the European Union (EU), Ukrainian Prime Minister Arseny Yatsenyuk said Wednesday.
 
 
Shun pills, try sex to get relief from migraine
London, Sep 17 (IANS) Got a throbbing or pulsing sensation in one area of the head? Forget pills and go between the sheets to relieve migraine symptoms.
 
 
Can another drink relieve you from a hangover?
London, Sep 17 (IANS) Is "hair of the dog" the best cure for hangover? According to a renowned author and journalist, another drink is the way to get rid of those forgetful morning episodes of a dry mouth, headaches, nausea and lethargy.
 
 
 

Latest from the Network

Syrian army gains ground against IS
Damascus, Sep 17 (IANS) The Syrian army has gained ground against the Islamic State (IS) terrorist group after launching intensive air and ground attacks in al-Ghouta, the eastern countryside of capital Damascus, a...
Read more on Politics Balla
 
'Zero tolerance for sexual harassment at Asiad'
Incheon, Sep 17 (IANS) The Olympic Council of Asia (OCA) Wednesday issued a zero tolerance policy for any cases of sexual harassment, if and when they come up at the Asian Games to be held here from Sep 19 to Oct 4....
Read more on Sport Balla
 
Jackie Chan's son formally arrested on drugs charge
Beijing, Sep 17 (IANS) Jaycee Chan, son of Chinese kung fu star Jackie Chan, was formally arrested in Beijing Wednesday following a drugs bust on his residence in the capital. The arrest was approved by Beijing's...
Read more on Celebrity Balla
 
Medical irregularities found in Joan Rivers' death: Report
Los Angeles, Sep 17 (IANS/EFE) The personal doctor of Joan Rivers is being investigated for the death of the popular American comedian and television host who died a week after undergoing a minor throat operation....
Read more on Celebrity Balla
 
17th Asian Games torch arrives in Incheon
Incheon (South Korea), Sep 17 (IANS) The torch that will be used to light the main cauldron at the opening ceremony of the 2014 Asian Games arrived here Wednesday. After a 36-day torch relay throughout South Korea,...
Read more on Sport Balla
 
First meeting of Nepal-India boundary group begins
Kathmandu, Sep 17 (IANS) The first meeting of the Nepal-India Boundary Working Group (BWG) commenced Wednesday in Kathmandu. The BWG was constituted this year to undertake field work related to finalising the Nepal-...
Read more on Politics Balla
 
Ukraine unveils roadmap to implement EU deal
Kiev, Sep 17 (IANS) The Ukrainian government has approved a plan to implement the Association Agreement with the European Union (EU), Ukrainian Prime Minister Arseny Yatsenyuk said Wednesday. "The agreement must be...
Read more on Politics Balla
 
ICC World Cup trophy arrives in Pakistan
Dubai, Sep 17 (IANS) The ICC World Cup trophy arrived in Lahore as part of its visit to countries which will compete in next year's extravaganza to be staged in Australia and New Zealand from Feb 14 to Mar 29....
Read more on Sport Balla
 
Sino-Indian cooperation invaluable: Chinese daily
Beijing, Sep 17 (IANS) The India-China relationship is of enormous strategic value, one that cannot be replaced by other bilateral ties, a leading English daily of China said ahead of Chinese President Xi Jinping's...
Read more on Politics Balla
 
Shun pills, try sex to get relief from migraine
London, Sep 17 (IANS) Got a throbbing or pulsing sensation in one area of the head? Forget pills and go between the sheets to relieve migraine symptoms. In a recent survey by German researchers, 60 percent of those...
Read more on Apple Balla