May 16, 2022

It’s Over: Why Investors Are Screwed

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RETAIL INVESTORS:
During the 20-year timeframe where REITS Oil, and the SP500 averaged an almost 10% return…the retail investor…BARELY managed to outperform inflation…at 2.5%. It’s largely summarized that most retail investors are prone to jumping in at peak hype, selling as soon as they’ve lost money, and the repeating the process over and over again…while, proceeding to lose a lot of money.

SURPRISINGLY…Bank of America responded to that by saying: “S&P 500 returns following period of retail inflows have been above-average and return post-retail selling have been below average, with retail flows a slightly better positive indicator than hedge fund flows”…or, in other words…retail investing is typically followed by a HIGHER RETURN…so, what gives…and, is that true?

Well…in the short term…their study food that – YES, retail investors are better than hedge funds for signaling an increase over the following 4 weeks, with an average return of 0.35% during that timeframe…but, here’s where things get even more interesting: If you REALLY want to try to predict market returns – look at INSTITUTIONAL INVESTORS….who sees a 1.3% increase in the following 4 weeks after buying in.

However, when it comes to INSTITUTIONAL BUYING, research at the University of Chicago uncovered that – throughout 783 portfolios – even though they usually have GREAT TIMING when they buy…their SELLING DECISIONS UNDERPERFORM, SUBSTANTIALLY… or, in other words: They’re REALLY GOOD at BUYING…but, REALLY BAD at picking the right time to sell…leading them to an 80 basis point LOWER RETURN than had they just sold at random, instead
https://www.nber.org/system/files/working_papers/w29076/w29076.pdf

From everything I could find, the BEST indicator simply seems to be: TOTAL INVESTOR SENTIMENT, in which – historically – high investor sentiment predicts low future returns and vice versa…suggesting that, in this case, we could very well be positioned for stronger growth over the next few years.

Unless, you’re supposed to do the opposite of that…

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