In the mid-1980s I noticed that many portfolio managers, like myself, said they were bullish but were not managing their portfolios that way. That’s because the previous ten years or so had been so bad that one just could not imagine they were really over. Thus portfolio managers and other investors said one thing while doing another. You can understand why. When I graduated from college in 1973, the Dow broke 1,000 for the first time. Ten years later, the Dow was 740, and this did not include an adjustment for inflation, which was horrible in the period.
Now I notice that portfolio managers and other investors say they are bearish about stocks. In the often backwards and upside down world of stock investing, such bearish sentiment is often taken as a positive. How’s that? If investors are already negative, they cannot turn that way. So, presto, bad is good. But are portfolio managers really acting out of bearish sentiment right now? I’m not so sure. It could be the mirror image of the mid-1980s phenomenon. That’s because the last 25 or so years have been so good for stock investing that people don’t really believe they could be over. Just in the last seven years stocks are up almost 200%. Any paring back of stocks has been punished with bad stock performance. The human inclination is to drag your feet and wait for more confirmation.
The lesson is to take sentiment indicators with a large grain of salt, because they may indicate what people are thinking and saying at the current time, but not what they are doing.