Individual Investors Remain Perfect Contrary Indicators
Originally published on TheStreet’s Real Money Pro…
Courtesy of Dr. Paul Price at Beating Buffett
The actions of Private Clients at brokerage giant Merrill Lynch can serve as a good proxy for America’s high net worth, individual account holders. This year the net buying and selling of equities by Merrill’s ‘Mom and Pop’ accounts showed just how terrible their decisions have been in terms of market timing.
After a big January rally individuals became big net buyers of stocks. Their buying persisted from February through May. That occurred as shares were getting significantly more expensive.
Stocks were headed for a nasty two-month plunge.
As the public was piling in, professional traders were exiting.
Individuals then sold into weakness. The sales continued until the broad market turned upwards again in August. Private traders once again began adding to holdings as prices headed towards yet another seven-week, sharp decline. (Chart via The Reformed Broker)
Superimposing the two periods when private clients were enthusiastic stock buyers over the SPY chart illustrates my point.
Their timing could not have been much worse. Typical traders buy into strength and sell into weakness. They are usually late to the party. Often they leave just before the real fun starts.
Over the last four weeks professionals bought a net $315 million through Merrill Lynch while private money (ML client accounts) dumped a net $920 million of their holdings.
The media-induced fear of another debt-ceiling-crisis type sell-off precipitated a one week net sale of $1.4 billion in stocks by individuals. The equity holdings of private clients literally, “fell off a cliff” (pun intended) just in time to miss the recent, very profitable, rally.
Hedge funds were more than happy to buy what individual investors were unloading last week.
You can avoid being a bad example by making your buy/sell decisions based on valuation, rather than momentum. P/Es are favorable (low) and yields are better (higher) when the markets are down.
Train yourself to ignore the news. Buy only when getting good value for your money. Your bottom line will thank you.
