Fear is your friend when the market seems low, but also when it is up, like now, and seems too high for so many people.
Fund managers of all types, for example, are at their most pessimistic since the financial crisis, a recent survey showed.
But as Warren Buffett famously preached: Be fearful when others are greedy – and greedy when others are fearful.
Such fear is ironic as stocks just hit all-time highs this week. That means the Bank of America’s fund manager survey is merely one sign of today’s rampant fear. And the American Association of Individual Investors’ weekly survey showed less than 30% of retail investors think stocks will rise over the next six months. At the same time, investor sentiment and economic confidence gauges across Europe are tanking. Headlines echo these fears, driving folks to yank money from stock mutual funds and ETFs in four of the prior six weeks through mid-June.
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Sour sentiment is bullish. Why? Markets pre-price widely known information – fears, opinions, forecasts and more. When you see headlines warning of tariffs, Brexit, Iran, or Europe’s allegedly imploding economy, understand that stocks already considered them.
Anything less bad is a positive surprise, hence bullish. Consider this bull market’s March 2009 birth. Folks feared a new Great Depression. The recession we got was big and bad, but not that big. Stocks rose while the economy fell. U.S. stocks jumped 72.3% in the bull’s first 12 months.
Consider today’s big fears like Iran’s threats to close the Strait of Hormuz and choke oil supply. Investors’ dread is priced in now. Anything tamer brings relief. Tamer is likely, because of ample global supply and the fact that Iran can’t really block the strait. Tankers have been attacked in years past, which wasn’t good – but it was no economic crisis either.
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What about European economic fears? A slow-growing economy with weak manufacturing beats recession. Bullish!
How about Brexit? By now, any darned development on that front beats expectations. As for tariffs, have you noticed, as I predicted here last August in great detail, that tariffs only take a nibble from global output, rather than cause the much-feared recession? It’s another pre-priced fear. Again, bullish.
I’ve often said bull markets end one of two ways: One, atop the legendary “wall of worry” as euphoria makes positive surprise essentially unattainable. Or the wallop – a multi-trillion dollar negative shock. The 2007-09 financial crisis was a wallop. But every other post-WWII bull market ended in euphoria. That matches Sir John Templeton’s legendary framework: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” Absent a wallop, bull markets end when investors tire of worrying.
We’re nowhere near that today. Stocks still have a big wall of worry to climb. At a true euphoric peak, sentiment surveys boast optimism. Money pours into stock mutual funds and ETFs. Headlines cite as many opportunities as risks. The investment world will ridicule the bears, not the bulls. You’ll fear missing gains more than fear suffering losses. If I write that bad times loom, you’ll call me crazy.
Sentiment isn’t a timing tool, of course. Euphoria is more like a dimmer switch than an on-off switch. To see euphoria correctly when it comes, you must think differently than others do. Instead of letting widespread fears send you scampering, envision what they say about sentiment broadly. When you see people excited to own stocks and dismissing risks, then start thinking about your exit.
Today, they do the opposite. Their fear is your future fortune.
Ken Fisher is founder and executive chairman of Fisher Investments, author of 11 books, four of which were New York Times bestsellers, and is No. 200 on the Forbes 400 list of richest Americans. Follow him on Twitter: @KennethLFisher
The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.