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Brown: Watch What Investors Do, Not What They Say

I'm going to let you in on a few little secrets about investor sentiment polls:

  • They're only consequential at extreme readings.
  • They're useless in the absence of other data.
  • They often conflict with other sentiment polls taken at the same exact time.

But by far the most important thing you need to understand when presented with sentiment studies is that people tend to answer these things in alignment with who they want to be rather than who they really are.

In polls, as in real life, the profligate spender wants to convince himself and others that he is miserly, the most reckless wish to outwardly convey a sense of prudence, and so on.

With that in mind, two articles that came out last week purport to give us a read on what the individual investor is up to at this juncture. They are highly contradictory, a textbook case of the investor class saying one thing and then doing another.

The first story, in Financial Advisor Magazine, concerns a recent survey from MFS Investment Management...

"In a recent survey of 613 people with at least $100,000 in investable assets, 89 percent said they were very concerned about another serious drop in the stock market and 54 percent said they will never feel comfortable investing in the stock market again."

More than half of investors with over 6 figures in investable assets say they'll never buy stocks again? I don't know about that, because the AAII Survey from this week indicates a 65 percent bullish ratio among the retail public.

More importantly, Morningstar's November fund flow data suggests a turning of the tide.

In an article at Registered Rep, we get evidence that investors are retreating from the bond fund mania en masse—inflows slowed from $21 billion in October to only $6 billion in November. The cash is now hitting money market funds ($24.7 billion in November). Investors have not begun purchasing stock funds just yet, but they've stopped selling them; can net inflows be that far behind?

"Although equity outflows continued in November, they were not as negative as they have been. During the month, $4 billion was pulled from U.S. stock funds, compared to $6.3 billion in redemption's in October and $16.3 billion in September."

I believe that December and January may turn out to be watershed months as bond fund flows could turn negative for the first time in, well, forever.

Meanwhile, equity fund flows may turn neutral or even bullish. We won't know how this actually plays out for a few weeks but from my conversations with investors and the action on my monitors, I think I'm on the money.

While investors tell surveyors that they are scared of stocks and will never own them again, the data tells us that they are in denial at best, disingenuous at worst.

In truth, retail investors have ceased liquidating stock mutual funds and within the next few months, may even become net buyers.

Watch what they do, not what they say.

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Joshua Brown is a New York City-based financial advisor at Fusion Analytics and the author of The Reformed Broker blog. The opinions he expresses are his own and do not constitute an invitation to buy or sell any securities.