Showing posts with label herd. Show all posts
Showing posts with label herd. Show all posts

Saturday 30 June 2012

The 10 Mistakes Investors Most Commonly Make

All investors make mistakes. Otherwise, we'd all be millionaires. The trick is figuring out what our investing mistakes are -- and then trying to avoid them.

Meir Statman, one of the nation's leading experts in behavioral finance (the study of why people do irrational things with their money), has written a new book on the topic. In What Investors Really Want, published in October by McGraw-Hill, Statman goes a long way toward helping investors understand that many of their mistakes are caused by their own deep-seated emotions rather than, say, a company's unexpectedly poor earnings. 

In an interview with DailyFinance, Statman, a professor of finance at Santa Clara University in California, shared his top 10 errors that trip up average investors:

Meir Statman: What Investors Really Want1. Hindsight error. "One of the most pernicious mistakes," Statman says. Because you can see the past clearly, you think you have a similar ability to tell the future. Hindsight error is common at the moment, Statman says, because many people are convinced they saw the crash coming in 2007. In reality, they may have thought a crash was possible, but they also thought the market might continue to zoom upward. Now, investors are convinced they actually saw the problem in 2007 but just didn't act on it. So, they believe wrongly that they can act correctly today. They think they know to sell at the precise moment the market is high and buy when the market is low. Based on their hindsight of 2007, portfolio diversification doesn't protect you from losses. But market timing rarely works, Statman says.

2. Unrealistic optimism. This is loosely related to overconfidence. Psychological studies have shown that when you ask people if they think they have the ability to pick stocks that will have above-average returns, men tend to say yes more often than women. "It's not because men are so smart. It's because men are unrealistically optimistic about their abilities," Statman says. This quality is great for job interviews, where you need to stand out from a crowd, but lousy for investing. "When you are unreasonably optimistic in the stock market, you are just readying yourself for an accident," he says.

3. Extrapolation errors. People expect that trends that existed in the recent past will continue in the future. For example, the fact that gold has gone up for the last 10 years has led many to believe it will always go up. But a study of a longer period -- going back to 1971 when President Richard Nixon ended the gold standard -- shows that gold hit a high of $850 an ounce in 1980 but was selling for $345 as long as 10 years later.

4. Framing errors. Often, Statman says, investing is like a game of tennis. People tend to see themselves hitting a ball against a wall, which seems easy. But that's the wrong frame. Investing is really like playing against another player -- when the other player is Warren Buffett or Goldman Sachs. Investors make framing errors when they see a CEO on TV talking up his stock. If it sounds good and you buy that stock, that's a framing error. Instead, you should be asking yourself: "Who else is watching this program, and what do I know that is uniquely mine?" "The answer is nothing," Statman says.

5. Availability errors. This refers to what information is available in your memory. Investors are often lulled into this error by investment companies. When you see an advertisement for a fund, it's almost invariably for one that has a four- or five-star rating from Morningstar. That way, the one- and two-star funds, with lackluster results, aren't available in your memory. "You say to yourself that there's a 90% chance I will be a winner," Statman says. Instead, look at results of entire fund families -- including the losers, not just the winning funds for a particular period, he says.

6. Confirmation errors. Investors tend to look for information that confirms their hypothesis, but they disregard evidence that contradicts it. Gold bugs, for example, constantly remind us that gold is a good hedge against inflation and a declining dollar. But when confronted with the evidence that gold actually fell price for an entire decade, they dismiss that as a different era because Ronald Reagan changed the rules of the investing game, and that problem won't be repeated.

7. Illusion of control. This is a sense investors have that they can make the market go up or down. It's like gamblers blowing on their dice before rolling. "These investors think they're riding the tiger, when in fact they're holding the tiger by the tail," Statman says. If you think you have a trick that can get the market to go your way, you better think twice: This is the illusion of control. "When you realize the market is actually a wild beast that can devour you, you try to put it in a cage," he says. A much safer approach.

8. Anger. This is an emotion we all know: It leads to things like road rage. In investing, you try to get even with the market. You do such things as double down or even sell all your stocks impulsively. "If you feel angry, it's better to wait 10 days before buying or selling, or you'll regret it later on," Statman says,

9. Fear. The other side of exuberance. When you're afraid, everything looks like a threat, and when you're exuberant, everything looks like an opportunity. Lots of investors are still afraid because of the market crash two years ago. They're sitting on the sidelines in cash earning no return or investing in things like Treasury bills, which aren't much of a bargain. "Risk and return go together," Statman says. "So, if you think the market is risky today, then you should also think the market has a good potential for high returns."

10. Affinity of groups. Also known as herding. You hear from your pediatrician that he's buying gold, so you think you should, too. But what do these people really know? What is the analysis based on? Statman notes that some herds are worth joining and some aren't. Many investors follow Warren Buffett's investment decisions and buy similar stocks. Since Buffett is usually a winner, perhaps that's a herd worth joining. But buying Internet stocks in 1999 or houses in 2005 based on what everyone else was doing was a horrible mistake.

Statman makes no grand conclusions in his book, but he does point out repeatedly that the average investor can rarely beat the market. Therefore, he recommends small investors put their money in index funds that provide average, if not spectacular returns -- and not catastrophic losses

"But if you like the pizazz of investing," he says, you might take a shot on individual stocks. Just be careful. 



Saturday 18 February 2012

Stay in Touch wi th the Market


Some investors buy and hold for the long term, stashing their securities in the proverbial vault for years.  While such a strategy may have made sense at some time in the past, it seems misguided today.  

  • This is because the financial markets are prolific creators of investment opportunities.  
  • Investors who are out of touch with the markets will find it difficult to be in touch with buying and selling opportunities regularly created by the markets.  
  • Today with so many market participants having little or no fundamental knowledge of the businesses their investments represent, opportunities to buy and sell seem to present themselves at a rapid pace.  
  • Given the geopolitical and macroeconomic uncertainties we face in the early 1990s and are likely to continue to face in the future, why would abstaining from trading be better than periodically reviewing one's holdings?


Being in touch with the market does pose dangers, however.

  • Investors can become obsessed, for example, with every market uptick and downtick and eventually succumb to short-term-oriented trading.  
  • There is a tendency to be swayed by recent market action, going with the herd rather than against it.  
Investors unable to resist such impulses should probably not stay in close touch with the market, they would be well advised to turn their investable assets over to a financial professional.

Another hazard of proximity to the market is exposure to stockbrokers.

  • Brokers can be a source of market information, trading ideas, and even useful investment research.  
  • Many, however, are in business primarily for the next trade.  
Investors may choose to listen to the advice of brokers but should certainly confirm everything that they say.  Never base a portfolio decision solely on a broker's advice, and always feel free to say no.


Saturday 13 November 2010

Herd mentality costs investors dear



Herd mentality costs investors dear
Thousands of investors have missed out on the recent FTSE gains because they shunned equities.



Investors that follow the herd lose out 
Investors' habit of following the herd has cost them hundreds of millions of pounds in lost returns as the FTSE 100 continues to climb.
The blue chip index has returned more than 50pc over the past 20 months. Yet hundreds of thousands of investors will have missed out on those gains because they were busily withdrawing money from equity funds as the market fell.
Go back to the start of 2009 and investor confidence was at an all-time low after the banking crisis. The FTSE 100 had fallen sharply and investors sought sanctuary in bond funds and absolute return funds (which aim to deliver positive returns in falling markets). During the first three months of 2009 net sales of corporate bonds were £4bn, compared with just £200m in equities, official figures reveal.
The timing of their run to safety couldn't have been worse. Since January 2009 the FTSE 100 has risen by 52pc – by comparison, the average corporate bond fund has returned 28pc, the average absolute return fund 9pc and the average cautious managed fund (another big seller) 23pc. The bestselling absolute return fund, BlackRock Absolute Alpha, is up by just 4pc – it is not designed to deliver bumper returns in a bull run.
Alan Steel of Alan Steel Asset Management asked: "Why is it the herd always piles into the wrong sector or investment at the wrong time?" One reason for a herd approach is that investors follow performance and this frequently sees them buy at the top of the market and sell at the bottom.
In 2000, for example, investors waded into technology funds when they should have been avoiding the sector. Those who bought at the peak soon saw the value of funds more than halve.
The 2006 commercial property phenomenon was another classic example. Many investors bought the funds as valuations reached unsustainable heights; the ensuing credit crisis triggered sharp falls in fund values.
Mr Steel said contrarian investors were often mocked, even though they can be proved right. "In February 2009 I suggested that stock markets were likely to rise imminently. I received comments from people who, anonymously, suggested I should be locked up or burned at the stake," he said.
"As doomsters on the telly continue the constant bad news with predictions that never come true, such as the double dip that's supposed to happen or the British economy that's supposed to collapse, I think it is better to share what's actually happened since the terrible days early in 2009. And it's good news."
Mr Steel is feeling smug with some justification, as the funds he recommended have soared. Neptune Russia and Greater Russia are up by 150pc, First State's Global Emerging Market fund has risen by 140pc, J P Morgan Natural Resources is up by 120pc and M & G Global Basics by 80pc, he says.
So what now? Investors will be chewing the cud, wondering whether they are at risk of buying shares at the wrong time again, given the FTSE 100's lofty rise to a 28-month high.
Mr Steel said he was expecting a correction, but insisted that investors should not avoid buying shares for fear of a setback. "We've been hoping for a little correction just to get a bit of common sense back into expectations for equities and it may still happen over the next couple of weeks. But we believe this is a time to embrace equities, not only in emerging markets and the Far East but in other places including Britain and the US," he said.
John Chatfeild-Roberts of Jupiter said the easy money made off the back of bombed-out shares had been made. But he believes that, as long as investors are selective about the shares and funds they buy, equities are still the asset of choice. UK funds he owns are Fidelity Special Situations, Invesco Perpetual Income, M & G Recovery and Jupiter Special Situations. "Government bonds are unlikely to provide a real return in the medium term, but many of the blue chips have not taken part in the rally and remain cheap," he said.
With clouds still hovering over the British economy, FTSE stocks that derive a significant chunk of their earnings from overseas have also been getting attention from fund managers.
"We are keen on UK companies with overseas exposure and the ability to raise profit margins from current levels," said Colin McLean at SVM. "British industrial companies such as IMI and Croda are still underrated relative to international peers, and could attract bids. Other leading global brands listed in the UK include British Airways and Burberry."
He added: "The risks in the stock market are in businesses more exposed to the British economy; consumer sectors and banks. Investors should focus on assets that have some protection against a weak pound and a sluggish UK economy."
Robert Burdett of Thames River agreed that the easy money in the UK had been made, but he still believes that shares offer good value and are cheap relative to most other asset classes. "Over a five-year-plus view I would not hesitate in putting equities first above bonds, property and other major assets," he said. Mr Burdett's favoured UK funds include Standard Life UK Opportunities, JOHCM UK Growth and Artemis UK Special Situations.
Many advisers reckon that UK equity income funds, which have not fared as well in the past three years, are also worth considering. Dividends are making a comeback after a disastrous two years and could be a useful contrarian bet.
Adrian Lowcock of Bestinvest said: "With stock markets reaching recent highs, a long-term approach to investing would be through companies with good cash flow, many of which pay good dividends. This is a long-term investment strategy and will provide some short-term protection should markets retreat.

Tuesday 17 August 2010

Classic example of herd mentality: Buying into small and micro-cap companies just because they have rallied on the bourses.

Ignore the herd, be your own master



Nikhil Walavalkar, ET Bureau

A teacher once asked a student, “If there are 10 sheep in a field and one escapes through a hole in the fence, how many are left?” Student answers, “None.” When the teacher berated the student for his poor maths, the student replied, “I know my maths, but you do not know about sheep.”

Some investors find it difficult to invest gainfully in equities because of behavioural issues. Here are some of the factors that investors should be careful about while investing in equities.

Herd mentality



Herd mentality means the sheep-like tendency to mimic others. “ Herd mentality can adversely impact an individual. When there is a scarcity of resources, it can be fatal,” says Om Ahuja, head – wealth management & strategy, Emkay Global Financial Services.

Most of the time, it leads to bad investment decisions as an individual ends up buying something unsuitable for his needs. Buying into small and micro-cap companies just because they have rallied on the bourses is a classic example of herd mentality. In most cases, followers fail to notice a change in the trend and incur losses. Unfortunately, blind followers return when they spot a herd to follow.

One can look at this from another angle. People tend to purchase a financial product when they get a call from a distributor who also tells that your best friend or neighbour has also bought it.

Anchoring



We tend to value our assets using certain reference points which may have no relevance to the present market condition. For instance, many assume that when a stock hits a 52-week high, it is time to book profits. Since listing, HDFC has hit 52-week highs several times.

Had you sold because the stock has hit a 52-week high, you would have lost heavily on opportunity. “The price point that an investor gets anchored to is the cost price, and if the stock goes down and the investor does not book loss, he aggravates his loss,” says Jayant Pai, vice-president, Parag Parikh Financial Advisory Services.

A similar example of anchoring can be seen in other day-to-day decisions like sales. Buyers may travel an hour to throng a sale offering 50% discount, even if the value of the purchase is a few hundred rupees, but he may ignore a 0.5% discount on something that costs tens of thousands of rupees.

Overweighing what can be counted



Albert Einstein got it right when he remarked, “Not everything that counts can be counted and not everything that can be counted, counts.” Many a time investors come across a stock that seems to be ignored by market forces. Such stocks represent a business with sustained rise in profits, return ratios higher than industry norms and a fantastic looking business model. For years the market has not given the stock its due and it quotes at bizarre valuations.

In heady markets such as the one we are living in, such hidden gems come forth and naive investors fall for them. Barring stray instances, they land on the wrong side. The reasons remain in the not measurable segment of analysis.

Endowment effect



It is the ‘endowment effect’ that blindfolds many investors when the stocks they hold start their downward journey. Individuals believe that the things they own are worth more than their real worth. Investors are no different. The stocks owned by them are seen to be more valuable than their actual worth. Investors find reasons to substantiate why they bought a stock and why they were holding on to a particular stock.

Theme junkies

To a man with a hammer, everything looks like a nail. When investors have only one idea, it can be a very dangerous situation. Especially, if the idea is a borrowed one, it can be fatal. When investors hear themes such as ‘India consumption’, there is a tendency to go for it and scenario starts worsening when investors try to look at ‘consumption’ in each and every stock they come across. Instead of being objective, investors try to rationalise and incur losses in the long term.

Incentive-caused bias



“Never ask a barber whether you need a haircut,” goes the old saying. Some lawyers induce clients to litigate when it is in the clients’ interest to settle and some doctors prescribe high-cost treatment when they could have treated the patients with a cheaper solution. These are classic instances of incentive-caused bias. In financial markets, we come across many such barbers – read intermediaries with vested interests. Sell-side analysts – analysts who recommend stocks to others – are a classic case in point. Typically, a sell-side analyst has more of ‘buy’ recommendations than ‘sell’ recommendations. They are to be watched out more carefully in boom phases.

On the other hand, there are some distributors offering investors products that offer the distributors higher fees or commissions and are not in the best interest of the investors.

http://economictimes.indiatimes.com/quickiearticleshow/6317492.cms

Friday 1 May 2009

A phenomenon called "herding."

Why You Shouldn't Follow Warren Buffett
By Tim Hanson and Brian Richards April 30, 2009 Comments (7)

Have you ever bought a stock because Warren Buffett bought a stock? You know, like Coca-Cola (NYSE: KO) or Wells Fargo (NYSE: WFC)?

If so, you're not alone. In fact, thousands of investors follow Buffett's every move, and that's such a hassle for the Oracle of Omaha that he has actually (unsuccessfully) lobbied the SEC to give him a dispensation from disclosing his stock picks.

Heck, it got so bad that in 1999, Coca-Cola was trading for as much as 40 times earnings -- an unbelievably high number for a steady consumer staple that sells sugar water.

Yet, if you believe Alice Schroeder's account in her Buffett biography The Snowball, Buffett wouldn't sell Coca-Cola even then because "the price of Coca-Cola could plunge as a result."
After all, if folks had mindlessly followed Buffett in, thereby driving up the price, they would just as surely follow him out.

This has a name When investors follow other investors into and out of stocks, or use another investor's decision to buy or sell to justify their own decision to buy or sell, you have a phenomenon called "herding."

While Buffett has been wary of passing along his stock ideas since the 1950s and '60s, it wasn't until 1990 or so that financial research established herding as a prevalent and powerful day-to-day force in the market's gyrations.

And recent research from professors Amil Dasgupta, Andrea Prat, and Michela Verardo of the London School of Economics allows us to quantify how herding affects stock prices over both the short and long terms.

We'll spoil the ending for you: Herding isn't much benefit to anyone.

Survey says ... It turns out that institutional herding around a few supposedly great ideas ultimately leads to overvaluation and underperformance.

Money managers -- in trying to avoid being outdone by their colleagues -- flock to the same sets of stocks. In the words of the professors, "money managers tend to imitate past trades (i.e., herd) due to their reputational concerns, despite the fact that such herding behavior has a first-order impact on the prices of assets that they trade."

It's a broken system that punishes investors who aren't courageous enough to think on their own.

But wait!
Not everyone agrees that herding depresses the returns investors can look forward to. Just look at "Imitation Is the Sincerest Form of Flattery: Warren Buffett and Berkshire Hathaway."

The authors studied Berkshire Hathaway from 1976 to 2006 and found that "a hypothetical portfolio that mimics [Berkshire's] investments at the beginning of the following month after they are publicly disclosed also earns significantly positive abnormal returns of 10.75% over the S&P 500 index." Wow.

So, we should all be poring over Berkshire's 13-F filings and buying what Buffett and team did, right? Not so fast.

Those findings are eye-opening and impressive, but in our view, they don't offer much for prospective investors for two reasons:

Berkshire circa 2009 is much different than the Berkshire of the 1970s, 1980s, and 1990s. For one, Berkshire is huge now and can only trade in mega-liquid, mega-cap stocks. More important, because of this herding behavior and its effect on stocks he likes, Buffett now favors private deals or full acquisitions over common stock purchases.

The Internet has revolutionized stock investing, making more information more readily available -- at a faster pace. In other words, informational advantages are likely lessened in the digital era.

It's this latter point that got us to thinking about one of our favorite Web resources, GuruFocus.
What now? GuruFocus is a website that tracks "the buys, sells, and insights" of the world's "investment gurus." This is a list that includes long-term outperformers like Warren Buffett, Wally Weitz, and Seth Klarman.

It's a neat website that sends out neat monthly emails, but we waver on this question: Is it a truly valuable service, or is it merely an interesting service?

After all, you shouldn't be buying or selling stocks because other investors are, and doing so may give you a false sense of security about your decision. As Ben Graham once said, "You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right." And that's true even if it's a really smart crowd.

So, what are the current "Consensus Picks of Gurus" (i.e., the stocks the most gurus are buying)? The list includes MasterCard (NYSE: MA), Walgreens (NYSE: WAG), Best Buy (NYSE: BBY), Sun Microsystems (Nasdaq: JAVA), and Canadian Natural Resources (NYSE: CNQ) -- a nice list of businesses, to be sure.

But are these sure winners over the next year, or five, or 10? No.

Who knows why these gurus bought them, or when or why they'll sell them? Was it macro opportunities/concerns? Bottom-up fundamental insights? Something they saw during a meeting with management? Are they selling because of investor redemptions?

Heck, it may be that Ron Muhlenkamp bought MasterCard because he saw that Steve Mandel bought it, or that John Hussman got Best Buy because he figured George Soros knew something.
Again, who knows? The point is: Don't buy stocks because others are buying the same stocks. Don't simply follow Warren Buffett's publicly disclosed stock trades -- following the Oracle's moves, herd-like, is likely to lead you down an unprofitable road.

If you want to profit from Buffett's brain, you have two choices.
Buy shares of Berkshire Hathaway.
Study Buffett's shareholder letters, magazine articles, and body of work, and apply those lessons to your investing.

Both are good courses of action
While buying a share or two of Berkshire is a prudent course of action (Tim added to his position just a few months ago), it is worth noting that Berkshire today is very different from the more nimble version that bought shares in tiny companies such as Blue Chip Stamps, Associated Retail Stores, and Illinois National Bank.

Back then, Buffett was able to focus on good businesses at great prices regardless of size, industry, or geography -- and thus got some great deals on the very small-cap end of the spectrum.

That's what we do each and every day at Motley Fool Global Gains. As co-advisor of Global Gains (Tim) and a contributing author to the international investing chapter of our most recent book (Brian), we believe the good businesses at great prices are the small and foreign companies that American investors largely don't think are worth their time.



Already subscribed to Global Gains? Log in at the top of this page.
Tim Hanson owns shares of Berkshire Hathaway. Brian Richards does not own shares of any companies mentioned. Best Buy and Berkshire are Motley Fool Stock Advisor and Motley Fool Inside Value recommendations. Coca-Cola is an Inside Value selection. The Motley Fool owns shares of Berkshire Hathaway and Best Buy and would like you to meet its disclosure policy.

http://www.fool.com/investing/international/2009/04/30/why-you-shouldnt-follow-warren-buffett.aspx

Wednesday 29 April 2009

Behaviour and projections

Behaviour and projections
Published: 2009/04/29


This article intends to explore the behavioural side of those who make stock market projections

THE economic tsunami that has hit the world since late-2007 has left many wondering where it is heading, what to expect, etc. Experts as well as laymen make projections, mostly trying to predict when the stock market will hit bottom. Unfortunately, no one can really provide a definite answer. Setting aside the technical details of the various projections that have been and are being made as we speak, this piece intends to explore the behavioural side of those who make these projections.

Gambler Fallacy

According to Hersh Shefrin, in his book titled "Beyond Greed and Fear", research has shown that strategists and analysts are often caught in a behavioural phenomenon called "gambler fallacy"- the misconception that the law of averages can be applied to even a small sample size.

This is illustrated by a simple coin-tossing game. If five consecutive tosses of a coin come up heads, most people tend to think that the sixth toss should be tails, even though the probability of getting either heads or tails is 50/50. Going by this, some predictions tend to project inappropriate trend reversal as evident by a study done by De Bondt in 1991. Based on published predictions by Wall Street analysts, the study shows that the analysts are overly pessimistic after three-year bull markets and overly optimistic after three-year bear markets.

What does this behaviour mean to you?

It is especially important if you use the projections to make investment decisions. When dealing with a bear market that has yet to touch the bottom, using an overly optimistic projection would lead to the wrong decision. You stand to lose by buying certain stocks believing that their prices are low enough and the downtrend is going to reverse anytime soon, only to find that the prices continue to drop. By the time the market actually hits bottom, you may have already used up your resources.

Naive Extrapolation

Studies have shown that individual investors have the behaviour that is quite the opposite of what has been described above. The retailers in the market, for instance, have the tendency of doing simple extrapolation - projecting the future based on the recent past. As a result, they are overly optimistic during bull markets and overly pessimistic during bear markets.

Seasoned investors would always tell you to prepare to leave the market when you hear that people around you (especially those who've hardly ever talked about investing) start to be active in the stock market. This may indicate that the bull run is about to end. Unfortunately, new and inexperienced investors would naively think that the bull run would continue.

The time to look around hard is when no one is talking about buying stocks. Your golden opportunity in getting good stocks at a bargain surfaces when others steer clear of buying them. As Warren Buffett said, "Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well".

Overconfidence

Both the analysts and individual investors have something in common. They are overconfident when it comes to predicting the future. So, they often end up getting surprises. Interestingly, it has also been found that experience plays an important part here. Those who are inexperienced turn out to be the ones that have greater confidence in their predictions and therefore higher expectations in stock market returns. Seasoned investors and analysts, on the other hand, tread with more caution and are more conservative in their investment approach.

Less Predicting, More Reading!

The combined effect of the behavioural phenomena from the investors drives market sentiment. As an intelligent investor, learn to separate yourself from the herd effect and try not to fall into the biased behaviour described above. You need to be aware of the market direction, but don't waste too much time predicting when the market will bottom out. Instead, spend your valuable time reading more and doing your research on the companies of your interest. Understand the fundamentals well and learn from errors that others have made in the market.

Securities Industry Development Corporation, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission Malaysia. It was es tablished in 1994 and incorporated in 2007.

Tuesday 2 December 2008

Where the Herd's Headed

NOVEMBER 20, 2008, 6:34 P.M. ET
Where the Herd's Headed

Merrill's monthly survey of fund managers shows some movement into stocks and bonds. Should you follow?
By BRETT ARENDS


My favorite monthly publication has just come in. No, not The Atlantic, Forbes, or GQ.
The Merrill Lynch Global Fund Manager survey.

OK, I admit it. I'm a stock market nerd. I love this stuff. The survey offers probably the best insights into what the big institutional money managers think about the market. Where they are placing their bets. And, sometimes, what they might do next.

It's a contrarian's bible. These are the people who move markets. So the assets they already own too much of are going to have a hard time outperforming, because who is left to buy more? Meanwhile, the reverse can be true for those investment classes they are currently neglecting.
The latest issue is a fascinating read. The big money crowd, the world's best financial minds, have looked at the wreckage of the worst financial crisis in 80 years. They considered the parade of humiliating fiascoes on Wall Street. And the bumbling and eye-watering extravagance in Washington. And yet the two asset classes they still seem to like are IOUs issued by the federal government, and stocks on Wall Street.

Go figure.

If you are thinking about investing in equities, you should know that institutional investors are already overexposed to U.S. stocks at the expense of the rest of the world. A thumping 55% of the fund managers surveyed now have more money in U.S. equities than their benchmark would require: Just 19% say they are under-invested in Wall Street.

Meanwhile, the picture for British and European equities is almost exactly reversed. Nearly half the fund managers say they are underinvested there.

Of course there is a lot of economic misery to come in Europe – especially in Britain, whose real estate bubble has only just begun to deflate.

Yet it's unclear whether this bad news is already factored into share prices there. British and European share indices have more than halved since last year's peaks and are now trading on multiples last seen in the mid 1980s. Several shrewd value managers are arguing that Europe – and Japan – now offer the best long-term buys.

As for bonds: I've been trying for weeks to understand fully why anyone would lend money to the federal government for thirty years, let alone at today's anemic interest rates.

The bailout parade slowly making its way through Washington, each package dazzling the crowd with its size and extravagance, is surely going to lead to slow-motion default in years to come through devaluation and inflation. That's a disaster scenario for bonds.

Nor could I understand why the only Treasurys that were unloved were TIPS – the ones that actually have inflation protection.

Now I know. These fund managers, the people who move the market, have suddenly written off inflation as a near impossibility. A startling 87% think core inflation will be lower a year from now than it is today. Just 5% think inflation might be higher.

Complacency?

You make the call. Note that just a few months ago more than four-fifths of these guys thought inflation was going to be higher than normal. So it's fair to say they're capable of changing their minds, dramatically, in a short period.

Heaven help anyone in the way when the herd suddenly changes direction.

At the moment, 84% of the fund managers think the global economy is already in recession.
One startling fact: Hardly any professional fund managers believe Wall Street analysts anymore. A whopping 90% told the Merrill Lynch survey they thought the consensus earnings estimates on the Street for the next year were too high. Amazingly, 59% called the estimates "far" too high.

That's a pretty damning indictment.

Doomsayers claim that stock markets must fall further because earnings forecasts have to come down.

Sure, Wall Street analysts remain laughably bullish. But it turns out no one with any money believes them anyway.

Write to Brett Arends at brett.arends@wsj.com