To be a successful investor, it often pays to go against the crowd. But when that crowd is composed of professional money managers, is taking a contrarian position a smart move or financial suicide?
Many investors follow measures of general bullishness or bearishness among buyers and sellers. Yet the most popular gauges of the market's mood, such as the American Association of Individual Investors' Investor Sentiment Survey, tend to focus on everyday investors. So when Wall Street's finest weigh in with their views, it's a little harder to decide whether you should go against the grain or get with the program.
What Wall Street's thinking
Over the weekend, Barron's released the results of its semiannual Big Money poll. Taken in September, the poll asked more than 130 institutional investors about their views on a wide range of issues, including the likely future direction of the overall market, how various asset classes will perform, and their views on certain individual stocks.
In general, views on the stock market are more pessimistic than they were six months ago, with only 46% of those polled saying that they're bullish on the market. More than half of respondents chose real estate, precious metals, or commodities as the most likely to post top returns by this time next year. And looking at their clients, 60% of those answering the survey said customers were bearish about the market -- an unusual state of affairs during a strong bull run.
Among individual stock picks, companies offering both growth and value were more popular than traditional high-growth favorites. Dow components General Electric (NYSE:GE), IBM (NYSE:IBM), and Microsoft (NASDAQ:MSFT) all garnered 70% support or higher, while beaten-down retail giant Sears Holdings (NASDAQ:SHLD) and busted-IPO Facebook (NASDAQ:FB) drew bottom honors.
Should you care?
With respect to the overall market, pros seem to be at best slightly ahead of the same curve that ordinary investors are following. According to the AAII's sentiment survey, bearish sentiment has risen by 17 percentage points in the past two months, with bulls dropping by 13 percentage points. Interestingly, even individual investors seemed to see September's strong gains as pushing valuations into the stratosphere, especially with negative third-quarter earnings expected right around the corner. That's fairly unusual, as individual-investor sentiment often gets more bullish as stocks advance, only declining sharply after a significant drop. By the time the market started its current leg down, sentiment had already gotten much more pessimistic.
With individual stocks, though, the key thing to remember is that the goals of the survey were much different from what a long-term investor would seek from a stock. Specifically, the survey focused on a six- to 12-month time frame for most of its questions, with predictions for periods as soon as December and ranging out to next June.
Such a short time period invites picks that could see big gains in the near-term even if they come at the expense of long-term growth. For instance, Microsoft has long languished in the shadow of its more mobile-savvy peers, but its recent tablet and operating system releases could give it a cyclical boost. That doesn't necessarily bode well for its long-term prospects, though. Similarly, IBM and GE have both seen substantial gains since the recession and financial crisis. Yet while their gains may continue in the near-term, IBM's most recent earnings report raised questions about the durability of its competitive advantage in high-margin services, while GE's planned foray into the mining sector could prove ill-timed if the global economy doesn't bounce back.
On the bearish side, Facebook faces the near-term brick wall of its most massive expiration of lock-up provisions later this month. After that, though, shares could eventually soar if the company can execute on its strategy to boost revenue through a combination of mobile ads and sales of gift items. It just might take longer than six months.
Follow your own advice
It's useful to see what other people are thinking, but in the end, it's up to you to chart the course for your portfolio. Having confidence in yourself puts the actions of others into a healthier perspective, letting you gain insight without simply following someone else blindly.
Fool contributor Dan Caplinger has no positions in the stocks mentioned above. You can follow him on Twitter @DanCaplinger. The Motley Fool owns shares of Facebook, General Electric, IBM, and Microsoft, as well as options positions on Facebook. Motley Fool newsletter services recommend Facebook, IBM, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.