THE PRAGMATIC CAPITALIST » » SMALL INVESTORS ARE GROWING MORE AND MORE CONFIDENT

SMALL INVESTORS ARE GROWING MORE AND MORE CONFIDENT

7 July 2009 by TPC 4 Comments

More evidence out this week that small investors are growing increasingly confident. A recent Morningstar report notes:

Diversified Emerging Market funds benefited from a $4.9 billion inflow vs. a net outflow of $2.6 billion in 2008.
Junk bond inflows have increased $12.6 billion in 2009 vs. a rise of $1.2 billion in 2008.
Investors have piled in $7.8 billion into natural resources and precious metals funds after withdrawing $2.1 billion from the same category in 2008.

Granted, all these areas have done well this year but, OptionsMonster co-founder Jon Najarian says don’t follow the pack. “Unfortunately the timing here really couldn’t be worse, for all three of those areas,” he says. Why? The rally has been extreme, oil prices are falling and U.S. business inventories are not low enough to drive manufacturing production in Asian markets.

This is in-line with reports from AAII and the recent Merrill Lynch Fund Manager Survey that we reported on last week. Investors are making the classic mistake of piling onto the best performing areas. As we’ve seen in recent weeks, these also tend to be the sectors that fall the fastest when the declines come.

A recent WSJ article highlights the herd mentality that drives this sort of investing:

Murray Schofield, a retired orthodontist in Arizona who sold most of his foreign investments in the second half of 2008, has been buying emerging-market funds, and funds dedicated to China and India, since March. He now has 23% of his portfolio in funds that invest in these stocks. “I have to recapture part of my losses,” says the 84-year-old. “Otherwise I’d be more conservative.” His portfolio is up 20.4% for this year, following a 44% loss in 2008, he says.

Unfortunately, this is exactly the kind of thinking that leads investors to chase returns and make mistakes in their portfolios.

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4 Comments »

vfsv said:

I suspect this might become a big story if /when we get another downraft in the market. FWIW, I try to never listen to Jon Najarian since I assume he’s always talking his (options) book.

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# 7 July 2009 at 6:57 AM

TPC (author) said:

I don’t mind the Najarians. They seem pretty level headed. You don’t agree vfsv?

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# 7 July 2009 at 7:01 AM

Onlooker said:

I don’t trust them either. They just seem like the typical pump and dumpers that populate the airwaves on CNBC. I could be wrong, but I figure I won’t go wrong by ignoring them.

With that said, he’s spot on here, of course.

SELL NOW Murray! Take your gains and figure you’re lucky to have bought towards the bottom. Decoupling won’t happen this year or next either. They have to export to a voracious American consumer; and he’s dead.