This post was originally published on this site
It’s troubling that novice investors now are more bullish than veterans.
Consider the results of a recent survey from Charles Schwab that explored the relationship between investors’ attitudes and how recently they began investing. A full 15% of respondents said that 2020 was the first year that they entered the stock market — a group that Schwab refers to as “Generation I.” It’s a fair bet that almost all of them entered the market after the February-March 2020 waterfall decline — most likely after the first stimulus checks were sent out in mid-April 2020.
That means that Generation I has only seen a powerful bull market. Since mid-April of a year ago, the S&P 500
SPX,
has produced a dividend-adjusted return of 52%, and the Nasdaq Composite
COMP,
has gained 70%.
The chart below shows what the survey found. Notice that, compared to veteran investors, Generation I is significantly more optimistic about the stock market and plans to invest a greater amount in equities.
This contrast is typical of a late-stage bull market. At such times, veteran investors—who have lived through prior bear markets and therefore recognize when the market is skating on thin ice — will have already taken some money off the table. New investors, who haven’t lived through a bear market and who therefore feel relatively invincible, not only won’t have reduced their equity holdings but — as the accompanying chart illustrates — will be intending to increase it.
The contrast between these two groups’ attitudes follows a market cycle. At the bottom of the next bear market, for example, it will be the veteran investors who will be more bullish. They will be the first to recognize that stocks have become cheap enough to represent good long-term value. Newer investors, in contrast, will have just suffered their first bear market and have become disenchanted with the stock market. Many will even swear off investing altogether.
Though it’s more than 50 years old, perhaps the best description of this market cycle comes from the late 1960s book “The Money Game,” written by the pseudonymous author Adam Smith. He used the phrase “kids’ market” to refer to late-stage bull markets, in which the investors making the most money are those too young to remember prior bear markets. “Memory can get in the way of such a jolly market,” Smith wrote, “that malaise that comes with the instantly gone, flickering feeling of déjà vu: We have all been here before.”
One way to make money in a kids’ market, Smith continued, is to have your money managed by advisers who “are too young to remember anything bad.” So long as the bubble continues to inflate, Smith wrote, these “kids” will be “making so much money that they feel invincible. Now you know and I know that one day the orchestra will stop playing and the wind will rattle through the broken window panes, and the anticipation of this freezes [the rest of] us” — those of us who’ve lived through unforgiving markets.
This psychological perspective on the market cycle helps us understand the polarization around topics such as bitcoin
BTCUSD,
GameStop
GME,
and Non-Fungible Tokens (NFTs). The newest investors, who dominate the markets for such things, ridicule veteran investors who express skepticism. They gloat about how much money they’re making and gleefully declare that the old-timers “just don’t get it.”
Someday the shoe will be on the other foot, of course, and the veterans will return the favor. It’s been this way forever in the market. While we don’t know how this story will unfold over the shorter term, we do know how it will end.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
