BULLS & BEARS: Reading a contrarian view from independent investors

May 2, 2005

In the 1958 Disney documentary "White Wilderness," the viewer saw what looked like hundreds of lemmings following one another over a cliff and falling to their deaths.

Ever since their big-screen debut, lemmings have had the unfortunate reputation of being stupid, blind followers of one another regardless of the consequences.

What the audience didn't see were cameramen herding the poor little rodents over the cliff with a piece of plywood. You see, lemmings don't commit suicide.

About the only creature that doesn't need herding to be a willing participant in catastrophe is a human. We humans love to follow the crowd.

Some fields of endeavor attract independent thinkers. The arts, science and high-tech areas come to mind. But for some reason, stock market investors, as a group, are not very independent in their thinking. It's so rare that the independent thinkers like Warren Buffett often are celebrated as wizards.

A great source for gauging the current group-think of individual investors is data from the American Association of Individual Investors.

The AAII is a not-for-profit group formed in 1978 and headquartered in Chicago with a stated mission of "assisting individual investors in becoming effective managers of their own assets through education, information and research."

The AAII is associated with the organization that helped so many investment clubs get started in the '80s and '90s. Obviously, their members are individual investors, not professional traders, money managers or institutions.

Each week, the AAII polls its members to gauge their overall sentiment. The membership is asked whether-looking at the next six months-they are bullish, bearish or neutral.

Like many contrarian indicators, the membership over the years has tended to become very bullish at market tops and very bearish at market bottoms. Since 1997, the members have become super negative on five occasions.

The first bout with depression was in late 1998 after the Russian currency crisis and the collapse of Long Term Capital Management. Stocks dropped 20 percent in a couple of months and at the same time the market was bottoming, the bearish poll numbers peaked.

Late 1998 was the wrong time to be bearish. One year later, stocks had rallied 30 percent.

The second, third and fourth super-low readings came right in a row in late 2002 and early 2003. The Dow Jones industrial average hit three bottoms of 8000 or below in June and October of 2002, and then again in March 2003.

Each of those three times the market bottomed, the members again were superbearish. Again, each of the three times was the wrong time to be bearish, because a year later stocks were higher by 25 percent to 50 percent.

The fifth super-bearish occasion was registered a couple of weeks ago on April 14. In fact, using the last four-week average of the poll numbers, the AAII membership is more bearish today than at any other time in the last eight years.

Personally, I'm elated by the AAII members' despondency. So far, they're batting a thousand, and I'm betting this time won't be any different.



Dave Gilreath is co-owner of Indianapolis-based Sheaff Brock Investment Advisors, money management firm.Views expressed are his own. He can be reached at 705-5700 or daveg@sheaffbrock.com.
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