As if companies haven’t been dumb enough in buying back more and more shares since the market bottom of early 2009, now individual investors are getting in on the act.
First there was this FT piece discussing large inflows into stock funds last week.
Now, this Bloomberg story notes that investors are more optimistic about stocks than they’ve been in 3.5 years. The piece gives a litany of reasons for the optimism, but one searches in vain for a view of fundamental valuation that would cause such a sentiment.
Finally, this WSJ blog post notes that put options (a kind of insurance protection) is the cheapest on the S&P 500 Index than it has been in a long time. Over the next three months, investors don’t expect any severe declines.
To which we respond, fair enough if three months is your time frame. Good luck with that approach though……
By contrast, with the Shiller P/E over 22, we think now may not be a bad moment to buy some longer-term put options on the index.
Below is a 3.5 year price chart of the S&P 500 Index, prompting the question for us – where was this optimism when prices were cheaper? I guess there’s some perversity in human nature that causes people to buy high. More accurately, human beings probably want to do what they see has worked recently among their fellows. Our sociability is a real drawback when it comes to investing.
Therefore, if protection is cheap, as the WSJ piece says, we’re likely to be buying it. If confidence is high, we’re likely to be pessimistic. If Mr. Market is manic, we’re likely to be worried — or at least not take our cues from him. Misanthropy usually wins in investing, and so we’re buying cheap put options. We hate to make short-term predictions though, so our puts are long-dated.
Update, 7:40 AM, EST, 1/28/2013 — It looks like Barry Ritholtz agrees with us, citing a front page, mostly positive story about a bullish asset class in a major publication.