Dorsey, Wright Client Sentiment Survey – 2/17/12

February 27, 2012

Our latest sentiment survey was open from 2/17/12 – 2/24/12. The Dorsey, Wright Polo Shirt Raffle continues to drive advisor participation, and we greatly appreciate your support! This round, we had 52 advisors participate in the survey. If you believe, as we do, that markets are driven by supply and demand, client behavior is important. We’re not asking what you think of the market—since most of our blog readers are financial advisors, we’re asking instead about the behavior of your clients. Then we’re aggregating responses exclusively for our readership. Your privacy will not be compromised in any way.

After the first 30 or so responses, the established pattern was simply magnified, so we are comfortable about the statistical validity of our sample. Most of the responses were from the U.S., but we also had multiple advisors respond from at least four other countries. Let’s get down to an analysis of the data! Note: You can click on any of the charts to enlarge them.

Question 1. Based on their behavior, are your clients currently more afraid of: a) getting caught in a stock market downdraft, or b) missing a stock market upturn?

Chart 1: Greatest Fear.  From survey to survey, the S&P 500 rose just over +1%.  Despite the moderate rally, client sentiment got worse this survey round, but not by much.  Overall client fear levels rose from 67% to 69%, while the missed opportunity group fell from 33% to 31%.  Despite a moderate pullback this week, it’s clear that client sentiment has improved significantly in the last three months with the market rally.

Chart 2. Greatest Fear Spread.  Another way to look at this data is to examine the spread between the two groups.  The spread jumped this round from 34% to 38%.

Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?

Chart 3: Average Risk Appetite.  The overall risk appetite number rose from 2.80 to 2.93.  Once again, I’d argue that the overall risk appetite number provides us with the best snapshot of client sentiment within this survey.

Chart 4: Risk Appetite Bell Curve. This chart uses a bell curve to break out the percentage of respondents at each risk appetite level.  The bell curve continues its recend trend towards more risk.  The most common risk appetite requested was 3.

Chart 5: Risk Appetite Bell Curve by Group. The next three charts use cross-sectional data. This chart plots the reported client risk appetite separately for the fear of downdraft and for the fear of missing upturn groups.  This chart sorts out as expected, with the upturn group wanting more risk than the downturn group.

Chart 6: Average Risk Appetite by Group.  Historically, this is one of the most volatile indicators in the survey.  This round, both groups moved higher with the market, which is what we’d expect to see in a rising market.

Chart 7: Risk Appetite Spread.  This is a spread chart constructed from the data in Chart 6, where the average risk appetite of the downdraft group is subtracted from the average risk appetite of the missing upturn group.  The spread fell slightly this survey round.

For this survey, the market rose just over +1% over two weeks, and the indicator responses were a mixed bag.  The overall fear numbers actually grew in the face of a rising market, which is not what we’d expect to see.  However, considering how much client sentiment has improved over the last few months, it’s not a stretch to see a slight pullback.  The overall risk appetite indicator continues to move higher with the market.  If the market rally can continue to gather steam, we should continue to see client sentiment improving into the future.

No one can predict the future, as we all know, so instead of prognosticating, we will sit back and enjoy the ride. A rigorously tested, systematic investment process provides a great deal of comfort for clients during these types of fearful, highly uncertain market environments. Until next time, good trading and thank you for participating.

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Weekly RS Recap

February 27, 2012

The table below shows the performance of a universe of mid and large cap U.S. equities, broken down by relative strength decile and quartile and then compared to the universe return.  Those at the top of the ranks are those stocks which have the best intermediate-term relative strength.  Relative strength strategies buy securities that have strong intermediate-term relative strength and hold them as long as they remain strong.

Last week’s performance (2/21/12 – 2/24/12) is as follows:

It was a pretty flat market last week, but high relative strength stocks managed to do slightly better than the universe.

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The Myth of Buy-and-Hold

February 27, 2012

No one can dispute that Warren Buffett is a good investor—he’s made a ton of money over many years and it’s been well-documented.  He holds court periodically and even his public calls have been pretty good, like his “Buy American. I Am.” editorial in the New York Times on October 16, 2008.  (More recently he said bonds should come with a warning label, so take that for what it’s worth.)  You could do worse than trying to emulate Warren Buffett.

So what is St. Warren actually doing?  Well, fortunately some college professors did the heavy lifting.  They analyzed Berkshire Hathaway’s quarterly filings from 2006 all the way back to 1980, 2,140 quarter-stock observations.  CXO Advisory had a nice summary of their work.  In the words of the professors:

…we observe a median holding period of a year, with approximately 20% of stocks held for more than two years. At the other end of the spectrum, approximately 30% of stocks are sold within six months.

Yep, Warren Buffett has 100% turnover.  He blew out 30% of his portfolio selections within six months, and held about 20% of his picks for the longer run.  That is active trading by any definition.

A mythology has grown up around Mr. Buffett, that he has a somewhat magical ability to select stocks and then holds on to them forever.  The truth is far more pedestrian, and encouraging since it is something any investor can do.  He might be holding on to what is working, but his portfolio holdings are pared relentlessly.   If I had to guess, I suspect Warren Buffett is simply doing what every good investor does.  He’s using his best judgment to select stocks and then cutting the losers and letting the winners run.  (The casting-out process used in our Systematic Relative Strength portfolios does exactly the same thing.)

There’s no glory—or capital gain to be had—in holding an underperforming piece of garbage for the long run.  Mr. Buffett’s stock selection may be above average, but his genius is more likely in his discipline.

Don’t be conned by the myth of buy-and-hold.  Even Warren Buffett isn’t doing it.  Search everywhere for good investment opportunities, hang on to the winners and get rid of the losers.

Don't Be a Buy-and-Hold Sucker. I'm Not.

Source: Photobucket       (click on image to enlarge)

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