Sophisticated investors are curious to learn what individual retail investors are thinking.
That initially might sound like a compliment. It is not.
Contrarian investing, as a strategy, is characterized by buying and selling in contrast to what is popular and trending.
The reason why the opinion of retail investors is important to the more knowledgeable investors, such as institutional investors and pension funds, is that they can use it as a contrarian indicator.
To the contrarian investor, popular views are to be avoided.
Many past articles have provided evidence of investors having less than admirable investment returns. It seems there is something about humans that makes it hard to be successful at investing.
Because individual investors’ decisions tend to be poor, more sophisticated investors don’t follow their lead.
If individuals think that a particular stock or stock market will perform well in the future, they will buy. The more sophisticated professional investor, those with more experience and courage, will use that information as an indication they should do the exact opposite.
Everybody who invests tries to make a profit. This is similar for both retail investors and the larger, more sophisticated, investors.
Many people reading this article will have purchased stocks in the past. The decision to purchase the stock was made because you thought the price would increase.
The fact that retail investors tend to be so consistently bad at investing makes that information useful for sophisticated investors.
Ouch! It is one thing to be wrong, but it is another thing when people, realizing you were wrong, profit because of your mistake.
Short-selling is another aggressive strategy, although far less common. If you think a stock value will decline, you sell the stock you do not yet own but have, in effect, borrowed from a broker.
For example: if a company’s shares trade at $10 per share, you sell the share and at some future point buy the share back in order to complete the transaction.
Your hope is to have the shares decline in value so you can buy the shares for less then you initially sold them for.
Some stock exchanges publish data on who is selling shares they don’t own and then divide them into two categories. Some sellers are professional traders and others are individual retail traders.
Sophisticated purchasers are interested to see what other professionals are doing as opposed to individual retail investors.
There is no benefit to realizing that individuals are poor investors unless you do something about it.
My recommendation is to speak with your investment advisor about your current strategy. Discuss the general types of mistakes that individuals normally make and build a strategy that will protect you from potentially making those same types of mistakes.
The investing process is not that difficult. The basics of good investing is maintaining the discipline to stick with your long-term plan, and having conference you will be successful.