Data Brief - Big Money = Smart Money?

Big Money = Smart Money?

Sunday, April 27, 2008

"And now, for some good news: the other shoe isn't going to drop."

So says the latest Big Money poll conducted twice yearly for Barron's weekly business periodical.

I've touched on this poll in the past, as it has an intriguing list of respondents - some of the largest investors in the United States. The poll receives a little over 100 responses each time from asset managers with several hundreds of millions to billions of dollars under their management, certainly among the investors with the best information available.

So...should we listen to them? Let's try and figure that out with a couple of charts.

The one below show a 10-year history of the S&P 500, along with the percentage of respondents in the Big Money poll who considered themselves bullish or very bullish (the green line) and those who were bearish or very bearish (the red line).

We can see from the chart that these folks were at their most bullish in the fall of 2001, not necessarily a good time to be so. They were at their least bullish in May of 2005, not a good time to not be bullish. But they were also very bullish in the fall of 2003 and 2006, both good calls on their part.

Currently, not one of the respondents was "very bearish". The only other time that has happened was in May 2004, which wasn't necessarily good or bad, as stocks just meandered for months afterward.

To better see whether we should pay attention to the aggregate bullish or bearish totals, the chart below shows the correlation between bulls' predictions of where the S&P 500 would be six months later, and the future actual outcome (I only used the bulls' forecasts since there were always more bulls than bears).

If there was a strong positive or negative correlation, then the black line in the middle of the scatter plot chart would clearly slope up or down, and preferably we'd see a tight grouping of those little blue diamonds around the line. As it stands, we see a very slight upward slope, meaning the correlation is very modestly positive, but the blue diamonds are scattered all over the place in an extremely loose configuration.

We don't have a big sample size with 18 data points, but using the formula derived from the chart above, it says we should expect the S&P 500 to end the year only about 0.5% above where it's trading now, plus or minus about 9%.

Bottom line, there isn't a lot of value in these forecasts, and the same can typically be said about these guys' individual stock picks. There are a number of reasons for that - they could be using a disinformation tactic to throw other investors off their best ideas, or it could just be that these guys, being so big, have to gravitate towards the largest stocks and essentially become "the market".

Whatever the reason, I usually get some questions about whether we should take notice when we see an unusual reading in this poll, like the most recent development of no "very bearish" respondents. My opinion? Nope.