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Sentiment Check


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Curious how different folks (if at all) measure sentiment and/if they use that in regards to positioning.


I assume a lot of folks here prescribe to the mr.market theory and want to take advantage of pessimism in the market and be aware of the opposite. What is a rational and unemotional way to track that (fear/greed, dma). There is the part of me that knows it’s foolish to try and time the market and maybe I should just leave it there. But if I truly believe the mr. market theory shouldn’t I be trying to take advantage? I don’t see myself as someone who would jump significantly to cash but I’m starting to consider using limited margin when things get cheap (easy to say this in hindsight). Gets a little circular because I know there’s value in not checking prices to frequently, but if you don’t check prices often enough you’re gonna miss some of the bargains that come along. How do folks balance this?

cc @Gregmal, @Viking, @thepupil, @SharperDingaan

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I haven't used any specific indicators, but you could take a look at the fear and greed index to keep it simple. And if VIX is really high, there's a good chance people are liquidating for non-fundemental reasons, which is usually a decent time to buy stuff you already know and like. But usually I'm just looking at stocks, and if a lot seems to be smack-in-the-face cheap, I've used up towards 20% portfolio margins at times (like March 2020). When I think they're around fair value, I sell and dial down margin and don't fret about paying taxes (I never joined the #neversell band).


I've basically used margin as a cash substitute, but it needs to fit your style and holdings. When I've used margin, I've had a large slug in stuff like Berkshire and tobacco and knew I could take a greater than 50% draw down without breaking a sweat. If I was as smart as @writserand @Hielko and had a large percentage of special sits, even better (I basically have only Twitter atm as it seems so simple that even an idiot can figure out Musk has a poor case).


There's no doubt leverage can be great if applied in the right dose and coupled with good stock picking. But, margin increases the risk of blowing up, and it might stress you out, which in turn might result in worse decisions. I think Buffets' general principle of not doing stuff which messes with your sleep is sound. As generalist investors and one man bands, we all have limited mental bandwidth and need to use it wisely. I can see why people would forego margin completely (it's partly why I don't short or trade options - getting the timing right is different than LT investing). A decent savings rate and a LT view should make most of us end up in a fine place (economically) unless we blow up.


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Thanks for starting a great new topic!


First of all let's not lie to ourselves, this is an attempt at market timing (I do it too), and you know it/seem to acknowledge it. Nothing wrong with that but let's look at it in the eyes. Some of us are doing it using idle cash ("dry powder"), some of us use margin so we can tell ourselves we're 100% invested at all times and not letting all that cash do nothing (depreciate really because of inflation) because we've read our Bogle and our Fama/French and we've seen the backtests. But that's bullshit because 100% invested is just as arbitrary as 90% or 110%. So let's say you're comfortable with 20% margin and you plan on going up there whenever sentiment hits a certain bottom based on the VIX or the Fear and Greed meter or whatever metric, my guess is you'd do better holding 120% long the entire time without waiting for a pullback. It's really all about our comfort level with volatility, our ability to withstand a margin call and the time frame of our investment.


Here is what I've learned from experience works, at least for me. Sentiment is ridiculously easy to get right. I follow this forum and another one from my home country and they provide a pool of investors who together paint a good picture of the average sentiment of people who follow the stock market. Newspaper titles (not financial newspapers) will give you markers for the bigger swings. Finally in more rare times of extreme sentiment one way or another the people around who know absolutely nothing about investing will tell you everything you need to know. For example my grandma wanted to liquidate everything in 2011. On the other hand my best friend became all of a sudden enthused with "investing" and was parading his gains on meme stocks and coins all throughout 2021 but refused to read anything of substance I would send his way when he asked me questions about investing. So here you have it. Three levels of information gathering and you can see that the more subtle ones happen very often (we spend our time freaking out about every little thing here because we're looking for things to worry about) and the huge ones are maybe once a decade when sentiment osmosis goes aaaaall the way to reaching the minds of the know-nothing and usually-doesn't-care-one-bit people.


Now the trick is to completely separate that information from whatever macroeconomic view you might hold. Do not consider the "why" at all. There will always be a million great reasons to be bearish at the very bottom and a million great reasons to be bullish at the very top. I see that often on the forum : someone will pound the table saying "things are cheap, let's invest" and someone else will reply 'Yes they are but I don't see how it gets better short term because blablabla, so not yet." This is a mistake. What moves stocks isn't the world doing better it's the average sentiment of people believing the world is about to be doing better or worse, and good luck timing crowd movements. Way too many variables and chaos since what we call "the market" is really just billions of overnight successful apes strapped together with fiber optics exchanging make-believe tokens at a frantic pace.


After a few ups and downs you know yourself and you learn to watch your own "gut feeling". Not necessarily run with it, not necessarily be contrarian with it either, just watch your own emotions with curiosity. What types of companies catch your eye these days and ask why? How do you feel before pressing the "buy" or "sell" button? Do you second guess yourself a lot or do you feel like you've got this? Then try to remember when did you feel like this in the past? What kind of stuff was it a good time to buy then? What mistakes have you made, successes have you had when listening to what part of your brain in what type of situation?



Edited by WayWardCloud
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Yea you have to have a variety of Petri dishes to properly gauge things like consensus and sentiment. You also have to appreciate the inputs for what they are. Going to Stocktwits and seeing meme stock euphoria is nothing abnormal given what Stocktwits is. But if volume of activity and certain tickers more dominant than normal? What about CNBC headlines? Twitter is harder to follow but same thing. Whats everyone constantly talking about. How extreme are predictions? You want to essentially want to be like Bruce Lee...be water. Its all potentially relevant and at the same time potentially irrelevant. In the bigger picture though it should generally be clear. Q2 you had basically every possible marker in the world for sentiment saying just buy anything purely on a shift. 


You also have to know yourself. Feel the market, acknowledge that what you feel is largely what everyone else is feeling, then step back, and recall things like "every time I've felt like this....such and such tends to happen", or "if this is how everyone is feeling, do I want to be on this side of things?".


On margin, I dont get why theres such wild misconceptions around it. If you are reckless or dont know what you're doing, sure. But otherwise, it baffles me why everyone thinks if you have 10-20% margin you're gonna get a margin call LOL. Ultimately it has to be about what your mindset is but to me I have no clue how people hold cash other than to avoid compounding the majority of the time so that they can say the avoided short term paper losses once in a while. If its simply about having the ability to buy when things get cheap, again, Interactive brokers solves this problem. Ive had 30%+ margin and buying power somehow greater than the entire value of my account after 20% market declines. If you're not lazy, just manage it. Its also really a test of how good you are at valuing a company, assessing its trading mechanisms, and managing risk. If I look at Berkshire, at $300 you can underwrite to a $200 decline and if its starts getting somewhat there, IE 260s you can start thinking about more aggressive hedging options. But your real capital at risk isnt $300 a share. And its not even $150. This is simply where paper pusher excel models and the real world differ. If I owned Berkshire, FRP Holdings, Alico, and MSG Sports, I'd sleep like a baby at like 250-300% long. 

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So also its kind of a blend of what others have said too. I dont try to time the market THAT MUCH. A little bit here and there. But its more about knowing the values and trading characteristics of what you own and then reacting to the volatility of them. There's obviously going to be overlap with buying lower and selling higher(if you're any good at it) and where "the market" is so I guess you could make the case theres a timing element to it, but its not mutually exclusive. Ideally you want things that dont always correlate so you have the ability to recycle capital.

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I think a quick look at the index charts tells you more about Mr Market than any of the indicators (fear and greed). Looking at the  VIX charts tells you a lot about the fear part.


The headlines from CNBC are often mean less chatter, imo. How often are they obsolete when they show in the website just 2h later? I have seen it endless times that the CNBC headline  shows “ Market is down because of XXX” and 2 h later the market turns green and yet the headline is still there.


These explanations of short term movements are superfluous and worthless but apparently create enough interest and that’s what CNBC and other care about. i think charts are actually better market indicators than any of the headlines as they represent what all the market participants are doing in aggregate.

Edited by Spekulatius
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