Investors should be afraid that they’re no longer afraid
Today brought the news that the “fear index” has fallen to its lowest level since Lehman Bros. went under. The CBOE Volatility Index (a.k.a. the VIX) technically measures the market’s expectation of nearterm market volatility. Basically, it measures how jittery investors are about rapid drops in market price.
Are investors no longer afraid of the market?
At its height, soon after Lehman’s bankruptcy, the VIX stood above 90. Now, it’s at about 28.75.
Some investors see this as a good sign that the worst is over. But for me, it recalls an old Warren Buffett maxim: “Be fearful when others are greedy, and be greedy when others are fearful.”
So now that stocks are up more than 35% from their low, investors are starting to feel much better. That would seem to suggest that the “deals” to be had in the market are rapidly disappearing. Still, at about 30, the index is well above the 10 to 20 range we saw in the five years before the crash.
A few people in a CNNMoney story on the subject seem to agree. Says a chief investment strategist quoted in the story: “A low VIX isn’t necessarily a positive. It could mean that people are getting comfortable and that might set us up to more shocks in the system. Investors might not be factoring bad news into the equation.” Several others quoted in the story said that they aren’t concerned as long as investors’ optimism continues to be backed up by good news.
I have enough trouble figuring out what’s going on in the heads of my friends and family members. So I’d never make a decision based on what I think all the minds of the market added together are feeling.
But if you’re a value investor looking for places to put your money, you’ve gotta wonder in the back of your mind if a drop in investors’ fear is really good or bad.
— Joe Light
