The AAII Sentiment Survey is a weekly poll conducted by the American Association of Individual Investors (AAII) that measures the mood of its members regarding the direction of the stock market over the next six months. Think of it as taking the pulse of the individual investor. Each week, AAII members are asked a simple question: are you bullish, bearish, or neutral? The results provide a fascinating glimpse into the collective psyche of retail investors, revealing the percentage of optimists, pessimists, and those sitting on the fence. For value investors, this survey isn't just a curiosity; it's a powerful sentiment gauge. Its true value often lies in its application as a contrarian indicator, a tool that suggests doing the opposite of what the crowd is doing. When the survey shows extreme optimism, a wise investor might grow cautious. When it signals widespread despair, it might just be the perfect time to go shopping for bargains.
The mechanics of the survey are quite simple, which is a key part of its appeal.
This straightforward process has been running for decades, creating a rich historical dataset that investors can use to compare current sentiment levels against past market peaks and troughs.
While you might think it’s best to follow the crowd, legendary investors often do the exact opposite. This is where the AAII Sentiment Survey becomes a value investor's best friend. The core principle is to lean against extreme emotions, as famously advised by Warren Buffett: “Be fearful when others are greedy and greedy when others are fearful.”
If the survey shows an unusually high percentage of “Bulls” (e.g., over 50%) and a very low percentage of “Bears,” it's a sign of widespread greed and optimism. This often occurs after a long run-up in prices when investors feel invincible. For a contrarian, this is a red flag. Extreme optimism can signal that most buyers are already in the market, leaving fewer people to push prices higher. It may indicate that the market is overvalued and ripe for a correction. It doesn't mean you should sell everything immediately, but it does suggest it's a time for caution, not for aggressive buying.
Conversely, the most interesting signal for a value investor is extreme pessimism. If the survey shows a huge percentage of “Bears” and very few “Bulls,” it indicates fear and capitulation. This typically happens after a sharp market decline. The herd mentality is to sell and run for the hills. However, this is precisely when the best bargains can be found. Widespread pessimism means that assets are likely being sold for less than their intrinsic worth. For those who have done their homework, it can be an opportunity to buy great companies at a significant discount.
No single indicator is a crystal ball, and the AAII Sentiment Survey is no exception. It's a valuable tool, but it should be used with a healthy dose of skepticism and as part of a broader analytical framework.