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Bullishness Remains Missing, Which Is A Good Thing

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Despite media headlines, podcasts, and broadcasts suggesting “doom and gloom” lurks around the corner, investor bullishness has increased markedly since the October lows. This isn’t the first time we have discussed investor sentiment, which is often wrong at the extremes.

One of the hardest things to do is go “against” the prevailing bias regarding investing. Such is known as contrarian investing. One of the most famous contrarian investors is Howard Marks, who once stated:

Resisting – and thereby achieving success as a contrarian – isn’t easy. Things combine to make it difficult; including natural herd tendencies and the pain imposed by being out of step, particularly when momentum invariably makes pro-cyclical actions look correct for a while.

Given the uncertain nature of the future, and thus the difficulty of being confident your position is the right one – especially as price moves against you – it’s challenging to be a lonely contrarian.‘” – Sentiment Is So Bearish It’s Bullish

That bolded sentence is the most relevant to today’s discussion.

Extreme sentiment readings, either bullish or bearish, typically denote the point where investors make the most mistakes. Such is because the emotions of “fear” or “greed” are driving investment decisions. From a contrarian investing view, we should be “buyers” when everyone is selling or “sellers” when everyone is buying.

However, that is a difficult thing to do because, as individuals, our own emotions are driving us to “follow the herd.” As Howard Marks notes, it is “challenging and lonely” to be a contrarian. However, it is often the correct thing to do.

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The chart below is a weekly composite index of investor sentiment. It only shows periods when investors are extremely bullish or bearish compared to the S&P 500 index.

Bullishness, Bullishness Remains Missing, Which Is A Good Thing

Using sentiment as a timing indicator for investing isn’t advised, as extreme bullish or bearish sentiment can last for extended periods as price momentum trends higher or lower. However, understanding that extreme bullishness or bearishness tends to denote market excesses is essential to temper our emotional biases.

Most importantly, as investors, we need to recognize that while bullishness or bearishness at extremes is often wrong, investor sentiment is often correct in the middle of the trend.

Bullishness, Bullishness Remains Missing, Which Is A Good ThingBullishness, Bullishness Remains Missing, Which Is A Good Thing

When Investing, Star Wars Is Wrong

There are numerous scenes in the Star Wars films when characters are told to “search their feelings” to discover what they know to be true. The problem is that, as humans, we tend to extrapolate temporary events as permanent trends, mainly when investing. When markets rise, we believe the current trend will last indefinitely. When markets fall, they must be going to zero. Neither is true and is also the “fallacy” behind “buy and hold” investing and “compounded” market returns.

A brief review of market history shows that markets neither rise nor fall indefinitely, and periods of bullishness always lead to bearishness eventually. The chart shows the difference between the Dow Jones Industrial Average’s real value and what it would be if it grew at 5% annually (the buy and hold premise). The difference in ending values is due to the periods of falling returns reversing the previous periods of growth. Crucially, periods of declining values destroy the compounding effect.

Bullishness, Bullishness Remains Missing, Which Is A Good ThingBullishness, Bullishness Remains Missing, Which Is A Good Thing

However, while that differential between outcomes is terrible enough, the reality is far worse due to investors’ emotional bias. Each year, Dalbar produces an investor survey that reveals the average investors’ performance versus the market’s returns. To wit:

“The bar chart below shows the difference in performance as well as the growth of $100,000 between the average equity investor and the S&P 500 Index for the past 30 years (through 2022). It also compares the average annualized return of such an initial investment to the rate of inflation and a short-term bond index over that same period.

Bullishness, Bullishness Remains Missing, Which Is A Good ThingBullishness, Bullishness Remains Missing, Which Is A Good Thing

Dalbar explains well why a reasonably significant performance differential exists between the average investor and the market.

“This research series studies investor performance in mutual funds. Its goal is to show how investors can improve portfolio performances by managing behaviors that cause them to act imprudently.

If you’ve been following Dalbar’s research over the years, you know that one consistent theme keeps cropping up. Namely, the set of longer-term data analyzed in these QAIB reports clearly shows that people are, more often than not, their own worst enemies when it comes to investing.

Often succumbing to short-term strategies such as market timing or performance chasing, many investors show a lack of knowledge and/or ability to exercise the necessary discipline to capture the benefits markets can provide over longer time horizons. In short, they too frequently wind up reacting to market maturations and lowering their longer-term returns.”

To simplify that analysis, investors succumb to their emotions of either bullishness or bearishness, often at the moment when an opposite action should be taken.

At the outset, I noted many negative headlines, prognostications, and a slew of data suggesting poor outcomes for equity markets. However, bullishness is rising contrary to what logic suggests.

Therefore, how should we consider current investor sentiment in our portfolio management process?

Right In The Middle, Wrong At Both Ends

As noted, investor sentiment, either bullish or bearish, tends to be right in the middle but wrong at extremes. If we revisit our weekly composite sentiment index, we see it is rising from an extreme low.

Bullishness, Bullishness Remains Missing, Which Is A Good ThingBullishness, Bullishness Remains Missing, Which Is A Good Thing

Reviewing the 2008 period, we see that sentiment can remain low for an extended period. However, once it rises more consistently, such tends to mark the equity market low. Such may be what we are seeing now.

However, while individuals succumb to emotions dictating investing actions, professional investors suffer from the same bias. The National Association Of Active Investment Managers (NAAIM) represents its members’ average exposure to U.S. equity markets. Historically, when that index falls below 40% exposure, such aligns with market bottoms (conversely, above 90% aligns with market peaks.)

Bullishness, Bullishness Remains Missing, Which Is A Good ThingBullishness, Bullishness Remains Missing, Which Is A Good Thing

Another measure of sentiment, the volatility index (VIX), also suggests the market low was in October. Extreme VIX readings occur at or near market lows as extreme “panic” drives selling. Bull markets are typically defined by a declining VIX from a previous peak. The 2022 selloff was a “correction” within an ongoing bull market because the VIX peaked around 30. With that index back on the decline, such also suggests that October was the correction low.

Bullishness, Bullishness Remains Missing, Which Is A Good ThingBullishness, Bullishness Remains Missing, Which Is A Good Thing

‍Excessive bullishness is missing, while extreme bearishness is fading but still prevalent.

Is the current rally since the beginning of the year a return of the bull market? Maybe. It could also be a “bear market rally” sucking investors back in before “the next shoe falls.”

Unfortunately, we won’t know until after the fact. However, rising bullishness from extremely low readings has often suggested a more protracted market advance “climbing a wall of worry.”

As Stephan Cassaday once quipped:

“More money has been lost trying to avoid bear markets than has been lost in any bear market.”

While it is easy to allow the many headlines, podcasts, and media prognostications to spin up our “emotional biases,” it is essential to remain focused on what the market is doing versus what we “think” it should be.

 

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Singapore’s Temasek cuts compensation for staff responsible for FTX investment

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May 29 (Reuters) – Singapore state investor Temasek Holdings (TEM.UL) said on Monday it had cut compensation for the team that recommended its investment in the now-bankrupt FTX cryptocurrency exchange, as well as for its senior management team.

The move comes around six months after Temasek initiated an internal review of its investment in FTX, which resulted in a writedown of $275 million.

“Although there was no misconduct by the investment team in reaching their investment recommendation, the investment team and senior management, who are ultimately responsible for investment decisions made, took collective accountability and had their compensation reduced,” Temasek Chairman Lim Boon Heng said in a statement posted on Temasek’s website on Monday.

Temasek did not detail the amount of compensation cut.

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Temasek had said its cost of investment in FTX was 0.09% of its net portfolio value of S$403 billion ($304 billion) as of March 31, 2022, and that it currently had no direct exposure in cryptocurrencies.

Temasek also said last year it had conducted “extensive due diligence” on FTX, with its audited financial statement then “showed it to be profitable”.

FTX’s other backers such as SoftBank Group Corp’s (9984.T) Vision Fund and Sequoia Capital had also marked down their investment to zero after FTX, founded by Sam Bankman Fried, filed for bankruptcy protection in the U.S. last year.

“With FTX, as alleged by prosecutors and as admitted by key executives at FTX and its affiliates, there was fraudulent conduct intentionally hidden from investors, including Temasek,” Lim said in the statement on Monday. “Nevertheless, we are disappointed with the outcome of our investment, and the negative impact on our reputation.”

Temasek seeks to deliver sustainable returns over the long term by investing into early-stage companies, Lim said.

“While there are inherent risks whenever we invest, we believe that we have to invest in new sectors and emerging technologies to understand how these areas may impact the business and financial models of our existing portfolio, and whether they would be drivers of future value in an ever changing world,” Lim added.

($1 = 1.3245 Singapore dollars)

Reporting by Urvi Dugar in Bengaluru and Yantoultra Ngui in Singapore; Editing by Himani Sarkar and Lincoln Feast.

 

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Al Gore-led fund leads $95-million investment in Toronto’s BenchSci, which uses AI to hasten drug discovery

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Liran Belanzon, CEO of AI company BenchSci, at the company’s new Toronto offices on July 27, 2021.Fred Lum/The Globe and Mail

Al Gore’s investment firm has led a $95-million financing of a Toronto company that uses artificial intelligence to help pharma giants cut time and costs from the drug discovery process.

Generation Investment Management, chaired by the former U.S. vice-president, led the growth equity financing of BenchSci Analytics Inc., with backing from past investors Inovia Capital and Golden Ventures of Canada, and U.S.-based TCV and F-Prime Capital Partners, affiliated with Fidelity’s founding Johnson family. It’s Generation’s third deal in Canada, after 2021 investments in AlayaCare Inc. and Benevity Inc.

Terms were not disclosed but Golden managing partner Matt Golden said it was a “clean deal” free of complex structured terms that financiers have increasingly demanded from startups to guarantee them a larger share of proceeds when they sell.

Multiple investors bid to lead the deal and BenchSci chief executive Liran Belenzon said it was “not a down round,” meaning the company at least maintained its valuation from when it raised US$50-million last year. The lack of structure or devaluation puts BenchSci in rare company amid a shakeout across the tech sector as companies run out of cash or face onerous funding offers from investors.

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Mr. Belenzon said “we weren’t in a position where we needed to raise money, but that’s when I want to raise. We have lots of traction and I want to make sure we have a good war chest to continue meeting demands.” He added he expects venture capital investing levels “will only get worse” despite steep declines already in the past year.

Tom Czitron: How artificial intelligence will change the investing landscape

BenchSci deploys artificial intelligence to rapidly peruse millions of scientific publications. Tens of thousands of researchers use its online subscription software tool to quickly determine which antibodies (proteins the body develops to fight invasive substances) and reagents (substances that cause chemical reactions) would be best to use in early experiments on new medications.

BenchSci’s product is used by 16 of the world’s 20 largest pharmaceutical companies, which shave months and substantial costs off the search for new drugs. Novartis in its 2021 annual report said it saved US$14-million from 2018 to 2021, as scientists using BenchSci to select the best antibodies and reagents cut down on expensive and unproductive experiments and accelerated projects by months.

Anthony Woolf, growth equity partner with Generation, a social-impact sustainability-focused investor, said his firm heard “what I’d describe as wild customer love” for BenchSci during its due diligence research. “The largest biopharmaceutical companies are spending billions of dollars a year on their preclinical research and development teams, so any degree of efficiency is meaningful to them.”

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BenchSci is working towards more diversity, equity, and inclusion initiatives in the company.Fred Lum/The Globe and Mail

He added there are relatively few software tools available for early drug researchers, and that BenchSci is a welcome response to “a massive innovation crisis” in preclinical research and development that has seen the cost of drug discovery skyrocket.

BenchSci was founded in 2015 by Tom Leung, David Chen, Elvis Wianda and Mr. Belenzon after they met through the Creative Destruction Lab at University of Toronto. It has grown rapidly since the start of the pandemic, more than doubling revenue over the past 18 months and expanding its team to more than 400 people from 100 in 2020. Mr. Belenzon forecast his company would double revenue again this year but didn’t disclose absolute figures.

Asked if he was concerned generative AI companies such as OpenAI could threaten BenchSci, Mr. Belezon replied: “I think every technology can be a threat if you don’t do anything about it. We will remain agile, adopt new technologies to help us solve the problem faster and never stop as an organization.”

Mr. Woolf at Generation added: “Our conclusion is that large language models” used in generative AI “are going to benefit BenchSci over time as long as they can incorporate it.”

 

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Singapore's Temasek cuts compensation for those responsible for FTX investment – Yahoo Canada Finance

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By Urvi Manoj Dugar and Yantoultra Ngui

(Reuters) -Singapore state investor Temasek Holdings said on Monday it had cut compensation for the team and senior management that recommended its investment in the now-bankrupt FTX cryptocurrency exchange.

“Although there was no misconduct by the investment team in reaching their investment recommendation, the investment team and senior management, who are ultimately responsible for investment decisions made, took collective accountability and had their compensation reduced,” Temasek Chairman Lim Boon Heng said in a statement posted on Temasek’s website on Monday.

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It did not detail the amount of compensation cut.

The move comes around six months after Temasek initiated an internal review of its investment in FTX, which resulted in a writedown of $275 million.

Temasek had said its cost of investment in FTX was 0.09% of its net portfolio value of S$403 billion ($304 billion) as of March 31, 2022, and that it currently had no direct exposure in cryptocurrencies.

Temasek also said last year it had conducted “extensive due diligence” on FTX, with its audited financial statement then “showed it to be profitable”.

FTX’s other backers such as SoftBank Group Corp’s Vision Fund and Sequoia Capital had also marked down their investment to zero after FTX, founded by Sam Bankman Fried, filed for bankruptcy protection in the United States last year.

“With FTX, as alleged by prosecutors and as admitted by key executives at FTX and its affiliates, there was fraudulent conduct intentionally hidden from investors, including Temasek,” Lim said in the statement on Monday. “Nevertheless, we are disappointed with the outcome of our investment, and the negative impact on our reputation.”

($1 = 1.3245 Singapore dollars)

(Reporting by Urvi Dugar in Bengaluru and Yantoultra Ngui in Singapore; Editing by Himani Sarkar and Lincoln Feast.)

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