Sentiment is an investment theme that can help investors take advantage of the return opportunities generated by the emotions, perceptions and actions of market participants.
Sentiment provides a forward view on the likelihood of near-term price changes, serving as a complement to investment themes that are grounded in fundamentals and take shape over the long term.
Although sentiment is a useful and important theme, we believe investors should be wary of stocks that may benefit in the short term from positive sentiment, but could suffer in the long term if they are overvalued.
All professional investors strive to remain unemotional about investing. One of the key advantages of a quantitative approach to evaluating stocks is the way it reduces the influence of emotion on investment decisions. But quantitative investing isn’t just about avoiding emotion-generated mistakes. It’s also about exploiting the emotional and behavioral aspects of investment decision making that can create return opportunities. This month’s commentary explores an important signal that, as quantitative investors, we use in our effort to convert investors’ emotions into better stock-picking decisions: investor sentiment.