One of the most recognized portals for users of finance in the world is Investopedia, for those who do not know them is a kind of Wikipedia on finance.
One of the most interesting tools provided by the web is the development of the Investopedia Anxiety Index.
What is the Investopedia Anxiety Index?
This index shows investor sentiment based on the web behavior of more than 10 million users since 2015. The operation of the index is very simple, based on keywords. In particular, they use 12 keywords and measure visits to the URLs with the most traffic on those topics.
Once launched, they performed a regression with these parameters to obtain their behavior in previous years, since the information was available on the web.
The evolution of this index has been as follows in recent months:
How are IAI data interpreted?
The interpretation of the index is very simple:
- Levels below 100: indicate low levels of intensity
- Levels above 100: have high anxiety
The index is also composed of 3 indicators that measure the level of anxiety of investors in relation to:
- Macroeconomics: measures interest in the global economy, inflation or deflation
- Markets: short sales, volatility
- Debt and credit: bankruptcy, solvency and bankruptcies
How important are these indicators?
Although it seems that these types of surveys are not very relevant, the high level of data they handle and the use of big data offers us a very interesting indicator of investor behavior.
Even on the web itself, the high level of correlation between its indicator and the VIX is noted , as shown in the following image:
Even one of the creators argues in the video below that this indicator complements the VIX since it shows patterns or intentions of investor behavior that the VIX itself cannot measure , even advances them.
As the graph above shows at the beginning of the Lehman Brothers crisis, the level of anxiety predicted the market’s concern about the economic situation long before the VIX.
The weaknesses of value investing
- If we look only at the results and not at the process (which is important) as soon as the results are not as expected, the “value” will lose its attraction to investors;
- The “value” makes investment decisions guided only by the valuation of the company that wants to buy, completely ignoring the macro environment.
- A company’s knowledge has a limit, so the ‘value’ must be filled in with active risk control strategies.
Over the past 15 years, the style of “value investing” in asset management has been very successful , especially when comparing the profitability obtained with that of other forms of investment. However, voices are beginning to emerge within the industry that warn that the trend in this investment typology – known as active management funds that deviate from the indices – is due to the wrong reasons.
“If we look only at the results and not at the process (which is the most important), as soon as the results are not as expected,” Value ”may lose its current interest . Many new managers of this investment style discovered the methodology during a bull market, ignoring that “value” does not always give good results. The management sector has an excess supply of “Value” that will be shaken when the market corrects it. We have no doubt that “value”, by definition, must be a minority product. The current fashion does not make sense ”, explain the managers of the Narval fund of Rentamarkets, José María Díaz Vallejo and Juan Díaz-Jove.
Both agree that the “Value” methodology should be used for what is really unbeatable: choosing companies to invest in the medium and long term. This style offers a global analysis framework for a company, providing the necessary tools and way of thinking to analyze all aspects of a company: from the analysis of the competitive environment of its sector, to the analysis of the quality of accounting, passing through the company valuation.
However, Narval fund managers warn, “value” has two very important weaknesses that should not be overlooked:
1 – Ignore the macro environment
Value makes investment decisions based solely on valuing the company it wants to buy, completely ignoring the macro environment in which it operates. For Díaz Vallejo and Díaz-Jove, this is a mistake for two reasons. First, when the environment changes and macroeconomic conditions change, a company’s ability to generate profits also changes, so what today looks cheap to us tomorrow may not.
And second, they say, the macro has a very significant impact on the balance of the liability side. The financing of a company is absolutely dependent on the macroeconomic situation, so such an important variable should not be ignored.
2 – Risk management
“This is not a methodology that, by itself, allows us to manage the risk of a portfolio. To limit the risk, you need to know the companies in which you invest. The more aggressive versions concentrate a lot of investments to have a very high weight on the companies that they know best “, affirm the two managers.
However, experience indicates that, even with all the information , it is always possible to make an interpretation error and this error can be fatal if the portfolio is over-concentrated.
Furthermore, they add, we can never imagine the aspects that we do not know in an investment thesis. A company’s knowledge has a limit, so the “value” must be filled with active risk control strategies.