Does the equity risk premium justify the risk?

Another bear? Goody, goody. Come on bears, get out in the open, the more of you, the better. A distinct lop-sidedness of either bears or bulls is a contrarian indicator. Lots of bears means we're near a bottom, just as when there are too many bulls, we're near a top.

Elizabeth Richardson

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Then you'll love this. My favorite contrarian indicator is the American Association of Individual Investors (AAII) investor sentiment poll. It measures how the members feel about the market over the next six months.

Currently it is: Bullish 22.17% -- the long term average is 39.2% Neutral 22.66% - the long term average is 31.6% Bearish 55.17% - the long term average is 29.3%

Here's the juicy part: Bullish: Max: 75.0% (1/6/2000), Min: 12.0% (11/16/1990) Neutral: Max: 62.0% (6/3/1988), Min: 8.0% (12/14/2000) Bearish: Max: 67.0% (10/19/1990), Min: 6.0% (8/21/1987)

So the bulls set a record high and the bears set a record low just before the

2000 debacle The bear minimum was just before the 1987 crash and the bull minimum was just before the 1991 boom.

So, bears, bring it on. There is enough doom and gloom that I am starting to think there might be a bottom somewhere. Not soon, I am always too early on this kind of thing.

Just a brief plug for the AAII. I've been a member for over 20 years. Their Journal publishes a whole range of articles on personal finance, not just investing. They are unbiased and without a sales agenda. See their web site at

-- Doug

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I'm not sure how much subjective estimates of the equity risk premium are worth. Here are my notes on the Dimson et al. study of data for the entire 20th century:

(The equity risk premium is ...) Extremely variable annually, roughly normal mean 7.7% std dev 19.6. Geometric 1900-2000 5.8% over bills. Same ballpark internationally. Ten-year premia: arithmetic 5.8% with std dev 5.4%, geometric 5.6%. NOTE lower than most previous studies due to longer time frame.

David

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