Sentiment Matters

Read this detailed primer on what Sentiment is, why it matters and how to use it in your investment process.

Alternatively, here is a quick intro to why Sentiment Matters.

Investor sentiment plays a crucial role in risk/reward analysis, managing behavioural biases, and spotting consensus versus contrarian opportunities.
While it shouldn’t be the sole driver of investment decisions, integrating sentiment into the investment process can help improve timing, enhance risk management, and ultimately increase the probability of successful investment outcomes.
Yet, not all sentiment indicators are created equal—being selective in choosing reliable, high-quality indicators is key to making sentiment analysis a valuable tool in decision-making.

Sentiment Analysis Can Improve Investment Outcomes

If everyone is already bullish on an asset, expectations are high, and even minor disappointments can trigger a sell-off. Conversely, if sentiment is bearish, it often takes only a small positive catalyst to spark a rebound.

As investors, we’re prone to emotional decision-making—getting greedy when markets rise and fearful when they fall. Sentiment analysis provides an objective tool to help manage these biases and avoid herd mentality.

Identifies when optimism or pessimism reaches unsustainable levels.
Assets go through periods of unbridled optimism and entrenched pessimism. Markets rarely stay at fair value and in equilibrium for long. So active positions are often most attractive when leaning against sentiment extremes.

Understanding market expectations improves decision-making on contrarian views.
Most investors are consensus most of the time. It is difficult to make money with consensus views. Some of the best trades come from high-conviction, non-consensus views. Sentiment analysis helps you understand what consensus is, giving you confidence in implementing your non-consensus view.

If an asset has extreme sentiment, it may be worth investigating further.
A contrarian position can be powerful when combined with a strong fundamental view and a clear catalyst.

Sentiment can highlight vulnerabilities in your positions. If sentiment is extremely positive, the downside risk increases, and vice versa.

Even with a strong fundamental view, timing matters. Entering a trade when sentiment is against you and exiting when it becomes consensus can help skew the probability of a good investment outcome in your favour.

Knowing what the market already expects allows you to assess whether your view is different enough to create an opportunity.