Investors flock to ETFs amid flight to sentiment

It's hard to pinpoint exactly when this happened but the world's stock markets are now awash with amateur psychologists who spend most of their time guessing what other market players are thinking and how they will react.

This means they have abandoned all that difficult stuff involving fundamental analysis of how companies actually make money and given up trying to determine what listed companies are really worth.

This flight to sentiment has profound consequences for smaller investors who, quite sensibly, are concluding in growing numbers that it is almost pointless to spend time selecting individual stocks or even individual fund managers who claim to have superior stock-picking capabilities; instead they opt to buy markets as a whole and are flocking to invest in exchange traded funds or ETFs.

We'll come back to the ETF phenomena in a moment.

Nowadays what used to be dismissed as gossip is the very lifeblood of not just so-called stock analysts but their main customers, the fund managers. They live in fear of not doing what others do and of missing a trend and therefore finding that their performance is out of line with other practitioners of this trade. Armed with fancy degrees, these fine men and women feign great interest in so-called fundamental analysis but in practice spend far more time worrying how others are perceiving the same pieces of information they have and wondering how this will affect tomorrow's or maybe even the next hour's market movement.

Obviously market sentiment cannot be discounted and indeed it is sentiment that moves markets in the short term.