This morning the S&P 500 opened above its all-time high of 1878. Looking at the charts, the uninformed investor would surmise that it’s been an easy road for investors. It has not. People have trouble with new all-time highs. We’re programmed to assume that things are about to go the other way. We do dumb things in the presence of new highs. The data tells not to but we do anyway (see Ritholtz’s ‘No, Market Highs are Not a Bad Sign’).
I wrote this at the start of the year, hope you find it helpful.
“New all-time highs”
Just reading or hearing the term itself engenders a certain kind of hysteria in people. It suggests that things are about to tip the other way any second, as we all carry within ourselves a cognitive defect known as the Gambler’s Fallacy. We innately believe that random occurrences are meant to balance out over short periods of time. That ten straight coin flips landing on heads virtually assures that a tails flip will be next – despite the fact that the next flip is its own event and nothing that came before it matters. That the roulette wheel “shouldn’t” be able to land on black or red more than five or six times straight – despite the fact that it most certainly can and will.
In 1945, the mobster Bugsy Siegel figured out that almost all of us fall prey to the Gambler’s Fallacy before it even had a name and he showed up in the middle of the Nevada desert to capitalize on it. An entire city sprouted up virtually overnight like the fabled beanstalk, avarice and good old innumeracy was the fertilizer.
It is tempting to hear about previously unheard-of prices for individual stocks and to reflexively declare that they are due to tip back over and bring order to the chaos they’ve wrought in our perfectly ordered mindscape. If only the world worked this way, predictions would be a snap – anytime we saw something unprecedented take place, like a stock trading at prices it had never seen before, all we’d have to do is bet the other way! But, in fact, behavior like this would quickly wipe our capital out, completely and permanently.
There is more meaning in an all-time high than meets the eye. This isn’t just a data point or a plotted roadside rest stop on the open highways of chartdom. This is a coronation of sorts.
When a stock hits an all-time high it means that people were willing to pay a price that no one before them has ever paid.
It means that no one has a loss in the stock or is “waiting to get back to even so they can sell”.
It means that a host of people who had been waiting for that pullback to get in are now ripping their own skin off in aggravation.
It means that it is the new favorite stock of those who are long, one that they will not easily part with because it is now “one of their winners” and it “has been good to them”.
It means the people who “bought small” are pissed even though they are up, these are the people sitting just below the offer like Tick Tock the crocodile loitering below Captain Hook’s gangplank – just waiting for a bite.
It means that every single analyst downgrade or estimate revision lower or silly piece of neutral commentary has been instantly invalidated – it all meant nothing and was a waste of ink.
It means that everyone who sold along the way, in varying degrees of course, was wrong – even if they were up big.
It means that any and all media carping over the company’s “fundamentals”, “model”, “management” or “outlook” were a total and utter waste of time and energy.
It means that these are the stocks that will be brought back to life the fastest from the depths of any market-wide sell-off or correction as they are now the hot money names.
Finally, it means that the stock must be on its best behavior from here on out. There will be more margined-up positions and quicker trigger fingers on any adverse headlines than ever before. There’s an apropos piece of advice that branch manager Lou Mannheim once gave to his broker Bud Fox: “Kid, you’re on a roll. Enjoy it while it lasts, ’cause it never does.” But this does not mean that the coin is about to flip tails or the roulette wheel’s destined for to land on the other color any time soon.
And so while our DNA and 100,000 years of evolutionary programming may lead us to believe that a new all-time high is a precarious perch and presages an imminent turn in the other direction, it isn’t ever quite that simple. Many new all-time highs are merely stepping stones toward the next set of new all-time highs, after all.