“New All-Time Highs”

“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.

***

Josh’s note: I originally published this post in January of 2014 as the markets began the year at a new all-time high. I would note that during the course of the subsequent year, the S&P 500 went on to print 53 fresh new all-time closing highs. How many will 2015 bring? 

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web