The Real Psychology of Stock Market Highs
Don't let the experts fool you
Posted Mar 11, 2013
Everyone says that the average investor makes terrible investing decisions. A whole industry is built on the fear surrouding this.
But what everyone forgets is that the Nobel Laureate Harry Markowitz who essentially created the idea of asset allocation warned that step one was not deciding risk preference but knowing what you believe and why. The fact that most investors are taught to believe the market is a mysterious game, too complicated for them to understand sets them up with the belief they can't do it.
The fact is that new highs tend to beget new highs - for longer than all the pundits say they will. An old saying is "Markets climb a wall of worry" and therefore, as long as people are on TV talking about how now the market is too expensive, chances are, it will go higher.
Think about it - anyone who is "long" (holding stocks) is making money. Anyone who is not in the market but wishes they were, will eventually give in and get in. And last, those who are short (or who have sold the market because they expect it will go down), have to buy or get long sooner or later. This creates built-in buying and built-in price rises.
Conventional wisdom also holds that the market predicts the future of the economy. So today's prices are not about today but about what will be happening in September.
It doesn't pay to wait until a stock - Apple say - has had a near parabolic rise. But those are the rare situations. Thinking through WHY someone will pay more for a given company's stock in the future - or what is called Theory of Mind thinking - has been shown to improve investing performance.
In short, don't let the naysayers automatically turn you off from the market. The surest sign of more new highs are new highs now.