I’m skeptical at all-time highs. I know that feeling isn’t unique to me, that’s just human nature.
It feels like it’ll end badly. It feels unsustainable. But those are just feelings.
At a blackjack table, I’m nervous to hit when I have a 15 and the dealer is showing a face card, but I do it because the data says to hit, and data trumps feelings 100% of the time.
I’m a big fan of historical data that is rooted in market psychology. There is a mile-long list of things that are different in today’s financial markets versus the past, but human nature is unchanged over the last century. Fear and greed is fear and greed.
We had Warren Pies on The Compound and Friends this week talking about what happens when the market finally makes a new all-time high after going more than a year without making one.
With the exception of 2007, returns were higher one year later 100% of the time.
Investing is way too complex to be boiled down to a single variable, so nobody is saying that all-time highs are when you should lever up. But having the knee-jerk reaction to sell them would be equally ill-advised.
Warren mashed together the 14 previous experiences to create an average path of returns over the following year. I think this is a given, but I’ll say it anyway; You should not expect this year to look like the average of all other years. To me, the takeaway is that the psychology of new all-time highs should not be underestimated.
Getting back to the blackjack analogy, yeah you might draw a 10 and bust, but that doesn’t mean it was the wrong decision. Same thing with investing at all-time highs. Sure, this recent move might prove to be a head fake, but that would be a low-probability event looking at the historical data. Admittedly this analogy is a bit of a stretch and can be taken down in two seconds, I’m just using it to make a point.
Anyway, we got into this and a lot more of Warren’s research on the show. Hope you like it. Have a great weekend!
Michael Batnick is a managing partner at Ritholtz Wealth Management. He is the co-host of Animal Spirits, What Are Your Thoughts, and The Compound and Friends. For disclosure information please see here.