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How hard is to buy something when it is at all-time highs?
Our every instinct tells us not to do it.
You’re paying too much. It’s going to crash. You’ll get your fingers burnt.
It’s so obvious.
Don’t dive in. Wait for a pullback!
But such instincts are misplaced.
Don’t trust your gut
In fact, such instincts are our worst enemy. They are part of the “wall of worry” that you have to get over if you’re to fully enjoy – and benefit from – a bull market.
The secret of investing is simple: you need to find a bull market and be long. Everyone is a genius in a bull market.
Of course, there’s the fear that this bull market isn’t real. It’s a bubble. But you know my definition of a bubble – a bubble is a bull market in which you don’t have a position.
You keep reading the stories about why it’s going to crash. But the bears always make the headlines; bad news sells better than good news. We’re hardwired to respond to bearish stories – it’s part of the human instinct to protect against risk.
Meanwhile, the market carries on going up and you’re on the sidelines. The further the market goes up, the louder the cries of “bubble!” get. Then eventually the market does go down and the bears are all hailed as geniuses.
It’s all noise. You want to be long in a bull market and you want to be out in a bear market – or you want to be short.
And do you know what? Things only break out to new highs in a bull market; they don’t break out to new highs in a bear market. So if something is breaking out to new highs, then that, by definition, means it’s a bull market. In a bull market, new high follows new high.
And yet it’s so damn hard to buy new highs!
In a bear market things break down to new lows. It looks cheap. You take the contrarian trade. “Look at the value I’m getting here!”, you think. But do you know what comes next? New lows. In a bear market, new low follows new low. You want to be short.
A long and painful story of ever-higher new highs
Back in 2013, the S&P 500 broke out to all-time highs. All that pain from the financial crisis still lingered. Buying the new high seemed like insanity. We were going to get another 2008 any day – that was the general feeling.
But do you know what followed that all-time high? Another all-time high. And another. And another. Day in, day out. Week in, week out. Three years of all-time highs.
In 2013, the S&P 500 was below 1,600. Today it’s over 3,000. Today, 1,600 feels very cheap. It didn’t then. But I bet you wish you bought it.
In 2015, we got a wobble. But then what happened in late 2016? Another all-time high. Then, we were around 2,200. It feels very cheap today; it sure didn’t then. US stocks were a bubble. Everyone could see that, surely?
What came next? All-time highs. Nearly three years of them, before a 12-month period of wobbling and volatility.
So here were are in late 2019, and what has just occurred in the US stockmarket? Yup. The S&P 500 has just broken out to new highs. There was some round-number-itis at 3,000 – perhaps six months’ worth – but we have just broken above. We are within touching distance of 3,050.
The Nasdaq 100 and the Russell 3000 have both also closed at new all-time highs.
New all-time highs are not characteristics of a downtrend. They’re characteristic of an uptrend, of a bull market. And in a bull market you want to be long.
I can find a million reasons why the US stockmarket should go down – an eccentric president, trade wars, excess leverage, out-of-control money supply, changing demographics.
Whatever. The market is going up. That’s all you need to know.
Who knows? In three years’ time, 3,050 on the S&P 500 might look as cheap as 2,200 does today. We might have round-number-itis at 4,000.
Or, in three years’ time, the S&P 500 might be back at 2,200. I doubt it, but I don’t know.
But I do know this: all-time highs lead to more all-time highs. Buying new highs is a better strategy than buying new lows.
For all its many flaws the US stockmarket is in a bull market. And in a bull market you want to be long.
There will come a day when the all-time high is the final all-time high. And that’s the all-time high we all live in fear of buying.
But the nature of bull markets is that you get lots of all-time highs before the last one.
Is this week’s all-time high the final hurrah? Or the first of many?
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