How to think above 21K feet, when markets are at all time high?

Last Updated on April 30, 2024

Climbers who ascend higher than a certain level (26,000 ft) on Mount Everest enter the “death zone.” In this area, oxygen is so limited that the body’s cells start to die, and judgment becomes impaired.

Similarly as markets are at all-time highs and there are people acting on two ends of the spectrum. One end being Over optimistic – investing in SME IPOs, new and flashy business models, ignoring valuations; and on the other end Extremely pessimistic – profit booking, being too fearful and not investing in any asset classes. In this blog, we will explore how to navigate and climb the mountain with equanimity (calmness and composure).

As Warren Buffet said– The sign above the players’ entrance to the field at Notre Dame reads: ‘Play Like a Champion Today.’ I sometimes joke that the sign at Nebraska reads ‘Remember Your Helmet.’ Charlie and I are ‘Remember Your Helmet kind of guys.’ We like to keep it simple.

Let’s look at common investing mistakes likely to be made and put on our helmets so we act with equanimity.

Behavioral biases to remain vigilant of in current market situations-

Recency bias: It tricks investors into believing that the latest market trends are the new normal, blinding them to the vast market history. It’s a costly reminder that yesterday’s news is often a poor map for tomorrow’s financial journey. Just because the stock doubled in a year, doesn’t mean it would double again in the future.
Narrative Bias: Investing has its own lore, seductive tales that captivate more than cold data ever could. But here’s the catch: a great story doesn’t always make a great investment. Narrative bias lures one into valuing storytelling over hard analysis, leading them astray. Remember, the market’s true language is numbers, not tales.
Overconfidence Bias: There’s a thin line in investing between confidence and overconfidence. The latter is an investor’s Achilles’ heel. It breeds an illusion of control, a false belief in our ability to navigate the market’s complexities with ease. Overconfidence turns risk into recklessness, transforming careful strategy into a mere gamble.
Herd Mentality: In the world of investing, following the herd can sometimes seem like the safest bet. But beware, the herd often runs in circles. Herd mentality makes us mirror others’ actions, diluting our unique strategies and perspectives. True investing acumen comes from informed, independent decisions, not from trailing in the footsteps of the crowd.

In conclusion, navigating the ever-shifting landscape of markets requires a blend of astute investment strategies and an awareness of the psychological biases that can cloud our judgment. Drawing lessons from the high-altitude climbers who carefully tread the “death zone,” investors must also ascend market peaks with a mix of caution and clarity.

Quality at reasonable valuation methodology serves as a reliable compass in this journey, guiding us to make decisions based on solid, quantifiable metrics rather than the fluctuating winds of market sentiment. It’s crucial to remember, as Buffett wisely notes, the importance of simplicity and prudence in our investment approach. The seductive narratives and crowd behaviors that often characterize market highs can easily lead to overconfidence and recency biases. These biases, while natural, can distort our perception of risk and value, steering us away from rational, informed decision-making.

At Moneyworks4me, we strive to embody the principle of equanimity – a calm and composed approach to investing. By combining a rigorous, data-driven investment process with a keen awareness of behavioral pitfalls, we aim to navigate the complexities of booming markets with a balanced perspective.

Our approach has proven its worth, yielding significant returns (30%+ returns last year; 20% CAGR) while prioritizing long-term stability and growth. In the end, investing, much like climbing, is not just about reaching the summit but doing so with an understanding of the terrain and respect for the inherent risks. By donning our metaphorical helmets and committing to a disciplined, informed strategy, we enhance our ability to achieve sustainable success in the dynamic world of investing.