Why Do People Hate Rising Stock Prices?
There’s a general disdain for rising market prices. Why? Because, the odds are, you aren’t participating in all of the gains. There’s some sad math behind the reality of the stock market and that math says we all can’t benefit from the market’s rises. You see, all securities issued are always held by SOMEONE. The market, in the aggregate, is the market. And we don’t all have all of our chips in the stock market, because, by definition, we can’t. When I buy stocks someone else sells their stocks. Again, all securities issued are always held by someone. And the fact that someone owns stocks means someone else doesn’t own stocks.
So, when stock prices go up there’s an inevitable sense of opportunity loss (by someone). You feel like you’re missing out on gains you could have potentially been a part of. You feel like you’re falling behind. This is a perfectly common reaction, but it’s also totally unreasonable and almost certainly misguided. Why? Because we don’t really have to be involved in all of the markets gains all of the time. What we really need our money to do for us is outperform potential purchasing power loss and protect us from the risk of permanent loss in a manner that is consistent with our risk tolerances and portfolio needs. That is, we need to create SAVINGS portfolios that create a sense of certainty and protection in what is really a savings account (not an investment account).
I started Orcam in large part because I want to help people better understand the role of the portfolio in their lives. It’s not there so you can get involved in the aforementioned herding race that many engage in on the way to inevitably underperforming the stock market (as most do after taxes and fees). Your SAVINGS portfolio is there as a residual income from your primary source of income. You get “rich” by maximizing this primary stream of income and then putting it to good use by protecting it and understanding how to construct portfolios that help you avoid falling into the pitfalls that are generated by the fear of opportunity costs.
It’s totally natural to hate rising stock prices. After all, it’s a certain sign that someone is benefiting from something that you’re not. But the worst response to this opportunity cost is to believe that you need to position yourself in a manner that will almost certainly result in excessive risk on the way to chasing returns. That’s just classic herding mentality that will likely result in excessive risk and uncertainty in what is ultimately your savings portfolio. So yes, it’s okay to hate rising stock prices. But it’s not okay for you to respond to rising stock prices irrationally.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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29 Comments
Too bad most people won’t view the world through this lens. They’ll continue to chase assets and pay up thinking they’re doing the right thing to get ahead.
Weak.
Does John Hussman ‘hate’ rising stock prices? Is he ‘irrational’ because he sees the market as overpriced?
Now he might be wrong, but let’s argue the bears’ case, not describe them as irrational or pin false labels on them.
This doesn’t mention bears or Hussman. What are you talking about? If anything, Cullen’s piece says you shouldn’t be concerned with chasing stocks here. It’s a justification of a more prudent and cautious approach. Sometimes I wonder if you even read this website at all. For someone who comments here so much you don’t seem to have a clue what’s actually being written and discussed.
OK, who hates rising stock prices?
I used Hussman as an example because he is probably one of the better known analysists with a cautionary stance.
I understand what Cullen saying — don’t chase market returns, don’t buy at the top; instead invest in my Savings portfolio. But people who are buying now don’t hate rising stock prices, they are enthralled by them.
Better known analysts?
http://bit.ly/YHwZqW
You know you can be forgiven for a year or two or three years of bad performance. But over a period of 12 years? Especially when the world gave him a recession and a financial crisis?
The problem is he doesn’t understand what matters and what doesn’t for a stock? and he over-analysis the things that don’t matter. Not dissimilar to all the technical analysis and chartistans
Are you that Warren Buffett the Oracle of Omaha? Anyway, I totally agree with you: Mr. Hussman has been failing to consider many other very important factors in his analysis, for instance, the role QEs have played to the asset prices. I sold his two funds 2 – 3 years and never regret about it.
Yawn… a bear manager with stellar returns during a bear market is falling behind in a bull market. Maybe he was right, maybe he was wrong, or maybe he just had the right investment style for the right time.
One might logically conclude that now may be a good time to lighten up on your stock exposure, assuming that you are not already underweight on equities. And March 2009 when stock prices were about half what they are now, that would have been a great time to buy. Be greedy when others are fearful and fearful when others are greedy. Right now with huge equity fund inflows in January it seems that others are greedy. Don’t chase the herd. Good article, Cullen.
Except the market can stay irrational longer than you can stay…. well, I guess you’re still solvent. But in the housing and dot com bubbles prices kept rising for quite some time after it was clear they shouldn’t be. So my question right now is…. how much higher and how much longer can we go before we get that moment. We’re no where near those two examples in euphoria. And I’m skeptical of the complacency levels. Everywhere I turn all I hear about is the impending sell off. Since everyone is expecting it, maybe it won’t happen until no one is expecting it.
“Dude, I own the wrong stocks.”
“Me too, dude.”
“If the market would just go way down, I would sell them and buy the right stocks.”
“Me too, dude.”
“But it just doesn’t”
“I know, dude, why?”
“Sigh.”
“Sigh.”
I dislike rising prices because it means it costs more for me to purchase dividend growth companies and reduces my yield when I do buy them.
You could sell puts instead. If the stock falls you get assigned the stock (at strike price – premium received), if not you get to keep the premium. Capital outlay should be the same in a margin account.
Rising Stock prices give people a false sense of wealth. This inturn causes them to make irational purchases.
I don’t hate at all the rising prices of stocks I hold.
I hate the rising prices of stocks I don’t hold.
Anyway, I buy (and then hold -usually- for a very long time) ONLY high dividend stocks of large, normally rather old and boring companies.
Never the ‘hot’ stuff.
Boring? Yes maybe, but then, I was never interested in the sport, or art, or whatever it is called, of doing frequent trades.
Plus, quality of life is better for me since I don’t have to rebalance the portfolio daily, or so.
It’s weird, but being out of a market that rises feels worse than being in a market that falls, at least in my personal experience.
At least in a bear market everyone else is miserable too
Misery loves company.
Rising stock implies reduced return expectations for those wanting to increase their allocation to the stock market. This is mathematical and the only reason for not being happy about it.
People of course don’t hate rising stock prices as such. Otherwise they would have to love bear markets, no very realistic.
“So, when stock prices go up there’s an inevitable sense of opportunity loss (by someone). You feel like you’re missing out on gains you could have potentially been a part of. You feel like you’re falling behind”
Yes,sure.Or just stop taking the cheap courses in psychology.Here in the UK I sold my entire property portfolio over three tax years ending 2007/2008. I can completely assure you it never crossed my mind for a second that I was missing out as the prices kept going up in 200 and 2007. So why is that? Because actually price going up means very little on it’s own. Despite what some people may think it really does matter who is doing the buying and the price level and the urgency they are putting into it.For sure prices going up are great at times ,because it gives you an orderly exit at a time you have deemed the risks to be disproportionate.
You want some psychology to discuss.Then try discussing why so many people find it so hard to sell a rising price …LOL
Its not rising stock prices that concern me but what it can lead to i.e. asset bubbles and debacles, which have reeked havoc in this country for the last 12 years. Think about the innocent guys who paid dearly who weren’t in the market etc. e.g. unemployed, under water mortgages, retirement saving wipeout etc.
Picking good investments is easy. The hard part is waiting for the good investment opportunities to appear and then waiting some more for them to bear fruit.
The great thing about investments with a good yield (either bonds or stocks), is that they start baring fruit immediately.
P.S. I should have probably called them “savings instruments” rather “investments”. My apologies to Cullen
Because everyone knows the market cycles back down. I think the next peak will happen in May – http://modeltstocktrends.blogspot.com/2013/01/sell-your-stocks-in-may.html
A lot of good points in the article Cullen but this;
“And the fact that someone owns stocks means someone else doesn’t own stocks.”
simply isnt true….. not by definition. Everyone on the planet could be the owner of at least one share of one stock. A person doesnt necessarily sell all they own. I agree that everyone ISNT an owner and its likely that many never will be but its not true that the world must have people who dont own stocks. Anymore than it must have people who dont own shoes.
Now certainly most stocks do not have enough shares available to even give all Americans one share but it sounded like you were making a market wide claim.
Besides the purely spychological reasons cited by CR, here are some others:
- The Fed pushes stocks up artificially; it is their way to manipulate psychology; it corresponds to the overachievement of the 5-year plan in China
- Brokers push stocks up on self-interest
- The media is brainwashed by Fed / media to push stocks up
- Stocks pushed up end up in bubbles that misallocate a lot of resources and wreack havoc
Hate to bust anybody’s bubble, but there is a rally going on. Fighting the market gets expensive, so just learn to love market direction. Believe change when you see it. Worried that you could lose if you get in now? Let that be a lesson, if you had believed the direction when the rally started, a loss would just be a little give back. Get on the right side of the trade and stay there, find a good set up then set your stops. If you lose so be it just do it right always and you’ll be ok. I know from experiance fighting Mr. Market sucks.
Be Careful Mike, we are entering a Birth Pangs territory for a new year.
It is though each year now has events that rock things. Tsunamis, Earth Quakes, Wars, Embargo’s. Sequestrations…. I’ll sit here on the Beach, let me know how the water is in a few month.
Hi Cowpoke. Come on in waters fine. Hey somethings got my leg I think its a bea
Om nom nom nom!