Breaking Through the Fear: Investing at All-Time Highs and the Power of Strong Fundamentals

Buying at All-Time Highs can be scary, but charts can be misleading

Investing in stocks at all-time highs can be a daunting prospect for many investors, as it often triggers psychological biases that instill fear and caution. The idea of buying into a stock that has reached unprecedented levels may seem like a bad idea, stirring concerns of an impending correction. However, it's essential to recognize that the fear associated with all-time highs might be based on cognitive biases rather than a rational assessment of the company’s underlying health.

Value investors like buying low and selling high, a principle rooted in the belief that undervalued stocks have the potential for significant future appreciation. However, the paradox arises when considering stocks at all-time highs. The fact that a stock has appreciated significantly does not mean that it is not anymore at a “low” price. Of course, people who bought in earlier surely got a better price, but, that does not mean that the price is now “high”.

Example: When I first bought Fairfax it was up >100% from the lows. It then went up 86% more in a bit over a year. I kept buying more during the rise.

Charts can be very misleading. Stocks going down may appear like a bargain and stocks going up may look expensive. Some times, this is true, when stocks correct it can be a good time to add and when stocks go up it can mean they reached a fair valuation. But other times, a downward move can mean that fundamentals have deteriorated a lot and an upward move can mean fundamentals have improved exponentially.

Value investing involves purchasing assets when the market has overreacted to negative news, but it also entails buying when the market has underreacted to positive news.

Each stock is an individual, non comparable case study. The use of logic for it's individual case is the only way to analyze it. It is important to evaluate each investment opportunity based on its specific fundamentals, irrespective of the prevailing market sentiment. In fact, when supported by robust fundamentals (such as low valuation and predictable earnings growth), investing at all-time highs can be a prudent strategy with a high margin of safety.

Kind regards,
Oscar.