Last week, the Standard and Poor’s 500 hit new highs. I’m in Vegas taking care of some business. Of course, Vegas is a great place to think about something that economists call the gambler’s fallacy.
NVIDIA is a chip maker, originally known for video games, and its valuation last week actually surpassed Apple to be the number two most valuable company in the world after Microsoft, which is its own behemoth. As I’m sure you’re aware, artificial intelligence has swept both the tech industry and the markets by storm. In fact, now they’re talking about selling PCs with AI built into them. No wonder NVIDIA has such a great future. NVIDIA and the other tech stocks have really pulled the S&P 500 to stratospheric highs.
Whenever the markets are at highs, I think it’s time to consider the concept of the gambler’s fallacy. Simply put, the gambler’s fallacy means a couple of things. One, when people lose, they tend to double down to try to recover their losses because the pain of losses are twice as great as the joy of wins. Anybody who’s addicted to gambling knows that feeling.
The second part of the gambler’s fallacy is this recency bias where when the markets have been on a tear or you’ve been on a winning streak, there’s a tendency to ignore the statistics and keep betting as if you’ve got a hot hand. The studies have shown there is no such thing as a hot hand.
With the markets as rich as they are, it’s maybe a good time to be thinking about rebalancing, redeploying a little bit away from the market and protecting ourselves, just in case we do get a nasty correction later this year. There’s certainly a lot of unknowns, uncertainties with the election, with the economy, with inflation even.
If you’ve got any questions, please reach out to me or anyone in my team. Meanwhile, we wish you the best of investing success. Thank you.
Sources
- Nvidia overtakes Apple as its market capitalisation surpasses $3tn
- Should you buy expensive stocks? (economist.com)
- This Time Is Different: Eight Centuries of Financial Folly: Reinhart, Carmen M., Rogoff, Kenneth S.: 8601404555053: Amazon.com: Books
- Stock market today: S&P 500, Nasdaq hit record highs as Nvidia leads tech rally (yahoo.com)
- S&P 500 Shiller CAPE Ratio Monthly Analysis: Shiller S&P 500 PE 10 | YCharts
Paul is the founder and CEO of Avion Wealth, LLC. He leads a team of wealth managers in building and executing financial plans for high net worth individuals and families. Contact Avion Wealth to speak with a financial advisor.
