Pinnacle Mentality

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I can’t see the future. It’s a bummer, I know. If I could see the future, I would have bought Tesla stock back when it was valued around $35. Believe me, I considered it too, but I had no true way to value the company so I decided to avoid the risk. That may sounds stupid now since it took off like a rocket ship and is now up over 500%. However, would you buy Tesla stock now? probably not, because it seems like it’s at the top and all the growing is done, but if it goes up to $1000 per share next year, we’ll all feel dumb again.

The fear of investing in a company like Tesla at a time like now is what I call “Pinnacle Mentality.” This is the belief that prices are too high to grow any more based on past performance. In the case of Tesla, there are other risks that should also be taken into account, but it serves best as an example here. This belief is what propagates all of the market doomsayers that are always telling you that market is just about to crash.

In 2011, I watched a popular documentary-style film called Zeitgeist. After seeing that, when the country was about to hit the Fiscal Cliff (for the millionth time), I was positive that the market was going to plummet and I should sell off my stocks. The Dow did fall that year, but the Dow has also risen ~30% from it’s highest valuation in 2011, does that sound like the “End of the World?”

My point is that even though you may think prices are at their highest, it’s only ever true relative to the past. In World of Warcraft, a long time ago, when I got my Lightning Bolt to deal over 6000 damage in PVP by using a clever combination of talents and buffs, I thought that was going to be the highest damage I would manage to do. Now, after a couple expansions, a shaman’s Lightning Bolt easily can hit for over 12,000. I thought I had peaked when in reality, numbers were just going to go up in the future.

Another reason this mindset is so common is that we’ve been trained to look for “bubbles.” After hearing all of the horror stories of the “tech bubble” or the “real estate bubble,” any time it looks like a price is rising exponentially, fear kicks in. A fun way to realize that it’s all an illusion is to look at chart (preferably on Google Finance) of the S&P 500. First look at the last 10 years, notice the dip for 2008 (which had real underlying infrastructure causes), but otherwise prices look like they’re rising pretty rapidly. Then push it back to going from 1994 to 2004, you’ll see another dip, and more prices rising at a similar rate. Finally push it back to 1984 through 1994, and you’ll notice that prices always look like they’re rising really fast and there’s a minor dip in one year. Unless, you’re at the bottom of a dip, the prices are ALWAYS going to look like they’re at the top or in a bubble. Also note that the best way to protect yourself from those dips is to just not sell and Tough it Out.

Warren Buffet has said that one thing he really believes in is the ability for businesses in the United States to continue growing. Even though when we look at stock charts we see the present date as a cliff, in a couple years, it will just be a bump on the way to new heights. So, don’t let yourself be fooled by a Pinnacle Mentality, buy smart, never sell.

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