In this edition of ‘Stock Teasers’ we are going to be looking at a submission to /r/CanadianInvestor on Reddit where the user is asking if they are alone in continuing to stay on the sidelines during this market run-up. Let’s dive in!

Below, we can see the user's submission asking if others feel the same way about holding off on investing in stocks since they feel the market is so overvalued.

Source: Reddit.com

Our Thoughts

The fear of ‘too much risk’ and skepticism around new all-time highs is an innate human response that’s engrained into us. It is completely natural to feel worried about the potential downside risks when the market continues to roar higher and make new all-time highs, but, while this is a completely normal instinct, it is one that investors need to counter with facts and logic. Historically, when the market breaches a new all-time high, it tends to continue to make all-time highs. In fact, the number of times that we see the market mark a top and head 20%+ lower are few and far between compared to the market making a new all-time high.

 Unlock the Power of Informed Investing with 5i Research!

DIY investing doesn't have to mean going it alone. At 5i Research, we're your trusted partner in navigating the stock market. Our platform offers comprehensive stock and market research, empowering you to make smart investment decisions. 

• Investor Q&A: Have burning questions? Get answers from our team of experts and fellow investors in our dedicated Q&A section.
• Research Reports: With over 60 meticulously researched Canadian stocks, our reports offer in-depth analysis, giving you the confidence to invest wisely. 
• Model Portfolios, Alerts, Forums, Portfolio Tracking, and Much More...

Market Overvalued?

Let’s look at an example of when the market was ‘overvalued’ using the forward P/E multiple for the S&P 500. We can see below, that in mid-2020 when the markets were recovering from the rapid drawdown earlier in that year, the forward P/E was at a staggering 25X. Yet, Over the next four years, the market gained 60% (roughly a 14% CAGR), AND the forward P/E came down to 20X. This is just one example of why basing one’s investment decision based solely on one figure and estimate can be misleading.

To address this user's other concerns about feeling that the market cannot keep going higher forever, we will look at some common investor behavioural biases.

Anchoring Bias: The first is anchoring bias. Investors may want to ‘anchor’ their beliefs to a specific value or price. Typically when a stock or the market as whole moves beyond a previous threshold (such as an all-time high), investors might anchor their expectations to that certain price, and begin to feel that any price above all-time highs is too much.

Recency Bias: Investors have a tendency to think that trends and patterns observed will continue in the future. For example, if the market has not hit a new all-time high for a while (like in 2022-2023), investors might begin to assume this pattern will continue. When the pattern does not continue, it can create a sense of dissonance and distort our expectations.

Loss Aversion: Investors are often more sensitive to potential losses than potential gains. Fear of a market downturn or buying at the top can make investors more skeptical about the market’s potential to rise.

For these reasons, we want to remind investors that the value of a stock or the market is determined by more than just its current price. Factors such as a company’s earnings, growth prospects, industry tailwinds, and the overall health of the economy can influence value. As an example, in 2020, many investors were confused as to how the market continued to move higher while the present day economy moved in the opposite direction. But, in hindsight, there was enough fiscal and monetary stimulus to help revitalize the economy over the near term, that the market saw through this and discounted it to the present day.

As a final reminder, it is not timing the market that is important, but time in the market.  

Research for Today, Invest for Tomorrow.

Twitter: @5iChris