Of Mountaintops and Market Tops

Is This the Top?

Photo: Doug Tengdin

After graduating from college, my best friend and I went off on separate career paths. I moved to Washington to analyze data and build economic computer models for the government, while he tramped around the mountains and streams of New Hampshire, calculating primary plant production and measuring how many people were out on the trails. We got together and traded tales, mine about the bureaucratic swamps of Washington, DC; his about wetland use and soil erosion in the alpine zone.

One of his more entertaining stories had to do with the week he spent on a popular mountaintop. Every day he would rise before dawn and head up, planning to arrive before the first tourist. During the day he would use a counter to get an accurate count how many people reached the summit. He would also estimate how much time they spent there, before heading down just after sunset.

Because he’s a big and official-looking guy (with a hand-counter), people would approach him during the day with their questions. One of the most common was “Is this the top”?

He was tempted to say, “No, that little cabin WAAAY down there, that’s the top,” and let them figure it out. And if you stand at the summit, it’s clear there’s nowhere to go from that place on the mountain but down. Even so, people who have just been hiking uphill for several hours might be forgiven for asking if they need to steel themselves for more pain. So, my friend just quietly affirmed, yes, this is the top.

Today, watching the markets rise to new highs after their dramatic COVID-inspired fall and Fed-driven recovery, people might be forgiven for wondering: is this the top? Like my friend, I’m tempted to respond, “You see that trough where everyone was selling and everything (including Treasury bonds) was selling off – that’s the top!” But no, people are exhausted. The nonstop streaming newsfeeds of pandemics and protests and politics and market volatility have us all on-edge. We want it all to be over, and it’s never over. How can stocks be making new highs, when the world seems so messed up? Isn’t it time to cash in our chips and walk away?

The answer to this question isn’t as simple as my friend’s situation. He had a clear geographical point. In fact, the US Geological Survey has installed small markers on the summits of many peaks in the Northeast. He could point to the marker and say, “There’s your top, certified by the Department of Interior.” But market participants don’t enjoy that luxury.

Photo: Doug Tengdin

The top of the market won’t be recognizable until well after it has passed. If people feel anxious about their gains, there’s nothing to stop them from taking a little money off the table. Investing isn’t gambling, but they share some common elements – significantly, “managing your stake.” But if you’re a long-term investor, it makes sense to invest strategically, consistent with your long-term objectives. You should change your strategic allocation when your strategic objectives change. For example, as you near retirement you want a more conservative allocation. But you’ll know about that long before it happens.

If day-trading and market-timing were easy, people wouldn’t lose their stimulus checks on websites and smartphone apps. Market prices discount the real value of future cashflows, and these are fundamentally unknowable. During volatile times, volatility is normal. In the markets as in the mountains, the first principle is: safety comes first. This may not be the top – or it may be – but we won’t know until we’re out of the fog.