Prices and Memory

Do prices matter?

That’s the question investors have to ask all the time. Is gold a good investment? Depends on the price: if you bought it at $1000, you’re still happy with the metal trading at $1250. If you paid $1800, you’re just waiting for it to go back up so you can get “your” money back.

But an investment doesn’t know that you own it, and the universe doesn’t owe you a living. If a stock goes down after you buy it and nothing has changed—same management, same business strategy—why should it go back up? But people do this all the time. “Please get me back to even so I can get out!” is one of the most common prayers to the market. It’s a little rosary of fear and greed.

But it does seem—in retrospect—that some prices are more significant than others. Traders and investors recall what they paid and that affects subsequent market action. Technical analysis centers around how people behave at specific prices. Support and resistance lines aren’t magic, they reflect emotions around market movements.

Try this out: mention an investment, and see what people say. If you hear “Ugh!” take note: you may have discovered a hated—and profitable–asset. But if the response is peals of joy, be very, very careful. Because what goes around comes around: nothing is so good that the price doesn’t matter.

Douglas R. Tengdin, CFA

Chief Investment Officer

Leave a Reply

Your email address will not be published. Required fields are marked *