A large part of successful trading and investing is about understanding how we as humans are wired, and allowing for that understanding in our decision-making. One significant tendency of the human psychological makeup is a form of recency bias that assumes that what is happening now will continue happening, no matter how illogical that assumption is. That is what we are seeing now in some quarters when it comes to tech stocks.
There are those who are saying that the selloff we have seen in the first week of this year was always coming and that it will continue. That sounds scary and in the immediate future, they could very well be right, but simple logic and every bit of evidence we have indicates that they will, at some point, be wrong. Their argument is that we started from record high levels, so an adjustment had to come, but the fact that we got to record highs shows that the doom merchants have always, without fail, been wrong in the past. They will be this time too, and not just because time favors bulls.
What we have been seeing over the last decade or so is a fundamental shift in the way society operates, and in where wealth is generated. These shifts come along occasionally in economic history and are prompted by innovation. The invention of the steam engine prompted a boom, for example, but then the internal combustion engine came along and forced a change away from trains while ushering the automobile boom. A series of otherwise unrelated things such as the contraceptive pill and prepared and frozen food combined to expand the workforce by empowering women, massively increasing the talent pool, and creating another boom. Each of these “revolutions” ultimately led to growth, but each time there were those who failed to recognize the potential and predicted doom and gloom.
Right now, there are a few concurrent fundamental shifts taking place, but all are rooted in improvements in tech. The globalization of the supply chain may have dubious advantages in terms of workers’ jobs, and hurts some people, but from a purely economic perspective, it is an extension of an idealized state where assets are allocated in the most efficient manner possible. However, it can’t happen without sophisticated computer programs to track and manage a global corporate footprint. Then there is automation, again a bad thing for some but, from a purely economic perspective, an improvement in efficiency that will ultimately benefit society as a whole. Once again though, that is a tech-dependent shift.
These are fundamental changes in the way we work and how wealth is generated that will increase wealth in aggregate. How we distribute that wealth will be something for politicians and philosophers to wrestle with but, if the total wealth of the world is increasing rapidly, then it is only logical that the value of equity in related companies will increase, too.
The stock market, in pricing that in, is simply doing what it is supposed to do.
When you hear a Wall Street analyst, a T.V. talking head, or an online commentator tell you that the tech selloff had to come and that it will continue for some time and be of major significance, ignore them. There may well be some individual stocks that got unjustifiably caught up in the move up, but the overall outperformance of tech in general is fully justified and has a lot further to go.
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