The chart above shows what historically happens after the the S&P 500 goes up more than 10% (in turquoise) during the first half of the year. This is juxtaposed with what happens after the market finished the first half up less than 10%. The takeaway is that a strong rally in the first half usually leads to higher returns in the second half than normal. This is infuriating for people who spent the first half waiting to buy. You’re telling them “Now you’re really going to chase.” And nobody wants to hear that.

But strength begets strength most of the time. The evidence is right in front of your face, whether you like it or not. This is one of the hardest concepts for people to get comfortable with if they don’t know the history.

I explained this ten years ago at The Reformed Broker a year and change after stocks had just broken out into a fresh secular bull market. New highs were occurring monthly and a lot of investors were still mentally stuck in the secular bear market of 2000-2013 mentality. We were convincing hundreds of investors back then that new highs were not, in and of themselves, a reason to stay on the sidelines. You wouldn’t believe the pushback. The people who became clients in that era, despite their reticence, should now be clients for life given what’s happened in the decade since.

We are predisposed to see something making a high as being indicative of something that’s about to fall again. “What goes up must come down” is something deeply ingrained in our consciousness from birth. It has to do with the cycles we experience in life. Summer gives way to fall which leads to winter. At the peak of summer, we know instinctively that it cannot last. We impute this innate tendency of thinking over to the realm of investing where, of course, it is completely unhelpful. Yes there are cycles, no they don’t have to obey any sort of rules of perceptible time and space.

But because this psychology is core our existence, it is unshakeable. The externality of these feelings has manifested itself into what science refers to as the Gambler's Fallacy - which I wrote about thusly:

In fact, markets do not fall simply because they have risen. They fall when they fall. There’s no schedule, the would-be dip-buyers eventually learn, much to their chagrin. There is a momentum to a trending market that can defy everything we deem to be logical or within the realm of possibility.

What the chart above shows is that there is also a seasonality to the way markets behave. It’s not astrology, it’s human nature. As a bull market charges forward, the people who’ve missed it are more likely to buy in, later - higher, because they cannot stand to watch their friends and neighbors riding it without them. This explains why the two green bars above are so markedly different from the other ten. In 56% of all years, the S&P 500 makes its peak for the year in either December or a few weeks later in January. This is the result of that chase. Again, not witchcraft, just people reliably acting like people act. Year after year, era after era. The data used to create the chart above encompasses the period of time between 1950 and 2024. That’s three quarters of a century of behavior. You could make the bet that - suddenly - people will stop acting as people always have, but that’s a low probability bet.

And this is the worst part for those who’ve made the low probability bet - the chart above shows what happens when the trailing 63-day returns for the stock market exceed 19% (which just happened). Incredibly, the result historically is that stocks go on to do even better. You can see why this would infurariating to those on the outside looking in. “You mean to tell me I just missed that whole run and now I still have to buy in to not miss even more?” For retail investors, it means frustration. For professionals, it means they lose their job. It becomes existential depending on how performance-focused their clients are.

These three charts come from the latest episode of The Compound and Friends. Our guests were the proprietors of this research, Warren Pies and Fernando Vidal. Michael and I have been fans of 3Fourteen Research (get it? Pies? Pi?) since they hit the scene a couple of years back and we’ve had Warren on the show to educate you since 2022. Having them both in-studio this week together was a lot of fun this week. Making our friends your information sources is the mission of the show. If you’ve been listening to us for awhile, you get that. If you’re new to our show, welcome to the gang. Educating ourselves and bringing you into the room is something we take very seriously, even though we have a blast doing it.

Listen to the episode on your favorite podcast app here or watch the show below:

Thanks for watching our stuff. If you want to become a Compound Insider, subscribe here.

Big Tech Talk

My friend Alex Katrowitz invited me on his show this week to talk about the latest developments at Apple, Amazon, Alphabet and Nvidia as well as a philosophical discussion about my chapter called Just Own The Damn Robots in the new book, You Weren’t Supposed To See That. Alex is excited about AI and the possibilities its about to open up for workers and companies around the world. I am slightly less positive than he is and we discuss why in the video below:

Thanks Alex! Love talking with you, even when we (sort of) disagree.

Listen to Alex’s Big Technology podcast here.

This week I am speaking at the Financial Planners Association of Nebraska annual wealth conference. It’s being held at Creighton University in Omaha, a city I haven’t yet been to, and I am very excited. I am told that the event is open to anyone who wants to register, so if you live in the Omaha area, go here and tell them you want to be there.

While I’m there I am on a mission to eat the local steaks and maybe see Warren Buffett at the local McDonald’s drive-thru. I’ll wait, I got time. Anyway, that’s all from me for now, have a great weekend! - Josh