I worry we're falling into a buying justification trap we're trying to pass off as logic in order to feel better about chasing stocks that have run significantly higher.
The logic thesis believes it is thinking in this manner:
If X is greater than Y ( X > Y )
And Y is greater than Z ( Y > Z )
Then X is greater than Z ( X > Z )
You may remember it as the transitive property.
Here's how traders and investors are applying it.
If X = $2 billion market cap
Then, Y is worth at least $1 billion because it is also a letter in the alphabet
And Z should also increase in value because X and Y are going up and they are all letters
Unfortunately, the analysis fails to include important qualifiers if we're thinking in terms of stocks. What if X holds a dominant market position? What if Y has an approaching lock-up release? What if Z has a huge number of outstanding shares, few institutional investors, and operates in a much smaller segment of the market? I could list a dozen variables without trying too hard. If it weren't Christmas Eve, I might take the time to list twenty.
So, here's what we have to understand about the above "equation" traders are using. It is short-term in nature only. That doesn't mean you can't use it to place a trade or find the next momentum name, but the second equation has a short half-life. The first equation can essentially live on forever.
One might argue the first is a fundamental comparison and the second touches on technical analysis and momentum trading. It's not that either is wrong per se, it's that timeframe separates the two. The transitive property will work itself out in time in the markets. It beats to the heart of the efficient market hypothesis. The second plays on the psychology of traders, a place where efficiency goes to die.
The long and short of it is: recognize what equation is driving your current buys and sells and adjust your timeframe accordingly.
I want to take this last line to wish everyone a safe and Merry Christmas and thank you all for the kind notes regarding my pops. We're getting an early Christmas gift today as he's set to come home from the hospital, so once again, thank you.