The ebb and flow of value, whether in real estate or stock prices, is a human construct based on time and other environmental factors. Value will always be relative to the “haves” and “have nots.”
A stock (or property) with enough demand AND enough people with the means to buy it, will drive the price up until one of those two conditions are not met – either there’s no more demand, or the people left with the demand do not have the means to afford it. A person can have a high demand for a nice luxury vehicle, but if BMW, Mercedes, and Lexus are waiting for that same person, who may only earn minimum wage, to come through their doors, all three of those auto manufacturers would go out of business. Luckily (for them), they have enough demand AND enough consumers with the means to keep their doors open.
A stock’s price that gets too expensive will eventually stall when there are no more buyers willing and able to purchase the stock at the given price. Sellers will need to offer a lower “Ask” price if they want to sell their assets. The same works for housing. Pullbacks are natural and should be welcomed.
If a stock’s share price was a like a ratchet that could not fall back once it notched another peg higher, only the richest people in the world would be able to afford to be in the market.
In May 2022, when Walmart released earnings that didn’t please the market, the stock price slide 11%, then another 7% the following day. This wiped out over $30 billion dollars in two days from the Walton Family – the majority owners of the company founded by Sam Walton. Certainly, there probably wasn’t a single member of that family who thought the loss in value was warranted, but the market decided the value needed to be cut by that much over the course of two days. Ironically, even with a drop like that, not a single person would argue that these people are now broke – the value of their net worth is considered very high by almost every measure.
Value will always be at the whim of the people, understanding and accepting this will prevent a lot of heartache later. Stocks can’t go up forever and it’s for that reason to never be too greedy, especially when trading. A 10-bagger (a stock that’s risen 10x from your buy price) is really nice, but sometimes you’re better off taking an 8 or 9.
Rising prices require energy and markets must recharge to get enough energy to move higher. Take advantage of those pullbacks to add to your high conviction stocks.