Pete Wargent blogspot





Friday, 15 September 2017

Why are they selling?

Two sides to a trade

There are two sides to a trade.

If you are buying an investment someone is selling it.

Ask yourself, then, a simple question: why are they selling?

It might be for personal reasons.

They could be selling some shares before financial year end to reduced a tax liability, for example. 

Or it might be for another genuine reason.

In the property markets, vendors often sell an apartment because they want to trade up and move into a house. 

Or, maybe, they don't like the investment as much as you think you do, and that's why they selling. 

Group think

Group think can be dangerous.

When everyone is piling into an asset class or certain investment, this may not be a great sign for future returns.

Try to become a contrary thinker. 

This is not necessarily a skill you are born with, but it can certainly become a learned habit over time.

Question everything - not to the point of inaction, or sleepless nights - but don't simply blindly trust widely held beliefs.

Try to think of counter-arguments your investment decision, or list potentially dissenting views.

Think of some worst case scenarios, and what you would do or feel if they played out.

Asymmetric information

Could the seller know more than you?

Real estate is an imperfect market which offers amazing opportunities to buy below market value or add value.

But asymmetric information is a common hurdle that needs to be overcome via thorough market research.

Almost by definition, the vendor of a property tends to know more about the potential problems and challenges than the buyer.

In the share markets insider information is also rife.

People often like to think they know more than the market, but the truth is, they often don't.

Therefore, before you pull the trigger on an investment, think to yourself:

"Why are they selling?"