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October 28, 2006 The Psychology of Buyers and Sellers
As we all watch the weakness of the housing market, it's fascinating to
consider the psychology of both buyers and sellers. In fact the lead story
in yesterday's USA Today told of how home buyers were quickly dropping their
prices in San Diego and losing faith in their ability to sell. Obviously
some homeowners have an immediate need for liquidity and may be forced to
drop their home price sharply to stimulate demand. Others are willing to
ride the wave, whether it continues to fall or quite possibly rebounds.
Buyers, as we all know, are not interested in purchasing depreciating assets,
therefore they are willing to wait out the declines and purchase at very
favorable prices (unless they too are under compulsion). The same psychology
applies to buying companies, and especially buying non-controlling interests
in companies. Poor performance and in particular, losses lead to steeper
discounts, as buyers sit on the sidelines and wait. Sellers then struggle
with a declining stock price and question how low they will have to go.
Buyers often sense weakness and may very well sit on the sidelines and wait
for the real estate agent to get fired. These trends are how steep
irrational declines happen in all markets.
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