Does Your Investment Depend upon the Current Market Conditions?

by Wes Bridel on December 27, 2010

in Stewardship

Is the market which you are looking at investing into on a roll?  Are you betting on this continuing?  Might that be your undoing?  Today, we’ll continue looking at methods of due diligence.

It is human nature to see big gains being made in a market and feel left out of all the money making.  The pattern which has repeated itself in every single market bubble is that people see that those who were early into a market made tremendous amounts of money so they jump in to make some of this easy money.  The problem is that once everyone jumps into a particular market, all the money to be made is gone.  What’s left is for the bubble to pop and the prices to come hurtling down because there’s no one left to buy.

This is why being a contrarian is so important in investing.  If everyone believes one thing, then that thing is unlikely to be correct because all the people who can buy (or sell) have bought (or sold) and there is no one left to do so.

It can be a very powerful investment technique to look for early trends and get into them early, but it can be devastating if you are the one to finally notice a well developed trend and jump into it with the assumption that it will continue well into the future.

It can also be a mistake to assume that because a trend has been going for a while that it can’t continue on further.  Always remember that a market can stay crazy longer than you can stay solvent if you invest to aggressively upon It’s turning around.  It’s good to see a trend reverse before trying to ride a new trend.

Let’s give some examples.  If you were a technology company stock investor in the late 1990’s, you were seeing your stock prices grow in leaps and bounds!  By the time 1999 started, prices had gotten so high that they made absolutely no sense at all.  Many famous investors steered absolutely clear of this market because it was pure gambling.  And yet, the year 1999 saw prices scream even higher.  It would have been a bad choice to try and sell short these stocks in early 1999 because even though prices shouldn’t be as high as they were (and were destined to fall) they could and did go much higher.

The problem is that most “investors” finally noticed what was going on in 1999 and this is when they got involved.  So they were able to experience a small part (the last part) of the ride up, but they held these stocks as they crashed down much lower in the early 2000’s.

This exact same story repeated itself in real estate over the next decade!

When looking at a new investment opportunity, are you simply seeing all the money that has been made and assuming it’s easy to do what everyone else is doing and make your own bundle?  If so, you’ll probably have the opposite experience.

OR…do you have an investment that will deliver value to the market in such a way that you can count on it even if market conditions change?  This is the type of opportunity that provides much more surety to you as an investor.

This is Part 22 in the series Investment Due Diligence. To use this as a growth tool to better understand your own calling, you might start by reading the first few posts in the series… Part 1, Pt 2, Pt 3, Pt 4, Pt 5Pt 6, Pt 7, Pt 8, Pt 9, Pt 10.

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