Despite what some believe, and undoubtedly what most believe, the market price of something is only what someone else is willing to buy it for. It is completely insignificant what the original price paid for the asset was, what someone thinks it should be, or what the math with discounted cash flows says it should be worth going forward.
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As people keep focusing on the bottom in housing, and the bottom in equity markets, this key point should be remembered. The price that was originally paid for an asset is immaterial. The waiting for the turn is what keeps people losing money. After a while, the money lost becomes a detail that is sacrificed to the faith that a turn will come ‘eventually.’
The theories behind technical analysis can help us analyze the individual decisions behind price discovery. Since we have all these people waiting for the eventual turn, once prices start to move up, this elicits sellers of the asset at the new market price. So, as prices rise, overhead supply comes to market.
Now, how many people are sitting in houses and stocks that are greatly underwater? I would say a significant number. Many of these people are waiting for prices to return to their original purchase price, but as they realize over time that the return to the original price is not going to happen, there will be more overhead supply.
<o></o>There is a significant amount of loss recognition that has to occur before prices will return to where they were.
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</o>People may soon discover that the ‘eventual’ turn will come much, much later than they expect.
<o></o>
As people keep focusing on the bottom in housing, and the bottom in equity markets, this key point should be remembered. The price that was originally paid for an asset is immaterial. The waiting for the turn is what keeps people losing money. After a while, the money lost becomes a detail that is sacrificed to the faith that a turn will come ‘eventually.’
The theories behind technical analysis can help us analyze the individual decisions behind price discovery. Since we have all these people waiting for the eventual turn, once prices start to move up, this elicits sellers of the asset at the new market price. So, as prices rise, overhead supply comes to market.
Now, how many people are sitting in houses and stocks that are greatly underwater? I would say a significant number. Many of these people are waiting for prices to return to their original purchase price, but as they realize over time that the return to the original price is not going to happen, there will be more overhead supply.
<o></o>There is a significant amount of loss recognition that has to occur before prices will return to where they were.
<o>
</o>People may soon discover that the ‘eventual’ turn will come much, much later than they expect.
