Human nature is very much like a pack culture when it comes to investment because many investors feel more comfortable following the “pack”. These are the situations which can lead to significant overbought and oversold positions in property markets around the world. Sometimes, if you are looking for a long-term career in property investment, it is sometimes sensible to go against the pack culture and look at the fair value of assets in their own right.
While many experienced hard-nosed investors are able to separate human emotion from investment strategy the majority of people are still led by their emotions. If, for example, we assume that an overbought or oversold position could be anything from 10% above or below the fair value there is potentially an additional 20% to be made. Obviously, this would only occur if you are able to buy a property when the markets are under pressure and oversold and if you’re able to sell a property when the markets are riding high and overbought. However, this is not such a unique event as you might assume.
Traditional investment valuations
When we strip away the emotion, the overbought and the oversold positions, traditional investment valuations are based upon pure supply and demand. As we have mentioned in previous articles, if you think of the investment arena as simply an information exchange you will begin to understand how it works. We have the full range of parties injecting data, information, reviews and indeed transactions which allow the markets to arrive at a “fair value” at the time. On many occasions this fair value will have an element of overbought and oversold because of momentum and investor sentiment.
It is worth noting that very often traditional investment valuations which worked in years gone by will need to be tweaked and updated to take account of recent trends and changes.
Timing is imperative
In a perfect world we would all buy at the bottom of the market and sell at the top of the market but unfortunately we do not live in a perfect world. So as well as keeping track of overbought and oversold markets/assets we also need to be appreciative of our time. It is also worth noting that trying to buy at the bottom of the market can be dangerous because very often markets will bounce quickly once they have bottomed out. It is often a similar situation in overbought positions when markets will suddenly turn when sellers realise that prices have overstretched themselves.
So, if you’re able to buy just before the market turns or sell just before the market tops out this would be a perfect scenario for long-term investment success. In many ways the main enemy of investors is fear and greed because they can turn a perfectly acceptable situation on its head very quickly and leave you nursing losses. In the words of Lord Rothschild, a very successful and very famous investor, “the reason I am so rich is because I always sold too early”. Think about that………it makes sense.