The Psychology of Selling

Whenever we discuss sentiment concepts like capitulation or exuberance, we get email asking why. "What’s with the touchy-feely crap?" writes a new reader.

One comment summed up this line of thinking perfectly:

"Remember when trading was not all "up in your head"? We’ve all switched to the marriage counselor’s version of investing. Crap."

Actually, trading is always "up in your head" — but ordinary market conditions mask it. A day like yesterday — a classic Bear Market rally, with the Dow up 276.74 points, and the Nasdaq gaining more than 3% in the session — can only occur when sentiment extremes are reached.

Anytime there is a long stretch of asset price depreciation, be it the past 9 months in US equities, or the past 3 years in real estate, the sentiment factors often move to the fore. Consider several psychological factors of sellers: There is remorse for missing highers prices, and a significant price anchoring that occurs with that.

Equity and Housing sellers are similar in that respect. When they miss a given price, all they want to do is get back to it to sell (or buy). How many times have you heard someone say "If only I can get back to break even…"  This psychological element of missed opportunity is what underlies the concept of support and resistance lines.

Anchoring plays a big role in the refusal to sell stocks that have fallen. In 2001 and ’02, I can’t count how many times I heard "I’ll sell my Yahoo when it gets back to $200."

In Housing, anchoring its even worse. Without a daily price print, homeowners tend to be even more anchored in past prices. Add in tract developments were homes aree so similar, and its a recipe for the following: "My neighbor got $XYZ last year, and our house is nicer — we have a new kitchen and a bigger back yard. So we should get at $X plus $50k."

That sort of mental selling analysis is a large part of the reason why there is so much home inventory available for sale. It also explains why prices seem to s l o w l y chase markets down.

Consider the following article about Florida Real Estate auctions. Pay attention to the elements of psychology impacting selling prices:

"Despite the standing-room-only crowd and live music, a recent auction of 22 properties in Port St. Lucie’s tony Tesoro community didn’t yield a single sale.

It’s not that no bids emerged at the June 28 event – it’s just that none of them were high enough for the owners of the 16 lots and six homes.

Call it a sign of the times.

One four-bedroom home listed for sale at $3.75 million attracted a high bid of only $1.2 million. Another, a three-bedroom, fetched a $450,000 high bid, though it’s on the market for $2.15 million, according to Scott Powell, a Stuart-based appraiser who attended the auction…

What happened at the Tesoro auction is consistent with what agents are seeing around Florida, Boza said.

"Buyers are continuing to look for steep discounts, and sellers are looking for top dollar," he said. "Until sellers readjust their asking prices, there will continue to be an overhang of properties in Florida."

The sellers are stuck in a 2005 or ’06 mindset; They are failing to recognize the change in psychology from a period of frantic bidding; they are ignoring the price depreciation, the rise in interest rates and the lack of easy credit.

These are the people who want to sell; The owners who have to sell are a different story.

>

Source:
Property owners balk at low bids at Tesoro auction
EVE SAMPLES
Palm Beach Post, Sunday, July 06, 2008
http://www.palmbeachpost.com/business/content/business/epaper/2008/07/06/m1bz_samplescol_0707.html

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  1. wtf commented on Jul 17

    cha-ching

  2. john_doe commented on Jul 17

    Blaming the Short Sellers…

    It never ceases to amaze me how people try to pass the buck in ever more creative ways. The SEC and Cramer etc… blaming the market melt down on the shorts. Bring back the up tick rule the claim, limiting shorting across the market.

    No, it wasn’t Wall St. Greed and corruption that caused this mess. Surely, it’s not that the financials are insolvent that their equities have dropped 80%?

    So they want to bring back the uptick rule?
    Well, here is my suggestion…. We need the DOWN TICK RULE to control INFLATION. The # next to the ticker symbol is called a STOCK PRICE. As we all know inflation is the aggregate increase in prices, and this can be bad if it increases at a rapid pace. Thus, if we institute the DOWN TICK rule then this will tame inflation as stock prices will have limited up side and prevent GIANT BUBBLES. And bring down inflation.

    Hey BR, housing makes 25% of CPI and Autos ~8%, how much of the CPI is the STOCK MARKET? Maybe if it falls low enough, then CPI will come down too.

    $$$Sheikh….. BEAR RALLY…Resistance @ 12K… DON’T BE FOOLED….

  3. Moses commented on Jul 17

    Spelling?

    “The Pychology of Selling”

    ~~~

    BR: Doh!

    I’ll fix above…

  4. Lars commented on Jul 17

    Reality can be so unpleasant that some avoid it.

  5. DC commented on Jul 17

    Guilty as charged. Great summary, though I will probably have to print it in a huge poster-sized font to try to avoid the same mistakes again and again.

    And suddenly the TVheads are suggesting Tuesday was capitulation. A lot of these folks seem to say that it’s like a monster movie — it’s scary but you know it will be over in a couple of hours then you go back into the sunshine and dance.

    I gather that your view is that it’s more like a mugging — I just got clocked and I’m not leaving my house for a looooong time.

  6. Marcus Aurelius commented on Jul 17

    Were the homes occupied, or new construction? Either way, 22 properties at auction in one community screams buyer beware.

    The owners of these white elephants might want to sell now, but they’ll have to sell later. The pressure to get out at any cost – if only to stanch the bleeding – will become too great, and the sellers will capitulate.

    There will be no bail outs for them.

  7. Marcus Aurelius commented on Jul 17

    Were the homes occupied, or new construction? Either way, 22 properties at auction in one community screams buyer beware.

    The owners of these white elephants might want to sell now, but they’ll have to sell later. The pressure to get out at any cost – if only to stanch the bleeding – will become too great, and the sellers will capitulate.

    There will be no bail outs for them.

  8. Marcus Aurelius commented on Jul 17

    Were the homes occupied, or new construction? Either way, 22 properties at auction in one community screams buyer beware.

    The owners of these white elephants might want to sell now, but they’ll have to sell later. The pressure to get out at any cost – if only to stanch the bleeding – will become too great, and the sellers will capitulate.

    There will be no bail outs for them.

  9. Marcus Aurelius commented on Jul 17

    Were the homes occupied, or new construction? Either way, 22 properties at auction in one community screams buyer beware.

    The owners of these white elephants might want to sell now, but they’ll have to sell later. The pressure to get out at any cost – if only to stanch the bleeding – will become too great, and the sellers will capitulate.

    There will be no bail outs for them.

  10. Steve Dallas commented on Jul 17

    Curious. I read something Doug Kass wrote where he referred to ETF “rentals”…what is that?

  11. Peter commented on Jul 17

    Great post. The market grinds slow, but it grinds exquisitely fine. And in the meantime we have huge movements based on psychology.

  12. Ben commented on Jul 17

    A great one and the most important thing is, it is practical!

  13. Andy Tabbo commented on Jul 17

    Another truism is that BEAR Markets never ever end with Good News that turns things around. And Bull Markets never end with bearish news. That’s why you know that yesterday was in no way “the bottom.” The market rallied because of good news from Wells Fargo, and then all the biggest losers of the year rallied hard.

    So, as I’ve posted before, treat this rally as terrific gift. I actually don’t think this is the beginning of the big countertrend rally. I think we make another new low this month before the big snapback.

    – AT

  14. Jeff commented on Jul 17

    Somehow when JP Morgan’s net falls by 53%, and it’s treated as good news? Just shows that much of this is just psychology (well the numbers were horrible but weren’t as bad as we thought so party on! Never mind the big challenges that lie ahead) and companies’ expertise with “setting expectations” (sandbagging, anyone?) with the street.

  15. chris_gee commented on Jul 17

    You are mostly right but the stock market is liquid with prices set on the day. Property is less liquid and barring forced sales prices move more slowly. Property auctions tend to attract the sharks who can enter unconditional contracts but will only buy if they can get a steal rather than a bargain or very good buy. The few times they find someone desperate or with Alzheimer’s pay off and they will wait for them but they are hardly willing buyers or price setters. I suggest most attenders are not buyers but onlookers.

  16. Jeff commented on Jul 17

    Bove just on CNBC saying that Dimon is the master at setting low expectations with the street and then beating them (thus making my point in an earlier post). Why does the MSM (CNBC in particular) seemingly ignore this kind of thing when cheerleading earnings reports? Drives me crazy.

  17. The Financial Philosopher commented on Jul 17

    I am not surprised but find it interesting how many people look to television and other mass media for “information” with regard to financial markets. The media thrives on pushing the emotional buttons of those willing to consume their message. Even those who complain of poor broadcasting, misleading messages and sensational delivery still continue to tune in…

    It’s called “media noise” for a reason…

    It is no wonder that volatility increases as emotion takes control of investor behavior.

    “When the mind is in a state of uncertainty the smallest impulse directs it to either side.” ~ Terence

  18. Mike in NOLa commented on Jul 17

    Innocent:

    Don’t have CNBC here, but another blog often compares Bove’s motives to a womans’s )

    Barry:

    You are right again. Was occupied yesterday and didn’t give you props for your call of yesterday’s rally.

    I see something of what you are talking about in my failure to sell out most of my short ETF’s when you called the local bottom even though I acknowledged that a bounce was getting close. I think my inaction was caused in large part by regret in selling my SKF at 150 for a 25% profit over a few months and then seeing it continue to rise to over 200. (not braggin here, but making a point) I didn’t want to have that happen again and should have been less greedy. Should have been satisfied with an annualized return of “only” 50-75% on my other shorts.

    Well, at least I can probably make out better than Fla. homeowners since it’s pretty certain that the market will come back to me as it did after the Spring rally. Although maybe I am being as naive as they :)

    BTW, looks like the Wall St. banks are going to lie again and hide losses this quarter. This is probably on word from Cox that only lies by shorts will be prosecuted, not lies that drive stocks up. Looks like SKF may become a buy again as it gets back to where I bought it a few months ago :)

  19. David Davenport commented on Jul 17

    They’re still building more new houses and condos here in the southeastern US.

    Inference: the inventory of unsold properties hasn’t yet peaked. Probably true nationwide.

  20. leftback commented on Jul 17

    Mike:

    Don’t beat up on yourself we all make mistakes in these markets. The key is to let them all be small ones. Regarding your discussion of price anchoring etc.. I think it’s always helpful to forget where you got in and remember to ask yourself “how much money can I lose today” ?

    As SKF climbed towards $200 and panic reigned in DC, risk of market manipulation was climbing every day. Set a target, then pick up the cash and walk away. Sometimes it’s better to sit on the sidelines and watch the action.

    Yes, you will be able to reload with SKF. At some point the ongoing commercial RE collapse will make SRS a better deal, IMHO. The RE stocks and retail have not been slaughtered yet. Energy and technology still have high P/E multiples. Bear markets are cycles of P/E contraction, one sector at a time.

  21. Mike in NOLa commented on Jul 17

    David:

    Same for construction in Houston even though their house sales were down for the 10th straight month in spite of the oil bubble. Plenty of apartment and townhouse construction, I suppose by builders who haven’t burned through their cash yet and who don’t read “The Big Picture.” :)

  22. Mike in NOLa commented on Jul 17

    leftback:

    Hadn’t noticed SRS. Looks like there’s potential there when this rally poops out.

  23. Jeff commented on Jul 17

    Ditto for Minneapolis. Many condo projects that have just been completed look to be sitting empty and idle right now. I remember thinking two years ago “who is going to buy all of these new condos?” Some projects never began. For over 2 years, still have a sign up for “high-end” condos in my neighborhood that reads “50th & Fabulous” with an adjacent big hole in the ground that had previously been a funeral home (should have kept the funeral home, probably a better investment). They were trying to market “high end” condos for $600K-$1MM+ in a neighborhood primarily consisting small, older detached homes that are worth no more than $250-$450K for the most part. That right there should have been one obvious sign for all of us that the housing market was in a bubble. Many of the projects that are still in progress are being converted to apartments instead of condos.

  24. Steve commented on Jul 17

    I’ve been whipsawed something awful when attempting to predict inflection points and trend reversals. I chalk these whipsaw losses up to tuition paid to the Market.

    I decided that there must be a better way. That was the point of inception for my systematic approach to trading, using hedge based risk management to skim the alpha and leave the volatility behind.

    For 6 months I have been tracking my results and posting my picks in real-time. You can track the live test of my trading at

    allstarstockmodel.blogspot.com

    Using a systematic approach has helped me beat the S&P 500 by 35% since Oct 1. Given my poor track record when trading directionally… trying to time the market’s trend reversals, I don’t believe I would have been able to generate these returns using a directional approach.

    I’ve found the best way to master the psychology of trading (emotions) is to eliminate the need to be right in our predictions.

  25. wally commented on Jul 17

    An average investor knows when something is cheap or expensive compared to yesterday.
    A brilliant investor knows when something is cheap or expensive compared to tomorrow.

  26. donna commented on Jul 17

    In business they are “sunk costs”. You already paid for it, so quit losing more money already.

    Hopefully you find a way to write it off.

    As to homes, if you buy a place to live and not an “investment”, the price changes won’t bother you. If you’re buying investment properties, don’t buy six of them in a bubble. Duh.

  27. VJ commented on Jul 17

    The sellers are stuck in a 2005 or ’06 mindset; They are failing to recognize the change in psychology from a period of frantic bidding; they are ignoring the price depreciation, the rise in interest rates and the lack of easy credit.

    I’m sure there are a number of sellers with that original perspective, but from my personal experience, it’s the real estate agents/brokers who are in LA LA land, and have convinced the owners of their unreality.

    I don’t know who is smoking more crack, the realtors or the investment brokers/advisors.

    How many more times do I have to hear from the bottom-callers about John Templeton and how the present is like the “point of maximum pessimism” ?

    Not. Even. Close.
    .

  28. AGG commented on Jul 17

    I’ve finely figured out this market; It’s an Epicurian market (Eat, Drink and be Merry for tomorrow we die). Rationality decreases as desperation increases. Hold on to your wallet, folks.

  29. AGG commented on Jul 17

    Pride contributes a great deal to Price anchoring. In a society where intelligence is attributed to wealth, what’s going through your noggin when you are looking at a 60% loss in equity? You know it’s going to get out that you used to be smart but now you’re a has been, loser, stupid, bone headed idiot. In other words, taking a loss is definitely NOT just about money. Whining rights don’t exist or make you popular like bragging rights do. So what does a smaht guy do? He figures that inflation will mask his loss (at least in conversation) if he can hang on to the equity for a few years. Of course, all this assumes that this smaht guy can service his debt. Leverage used to be fun but it’s looking more and more like a big baseball bat.

  30. tom B commented on Jul 17

    Anybody got a good take on the accuracy of “Zillow” “Zestimates”?

    I am in a less-overvalued region (North Carolina). I’ve been in a house about 4 years, and, unfortunately, I may need to sell because of that booming Bush economy (I lost my job). I am wondering how much equity I’m going to lose….

  31. tradeking13 commented on Jul 18

    Want to see something even funnier? Take a look at the REO listings on Fannie’s website. Their asking prices (at least in the Philly area) are well above the highest comps, even going back to 2005-6 prices!

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