The stock market is the only market people run to when things are on sale.
A seemingly innocent phrase, but perhaps no truer than what is happening in the markets right now.
Stocks, crypto, the shocking implosion of Luna and Terra – it’s all a dreary sea of red right now.
It reminds you of popular sayings from when the market was hot.
“I’m waiting on the sidelines to buy the dip”
“I go all in when the market goes down”
This is what you usually hear on various forums or even in meetings with your friends and family.
And probably what countless people have repeated in every recession.
It may seem obvious in hindsight now, but when we last wrote about the possible effects of the pandemic on the housing market in February 2020, we received backlash on our views.
So much so that we felt compelled to change tact for fear of further negative reviews.
But since then (if you had bought) the prices have already increased significantly.
I’m sure a lot of people look at this moment with regret, as we know that many of those who needed to buy resisted this moment for fear that the market would fall further.
So why don’t people just buy when prices go down?
After all, you should already know the very popular mantra said by Warren Buffet:
“Be fearful when others are greedy and be greedy when others are fearful.”
Let’s look at some of the reasons why this is easier said than done.
The market does not exist in a vacuum
As you can see from the real estate cycle, every time it goes down, it ALWAYS goes up.
You would think people would have learned after a few cycles, but why are most people usually too scared to pull the trigger?
One of the reasons it’s not easy to buy on the downside is that the market doesn’t exist in a vacuum.
If you notice, whenever someone says they’re waiting for the drop to buy, it’s always easy to say that because they’re thinking of the market going down but with everything else constant (all other factors are fine ).
To give you an example, let’s go back to March 2017.
Martin Modern along River Valley launched at around $2,000 psf.
Seems like an incredible price right now, especially with new OCR launches looking to cross the $2,000 mark in 2022.
Today, it averages $2,700 per square foot. Several people have made 6-figure profits, the highest being $700,000 so far.
So why were most people afraid then?
Here are the headlines at the time.
At the end of 2016, several reports spoke of Singapore entering a technical recession.
In the real estate market, there was talk of an imminent increase in interest rates (sound familiar?)
Real estate prices had slowly fallen.
The rental market was weak.
Like it or not, consumer sentiment plays a huge role in buying decisions.
You may feel confident in your work, but reading newspaper headlines about the impending doom of the recession, listening to your friends’ alarmists – even the most positive person can recoil in fear.
Most people don’t because of loss aversion.
Loss aversion refers to a phenomenon where people care more about losing than winning.
For example, the pain of losing $1,000 is often far greater than finding the same amount.
The reason for this seemingly irrational behavior is that we feel the pain of a loss about twice as much as the pleasure of a gain of the same amount.
As such, the fear of losing money is much more difficult to overcome, which is why during a real estate downturn it is much more difficult for people to commit to buying property for investment.
Despite the fact that everyone was waiting for the market to fall when the market was hot, the pain of possibly “losing” money is much greater than thinking about any gains – even if you are aware that the market will eventually always bouncing back.
There is also the part about the negative bias.
Although somewhat similar, loss aversion can also lead to what is known as negative bias.
Since humans tend to dwell more on the negative than the positive, this means that you will tend to dwell more on a negative comment than a positive one.
A criticism will affect you more than compliments, and there’s a reason why bad news is much juicier than reading good news.
Here is a more relevant situation.
Have you ever read a hotel review online? There may be hundreds of positive reviews.
But find a particularly descriptive negative review about how the glass cup was not clean, and our perception of the hotel can immediately change.
This can have an unintended effect on when we read the news.
There might be different reports about the stability of the real estate market in Singapore, but read one about how the market could crash soon – and all rationality will vanish.
Some people don’t because they can’t distinguish between price and value.
“Buy Low/Sell High” is a speculator mentality because it focuses on price, when you really should be thinking about value.
In general, when the stock price goes down, the value goes nowhere.
Its value only exists to the extent that people agree it exists.
Let’s say one day you inherit a house and it’s been appraised by the bank for a million dollars.
It makes you a millionaire.
However, a day later you get a call and the bank tells you they made a mistake and it’s now $500,000 instead.
You feel like you’re chicken because you just “lost” $500,000, but where did the money go?
Was the previous value really just an illusion?
Basically, price is what you pay for something, or what the market thinks something is worth; the value is what you think it is worth.
If the property is worth $1 million today, but suddenly drops to $200,000 during an economic downturn, does that mean the property is really worth $200,000?
What has really changed?
It’s still near an MRT, it’s still freehold, and it’s still in a very convenient location.
So when the price drops, people don’t think enough about the value and are afraid to buy when in reality the merits of the property have not changed at all.
The fear is real
If everyone you know has just lost their jobs and businesses are closing left and right, it takes courage to go against the tide.
Although history has shown that it is never good to sell after a huge crash, emotions always get the better of us and the prospect of incurring even more losses can cause us to make bad decisions.
Here’s an example of how even the best in business has shown how emotions can get the better of a person.
In early May 2020, airline stocks were crashing under the impact of Covid-19.
Warren Buffet sold all of Berkshire’s airline stakes at a loss, selling Delta Airlines, American Airlines, Southwest Airlines and United Airlines.
At that time, those stocks were down between 45% and 70% year-to-date.
Since then, however, stocks have made a comeback. They are all still below their levels at the end of 2019, but just a year later in May 2021 – Delta is up 168%, American is up 163% and United is up 199%.
Although Buffet still denies that he regrets selling all the airline stocks, there is no doubt that if he had waited he would not have suffered the same amount of losses.
However, in his defense, he said he thought Congress might not have helped the airlines if a top investor like himself still retained a major position in the airlines.
Look, at the end of the day, this isn’t about trying to encourage people on the sidelines to step in during a downturn (whether it’s property or stocks).
It’s about having a long-term view. Like what we wrote in April 2020 when the pandemic started, if you always had a long-term view, you would know how to act in situations like this.
The ‘good’ part is that you are forced to own property in Singapore because of the SSD – unlike stocks where you can just sell it.
I’d like to leave you with this fantastic quote from Fred Ehrsam (co-founder of Paradigm and Coinbase, courtesy of Milk Road)
“Cycles are neither good nor bad, they are natural. Maximum euphoria gives the world the opportunity to dream about the future. The underlying desperation requires practicality and clarity. When things are going well, they are never as good as they seem. When things are bad, they are never as bad as they seem.