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Beware – People tend to look at the front number(s) and get mesmerized

This is a small thing, and so this will be a small post.

Learn to set your expectations right.

When you buying something and see a price like $19, $19.95, or $19.99, think $20.

 

When you are buying a car, and see prices like $19,000, $19,900, $19,990, or $19,999, think $20,000.  The same thing applies to homes, and be sure you have a strong estimate of all of the extra taxes and fees that will get thrown into the price.

People tend to look at the front number(s) and get mesmerized.  Learn to round it up as a buyer.  We tend to get too quick in our judgments, and be too optimistic when we buy, so round prices up — especially true if you are on a budget, and you are keeping a running total of costs.

Now, if you think this doesn’t happen in institutional pricing, it happens there as well.  I remember cases where I was trying to sell bonds, and I could not get a deal done, I would ask my sales coverage, “Why? How is the other side pricing the bond?”  If it was a dollar price like $100, I would make a note of it, and if the market fell for general reasons under that price, I would make an offer a little under the price, say $99.95.  Frequently, I would sell the bonds for my client, even if the yield spread had worsened in relative terms, and the bonds were less attractive to a more rational buyer.  The same applied to other means of pricing bonds, and applied the opposite way if I was trying to buy bonds.  You would be surprised how many were looking for a shiny price like $105, and after a general rally deals would get done at $105.01.

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Buffett has sometimes had a phrase, “Your price, my terms.”  If there are other facets to the deal than merely price, try giving the other guy his price in a prominent way, with other terms that favor what you want to achieve.

You would think that people would be more rational, but they are often not, and you and I aren’t much better.  That is why I encourage you to think conservatively in your economic decisions to avoid undue optimism.

PS — remember that this happens with institutional investors in setting target prices as well — they like the glossy round numbers.

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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