Riddle Me This, Part 1

Let’s say you go out and buy a car for $40,000. Since everyone overreacts when it comes to purchasing a brand new car, we’ll assume it’s slightly used (maybe it was test-driven). This car is sick. A sun roof to gaze at the sun, moon, and stars. Heated seats to warm your wedgie. It even has the TV in the head-rest for the little one. This car not only drives like a dream, it will allow you to reach your dreams. It’s the vehicle that will take you wherever you want to go.

Now that the stage is set, let’s say you’re at the grocery store six months later. A man beside you blatantly says, “Hey! I think your car is worth $30,000.” Completely thrown off by the unnecessary comment, you go about your business pretending nothing was said. The following day you’re at the gas station when another gentleman approaches out of nowhere, “I think your car is worth $25,000.” Confused again, you leave the pump as if it didn’t happen.

At this point, aside from the uncomplimentary commentary, you’re very pleased with the car. It runs perfectly; feels like you’re driving on a cloud. Absolutely no complaints.

In the coming days, more strangers offer up how much they would sell your car for and question your decision to continue driving it.

You receive offers to buy the vehicle but the offers are extremely low. Owners, similar to yourself, are beginning to let go of their cars for far less than they (or you) originally paid. It’s awfully discouraging to receive valuations of $20,000, $18,000, and even $15,000.

In a panicked state, you go home to your wife and explain the strange situation. Why would the value of the car continue to decline rapidly? Without any concrete evidence as to why, you simply assume something must be wrong. I mean, why would all these other owners sell their cars? They must know something you don’t.

After much deliberation with the Mrs. you come to an agreement to sell the car, even though the car was supposed to be a long-term solution.

The Answer

I know what you’re thinking…

How dumb is this couple? Why would they let go of this perfectly good asset? Why would they let the actions of others affect their decision to keep or sell their car? It doesn’t make sense, does it?

The Twist

Let’s say we’re no longer talking cars, rather a different kind of vehicle: an investment vehicle, or stocks.

If the above scenario is so obviously ignorant, then why does it happen each and everyday in the stock market?

To be continued…