Wildstar,
"...A couple of years ago, there was a 75% off liquidation sale at a local sporting goods store. I spent a large amount of money there, more than I would normally spend in a given year on sporting goods. I literally bought many years worth of tennis shoes. Would I be correct in saying that the reason I did so is at that time, by demand to hold money was relatively low due to the high % discount I was receiving for the goods, and the high unlikelihood that such a % discount would appear again?"
I would describe the situation slightly differently.
One of the reasons that you had a demand for money in the first place was just such an appearance of a bargain. After you respond to the bargain, your demand for money will increase and remain high until you have built up your money cash balance again to a desired level to be ready for another bargain.
At the point of accepting a bargain, you are comparing the value of a current bargain priced good with the discounted present value of all the bargains you judge likely to be encountered in the future that would be precluded by a present purchase.
Another question -
From the article:
Prospect theory led to "loss aversion," which explained why investors clung to losing stocks rather than sell. Investors were more likely to sell stock they purchased at $50 a share if it rose to $70 and seemed overvalued; but if they bought the same stock at $90 and it fell to $70, they were disinclined to sell, even if shares still seemed overvalued.
What do you think about this? Does the percentage aspect of the gain or loss affect the analysis in the same way? Since the analysis you presented used only net gains for the shopper (bargains), I am having trouble thinking of an analogous situation which involves the percentage of loss for the shopper.
This has little or nothing to do with percentages.
However, the premises are still questionable.
If the company stock was purchased at $90, it is presumed that it was not considered over-valued. If it now is thought to be over-valued at $70, something fundamental has changed, at least in your thinking. The reason for selling the stock is not that it has fallen in price, but that something has changed. The fall in price may well be a symptom of the change, and require a re-evaluation, but it is not THE reason to sell the stock itself.
A strategy that realizes every loss that occurs is not one that is likely to be a winning strategy, although it may be a slow loser. A great company that falls 50% to 75% should be bought, not sold. If you can't tell the difference between a great company and one not so great, maybe you shouldn't be buying stocks in the first place.
Regards, Don |
