When prices begin to fall in a speculative market, most speculators initially respond with denial.
Investors have over the past 25 years been emotionally rewarded by purchasing and holding the asset and see no reason to believe the first signs of a declining market are anything other than a temporary aberration.
As prices continue to fall, the emotions change: fear begins to creep in, and the battle between denial and fear goes on well past the breakeven point where the speculator could have closed the position without losing any money.
As prices fall further, the fear begins to take an emotional toll and the speculator starts to feel pain. The further prices drop, the more pain the speculator experiences.
What is the natural reaction to pain? Push it away, Ignore It. As a speculative investment becomes painful, the natural reaction is to want to get rid of it. This prompts the speculator to sell the asset without regard to price – only after they have lost money.
A speculator’s emotions always work against them.
When the asset is rising in price they want more of it, and when it is falling in price they want less. This is a natural reaction, but the wrong reaction. The Prudent Speculator invests when prices are falling and sells when prices are rising. And it is the cause of all losses in speculative markets. This is why most speculators fail.
Since the peak, property values have declined about 25-75%, depending on the area and type of property. Investors that were leveraged are now underwater.
Right now they are in denial. They still plan to keep properties as they expect prices to be back up to the peak valuations in a couple of years. They were so rewarded for buying and holding their first property that they are not feeling enough pain in their current situation to do anything about it.
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