Sentiment & Motivation

In every transaction in a market there are (at least) two parties involved, a buyer and a seller. A trade occurs where the buyer and seller come to an agreement… well, kind of. They've come to an agreement on price, but they probably couldn't disagree more on what that price represents.

Sentiment

Think of any stock you've briefly considered buying, why did the thought cross you mind? Why now? Something undoubtedly trigged a thought that the company in question had a bright future ahead. A new rumored product maybe? A news announcement talking about the success of their current products? Whatever it was, you were confident there was a bright future ahead and the company would be worth more tomorrow/next year than it is worth today.

But in buying, someone else had to give up their stock so that you could have it. Why would they do it? Maybe they've owned it for years and have had a wild ride and feel the best days are behind them. Maybe they think even if there are good days ahead, there are better days if they put their money in a different company. Or maybe they suspect that innovation has stopped, the media has over-hyped the success, and reality is going to catch up with the value of the company. Excluding some external factor forcing them to sell because they need the cash, you can be sure most people would hold their stock if they knew it was going to double in value the next day.

Motivation

Investment is just a means to an end, a vehicle to give you a lifestyle. So the other factor that influences buying and selling is motivation, or how the parties want to use that vehicle. Are you wanting to generate income today to support your current lifestyle? Or focussing solely on building up a safety net for retirement? Is retirement in 5 years or 30? Each of these will factor into how an individual prioritizes where their money should be to most effectively achieve those goals.

Markets occur where people disagree

So it's worth remembering that any trade only happens when where the opposing sentiment and/or motivation of two people intersects. And what constitutes a "fair price" for the transaction is typically within a range that one or both parties are willing to compromise on based on the strength and duration of their sentiment or motivation. If both parties shared the same sentiment and motivations, there would be no trade. The person holding the stock would want a price that fairly reflected all of the potential they saw in the future, the person with the money wouldn't pay that price because it would mean there was no/limited future potential for them to make money.

So remember any time you come across a trade that is a "no-brainer" or a deal that is "too good to be true" take pause, and question who is on the other side of that deal and what they might be trying to achieve. If it really was a no-brainer there would be a stalemate. The fact a trade is possible is because the counter-party couldn't disagree with you more.