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Real Estate Speculators Usually Fail
Despite the huge price spike in the final two years of the Great Housing Bubble caused by wild speculation, most speculators will lose a great deal of money. They will buy when prices are high, and they will sell when prices are low. The causes are rooted in basic human emotions that work against making the proper decisions to profit in a speculative market.
The moment a speculative asset is purchased and the speculator has taken a position in the market,[link widoczny dla zalogowanych], emotions are immediately in play. If the potential resale price in the market is rising,[link widoczny dla zalogowanych], the natural reaction is to want more. Greed takes over and the asset is strongly coveted by the speculator. If possible, the speculator will purchase more of the asset in question. This was common in the bubble when people would take the equity from one property and purchase even more residential real estate.
The problem with this natural emotional reaction is that it prevents the speculator from selling the asset and taking profits when they are available. People who successfully make a living participating in speculative markets have learned to override this natural instinct and sell when their emotions are telling them to buy more. The average residential real estate speculator does not have this discipline or awareness. He will hold the asset through the good times.
When prices begin to fall in a speculative market,[link widoczny dla zalogowanych], most speculators immediately lapse into denial. They were so emotionally rewarded by purchasing and holding the asset, they see no reason to believe the first signs of a declining market are anything other than a temporary aberration. As prices continue to fall,[link widoczny dla zalogowanych], 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. As prices drop further, more pain is inflicted on the speculator. What is the natural reaction to pain? Push it away. 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, only after he has lost money.
Speculator's emotions always work against him. When the asset is rising in price he wants more of it, and when it is falling in price he wants less. This is a natural reaction, and it is a primary cause of losses in speculative markets. This is why most speculators fail.
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