Investing Using The Principles of Supply and Demand

Investing is not difficult to learn. Actually, I believe it involves unlearning behaviors. Unlearning to use emotions to make financial decisions. We, including myself, struggle with this regularly, both in our personal finances and investments. But it simply really is about the discipline to think objectively, choosing the factual side versus the emotional side, or the opinions, or what you hope and wish for.

Objective Thinking….

One way to think objectively is to maintain a principle of supply and demand. If we can get into economics 101 for just a second, let’s recall this. Values are based on supply and demand.

  • When there is a shortage of supply or an increase in demand, prices tend to increase.
  • When there is an oversupply or a decrease in demand, prices tend to decrease.

Many are noticing this happen with the normal every day prices of groceries, used cars and so on.

Let’s talk about real estate, for example.

Housing Shortage… 🏘

Right now is a very interesting time in the real estate market. There simply are not enough homes (supply). According to Marcus and Millichap, there is a nationwide shortage of 4.2 million housing units! That, compounded, with the supply chain issue, means units cannot be built up fast enough to immediately satisfy demand. This shortage of supply drives both housing prices and rental rates*.

*From an investment standpoint, please note that just because the demand for housing is great, that is not justification to overpay for real estate. Every investment has a price at which one can overpay and put the investor’s capital at risk.

Safe Investing ⚠️

For this reason, due to the limited supply, today presents opportunities to acquire real estate as an investment class. Using factual data, not gut feel or opinions, our strategy is to identify markets with fundamentals that are poised for continued growth, with the characteristics of limited supply or growing demand. Paying attention to the basic supply and demand characteristics surrounding your potential investment is a great first step in safe investing.

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Author: Rodney