If the price of a commodity (good or service) is too high for the market in which it resides it will...
If the price of a commodity (good or service) is too high for the market in which it resides it will not sell. Reduce the price to a point at which it seems reasonable to ask and it will sell. Reduce the price too much and it would appear that potential purchasers become convinced, without foundation, that what is being offered for sale is clearly no interest to man or beast (be it bull or bear) and stay away in spite of his or her better judgement.
Here is a practical example: Mrs Goodenough plans a treat for her hard-working financial adviser husband in the form of a pheasant pie. Proud of her housekeeping abilities, she decides to survey the poultry market instead of making a purchase at a 'long stop' maximum price of £3 per pound based upon her extensive knowledge of the local and global market. Game dealer 'A' informs Mrs Goodenough that while his fee of £3.10 per pound is very competitive in light of prevailing economic circumstances, the price is under review as many of his clients have expressed a view that the stock is slightly overpriced.
Mrs Goodenough decides to hold on and return a little closer to her deadline of 4pm after all, it is only 10am and she is not in the habit of making a purchase so very far ahead of any deadline.
As Mrs Goodenough visits the other game dealers in the market, she detects an alarming trend every dealer is offering a slightly lower price than the last. In fact the price is now well below her target price of £2.90 and is still falling.
Concluding that there must be something wrong with the pheasants and realising all other game prices seem to be performing in a similar fashion, she decides to abandon her plans altogether. Now so late in the day, she has no option but to prepare beans on toast instead.
It is understandable that in a market as transparent and fluid as the stock exchange, reactions can lead to and prompt over-reactions. This has been seen in recent weeks. The market, though still volatile, does seem to have 'plateaued' and yet investors still refuse to act. At least that is how it would appear, with Isa sales down at least 30% on last year.
The uncertainty of recent weeks could be described as the biggest shake-up in the UK and International market we have seen since the introduction of Peps and Isas to the market. The uptake of the tax-free wrapped unit/investment trust has been such a success story that politicians have even tried to retrospectively cap the investment levels. But investors continue to take advantage of the tax incentives and repeat the exercise often at the last minute every year at least every year while they continue to look attractive.
Trying to pin down exactly why last year's Isa sales have been so poor is not an exact science but there are certainly a number of factors worthy of mention. For starters, the traditional Pep/Isa investor is now more attuned to the state of the world's stock markets than ever before.
Consider that your average investor probably has a high decree of their net worth linked to the stock market through existing Peps, pensions, and perhaps options in their employer.
When markets fall, the investor feels poorer and is less disposed to throw good money after bad as they see it. Fears that a recession may be looming appeal to their savings instinct but only if it can be done without risk.
On an economic front, the US has witnessed enormous growth over the last 10 years and while in the UK it has been controlled growth, there is a groundswell of opinion that expects any recession in the US to spill over elsewhere. To what extent recent stock market falls have factored in this view is unclear.
Interestingly, one could argue that US and UK stock markets appear to have found their natural level and it may be the case that the main indices show little increase over the next few years.
The dominating theme of course is the collapse of the technology stocks witness the 62% drop in value of the Nasdaq 100 in the year to 9 April 2001. Many investors are simply feeling stung and nursing their wounds made worse by the fact that the end of the tax year coincided with the peak of the market.
Much has been written about the 'irrational exuberance' that Alan Greenspan, head of the US Treasury, spoke about in relation to the surge in technology stocks, which unfortunately now appears to be operating in reverse.
The simple fact of the matter is that most investors gave no thought to the level of risk they were prepared to take and now have to live with the consequences.
On a brighter note, the investor in the UK concerned about the prospect of fairly low returns and increased volatility in the stock market can now take advantage of a range of new funds designed to produce a positive return in a negative market by using well-established hedging techniques.
There is currently rapid growth in the long/short hedge approach with star fund managers leaving the shackles of traditional UK unit trust investment regimes behind them.
This may be worth consideration for some of a client's investment portfolio but is unlikely to play a major role.
Some Isa managers (including one IFA firm) have set up cash holding bays within their equity Isa and these seem to have been popular with clients who wanted to take advantage of Isa allowances without entering the equity market right away.
If the recent shake-up in the markets leads to investors taking a more realistic view of risk and reward when they consider investments, then surely that is a good thing.
Perhaps in time, this greater awareness will lead to investors and their advisers remembering that equity investments are best viewed as medium/long term investments and respond to market volatility not with horror but with a recognition of a worthy buying opportunity.
Duncan Armstong is a senior financial consultant at IFA firm Timothy James & Partners
What made financial headlines over the weekend?
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch