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Steve
02-20-2011, 11:06 PM
Looking at investing and speculating from a far away perspective, you see that it is not a science. It's not rational. Most everyone reacts to their investments with emotion and because emotion is involved, their thought process is altered.

People are excited about their investments when others are excited. Conversely they are scared when others are scared. These emotions create waves of exuberance and fear. All of this leads to bubbles.

As people get more and more excited about an investment, the price of it goes higher and higher. People begin feel the old rules no longer apply to the new economic reality.

Prices continue to rise until people panic and try to get out. This makes the price fall. As more and more people get out, the price falls further.

If you don't base your investment on a rational cost analysis you can find yourself losing a lot of money.

Furthermore, this is why you should never purchase investments with loaned money. When you invest your own money and you lose it, it's lost and that is that. But when you borrow money, you multiply your losses by a potentially large ratio. You can dig yourself into a hole you may never be able to climb out of!

We are seeing all this happen now with the real estate industry. These cycles of growth, irrational exuberance, and crash will continue on and on forever.

So be cautious when you invest in anything. Whether it be a mower, truck, customer list, stock, house, business or whatever. Make sure you are not overpaying no matter what your friends think. Base your purchase price on a solid goal of preserving your principle and achieving a satisfactory return from your money invested.