Before Investing, You Should Understand What Drives the Price. It’s Always About Supply and Demand

Before investing in any stock, piece of real estate, cryptocurrency or business, you need to understand what drives the supply and demand before even considering price. And don’t limit yourself to the products or services of the company and its direct competitors. 

Consider whether customers can choose substitutes. My concern about cryptocurrency is how easily new currencies can be coined until there’s one clear winner. One tech stock’s initial public offering followed another in the late 1990s until the industry shook out. The cryptocurrency binge today reminds me vividly of those days. 

Once you’re confident in your supply/demand outlook, then and only then can you consider whether an asset is cheap or rich. 

Most of the time, the market gets it approximately right by averaging out everyone’s mistakes. Some investors might be overly optimistic and buy too high while others might be too pessimistic and sell too low. Usually those errors cancel each other out, but once in a very long while, crowd psychology takes prices to extremes. 

If you become good at spotting when markets may be ahead of themselves, you have a better chance at profiting from one of those life-changing opportunities or avoiding catastrophic mistakes. 

With that said, you can overpay for a great company and still make money if you are patient and the company continues to grow. If it grows quickly enough, it can catch up to the price you paid and go on to turn a losing position into a profitable one. BetterInvesting stresses focusing more on buying at a reasonable price than the perfect price. 

The most urgent challenge is to find companies that can stimulate demand for its products and ward off competition.