How To Use Psychology To Gain A Competitive Edge How emotions impact business and the markets, and how you can use this to gain an advantage over the competition.
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When people think of entrepreneurship and investing, they often focus on numbers and financial calculations. All that is, of course, an integral part of the business world. However, what I have discovered as a businessman and investor in UK property, is successful business and investment is ultimately about people. To succeed, you need to understand and work well with people — whether they are customers, partners or investors.
It is imperative to understand human psychology both at the macro level (understanding market trends) and at the micro level (understanding the person you are doing business with). If you get this right, you can consistently produce outsized returns in your business and your investments. Get this wrong, or fail to control your own emotions, and you can end up losing money when others are getting rich.
In this article, I will address the different emotional states of the market and the individual actors that make it up. I will give you strategies that allow you to profit from each of them and give you insights that will prepare you to control your own emotions.
Fear is a powerful motivator of human action. This is as true in business, financial and real estate markets as it is in the rest of society. When there is fear in the markets, justified or unjustified, sell-offs quickly follow. Inevitably, this leads to assets being sold at prices way below what they would normally be valued. For those that resist giving in to fear, there are some huge and potentially life-changing opportunities at these times.
Stock market genius Warren Buffett says to "be fearful when others are greedy, and greedy when others are fearful." Whenever everyone is running for the exits, it is time to look at assets with a cold, calm head. For example, in the real estate industry, look at what a property is cash flowing or could cash flow. If that number allows you to hold the property for the long term, it doesn't matter much if prices continue to fall.
Even when markets are not fearful, any market will have motivated sellers. Motivated sellers want to get rid of their properties fast. This could be because they are moving overseas or need to sell the property due to a relationship ending. Your job is to understand their motives and make life easier by offering them a quick sale. In exchange, you can get the property below market value.
In the business world, you may need to adapt your product offering. This may mean offering cheaper online versions of real-world products or events. However, it may also simply be a matter of re-framing existing products. Does your product help people protect themselves from uncertain market conditions, for example? How can you emphasize this aspect of your offering in your marketing?
When the market is not moving too fast in either direction, people tend towards neutral emotions. People are not normally selling assets for either very far below their normal price or too far above their normal price. There is more time to assess deals and for both parties to consider all their options. This can create a challenge for those looking to get market-beating deals either as a buyer or a seller.
The key in this type of macro environment is to look at the micro. Just because the market isn't in a rush to buy or sell doesn't mean individuals aren't.
In real estate, for example, regardless of the market, there are still people that need to sell their homes fast, and there are still people in a hurry to buy. In business, this is the time to understand your customers and their needs. In the investment world, it is a great time to understand companies' true value and dig deep into their balance sheets.
Again, this is about understanding people and their psychology. Take the time to talk to the people you are doing business with and understand their story. If you can work within their timeline, they may be willing to give you a great deal. The better you can empathize with others, the better you can create win-win scenarios for all parties involved. Remember, the business world is always about people.
When the market is booming, people experience FOMO (Fear Of Missing Out). This pushes prices much higher than is reasonable.
In the property industry, this is a good time to be a seller or refinance your properties. If you are buying, you need to control your emotions and only pay what you think an asset is worth. Be willing to walk away and have plenty of deals under consideration at any one time, as many will fall through.
FOMO is also particularly relevant in the world of Bitcoin and cryptocurrency investment. That industry is driven by hype and 4-year market cycles. When everyone else is buying, this is the right time to sell into the demand. If you are buying when everyone else is, you can lose a lot of money in that market.
In conclusion, regardless of market conditions, if you understand: your own psychology; the psychology of the market; and the psychology of those you are doing business with, you can make money as an entrepreneur or as an investor at any time!