Picture this. You buy books at a discount sale at a certain store. A fortnight later, the store slashes prices further. Would this change your decision to buy more books at the store? And is there is a parallel in the stock market?

Suppose you buy a book at Rs 300. A fortnight later,the store slashes the price to Rs150.As a typical consumer, you will immediately search for reasons to justify your purchase. You may reason that you anyway got a 50 per cent discount on the book's retail price of Rs 600.

While your brain actively justifies your purchase decision, it also prevents you from buying more books. You may want to postpone your purchase to the last day of the sale, just in case the store throws-in more bargains!

Buying shares

It is interesting to see how purchasing a book is different from purchasing shares. The basic difference comes from what we do after the purchase. We buy books to consume. And we buy shares for re-selling. It would be, hence, optimal for us to buy consumption goods at a cheaper price. For, lower the price we pay for such goods, higher the satisfaction. The same cannot be said of investments. Why?

We gain from our investments as long as the price we pay is lower than the price we receive. And a stock selling at a discount may not always be good; it could also mean that the market is concerned about the earnings of the company.

Extending this logic, you can afford to buy a stock at a higher price as long as you are confident of reselling it for more. But you are more price-sensitive with your book purchase because you are buying it for personal consumption. Postpone your purchase today, and you may not get the book at a discount at all. Buy it today and you may end-up paying more, if prices are slashed further. The decision to buy consumption goods is, hence, not easy!

(The author is the founder of Navera Consulting. He can be reached at >enhancek@gmail.com )

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