Price, Sentiment, and the Apple Seller
A Tale of the Apple Seller and the Financial Markets
The Apple Seller
Imagine for a moment a market stall selling apples.
Each apple starts the week priced at £1. The seller has 1000 apples to sell. He sets out his sign and waits for customers.
There’s a steady flow of customers and he sells 50 or so relatively easily. But then business starts to dry up. Not many customers.
Negative Sentiment
The seller opens up the news on his phone… “Apples linked to low libido”
Dam!
No wonder he’s not selling any apples, the sentiment has shifted negative.
He needs to cut his prices to attract people. Enough of a discount to overcome this negative sentiment around his apples. He tries 80p…. And a few buyers who like apples and don’t care about the news step up.
But they soon dry up, now the news is everywhere and no one wants to buy apples.
- People who agree with the news aren’t buying
- People who see the price falling and want to buy cheaper aren’t buying
He cuts to 50p, nothing. 30p, nothing. He starts to panic now, what if apples become worthless, what if the price never recovers? So he slashes the price to 10p.
At first, nothing happens, then all of a sudden a few buyers step up. People who like apples and the odd trader who is taking a bet that they may be able to sell this again later at a higher price.
The apple seller decides to raise prices a bit, 10p is killing him, even at 15p he’ll be better off.
No buyers.
People are watching, but not buying.
Surge of Buyers
He drops back to 10p – maybe those buyers from before will come back.
All of a sudden there is a rush of buyers. All the people waiting and watching who missed the 10p price now get another chance. The seller offloads a bunch.
He decides to raise his price again 15p. Still buyers. But this time some big buyers are coming in to buy 100s at a time.
“I’ll pay you 20p” one shouts.
“25p” another screams.
He sells to them and raises his price some more.
50p, 60p, 75p.
There’s a buying frenzy. People just can’t get enough apples. No one cares about the news article anymore and all he can hear are people saying how tasty they look and how juicy they are. They don’t want to miss out, look everyone else is buying!
The seller tries his luck and prices them back at £1.
Buyers are flowing. One motivated buyer who has been sent out to buy apples for a pie by his wife sees the seller with only a box left and shouts “£1.50!” (He’s going to pay the premium to save an argument at home…)
The seller gives him 5.
“£2!” he hears.
“£3! £3.50!”
Sold sold sold.
People have forgotten what they are buying, they see others buying, the price rising, and don’t want to miss out.
The seller tries his luck. “£5 per apple” he bellows.
One person buys a small bag. Everyone else suddenly realises what’s going on and the buying stops.
The seller is not panicking or concerned, but slowly reduces his price over time. £3, £2, before finally settling at £1 which brings in just enough customers to sell all his stock.
And that ladies and gents are the financial markets!
Sentiment, news flow, greed, fear, FOMO, and human nature all rolled into one.
Price went from £1 to 10p to £5 and back to £1.
The apple didn’t change, the only thing that did was the sentiment…
Today think about the apple seller when you make a trade.
Are you taking advantage of human nature or is it taking advantage of you…