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Zero Sum Game- The Lost Art of Negotiation

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from http://www.free-pictures-photos.comThere is a story I read recently that tells of a lecturer who will auction off $100 to the highest bidder in the class. The catch is that the second highest bidder will also pay for what he or she had bid for while getting nothing. This makes for a rather interesting game.

One would have thought that at around $50, people will stop bidding because this is a negotiation class and some smart student should have immediately negotiated so that the bidders can have a win-win situation. Ironically, that is not what happens. People instead bid beyond $100 which has become sort of a game which the top two bidders do not want to lose. You lose the bid at 90 and you have to pay $90 so why not out bid the other fellow at $95. When it goes beyond $100, it becomes a matter of recovering some money and later pride.

The reason I brought up this story is to illustrate the mentality of a greedy speculator who could be participating in a market run and keeps staying in when the price of the stock has risen way beyond its market value. You stay in because everyone else is buying and you do not want to be the first one to stop buying or sell. You think that you can be the one who sell off the stock at its peak. Somehow, you are the special one who can see the market and sell it right at the top.

As an example, I shall use myself. I read the Business Times sometime in the middle of 2007 and the commentator mentioned about this stock which was the subject of a takeover and which managed to stage a reverse takeover. The stock had properties on its books that if liquidated, will effectively value the stock at two times its present price. I made a note to look up this stock and read more about it and was convinced of the findings of the article to buy around 10,000 shares. It went up after that, but I was greedy and wanted the share price to nearly double before selling. However, the sub-prime crisis came during that time and the market took a tumble.

Now, fear took over as I worried about the prospect of the stock. When the market made a recovery from its lows, I sold off the stock when it was near the buy price I bought so i actually broke even on it. What is the price of the stock now? It is doubled what the reporter said it will be back then even with a weak market.

The moral of the story? When you have done sufficient checks and what you found out fits, be confident to stick the course. Never fall to the twin emotions of greed and fear when investing in the market. Warren Buffet has a good quote on this, "The stock market has an efficient way of channeling money from the impatient to the patient"

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