Why do people buy at the top of the market?

Arabian investors piled into Tech shares in late 1999 just before the bubble burst. My brother-in-law became a UK property developer in 1989 and turned a modest inheritance into a huge debt. Today Middle East investors are still buying London property, after prices have started to fall.

It is an old problem. For some reason many investors only wake up to an opportunity after it has past. Indeed, this is probably the biggest mistake any investor can make.

With the benefit of hindsight the warnings are usually there. You just had to look at Tech share graphs in 1999 to realize that the vertical lines meant trouble to come. Similarly when buyers can not afford to buy property without huge loans it is time to sell out.

The Japanese buyers in the late 1980s who took out multi-generational mortgages, i.e. debts so big that they passed from father to son, were a classic warning sign.

So also is the 'smart money' moving out of the market. The two richest house builders in Britain, Steve Morgan of Redrow and Tony Pidgley of Berkeley Homes, sold the majority of their shares in their own companies some time ago.

There is definitely a herd instinct to investment which is dangerous to follow. The more people that buy, the more confident the crowd becomes. The danger is that the whole crowd then jumps off the cliff like a group of lemmings by ignoring the quite obvious warnings that the market is changing direction.

However, the good news is that all we are talking about is attitude and behavior and any fool can change this. You do not need a degree in metaphysics to unravel investment options, just a shrewd head. Neither of the two richest house builders mentioned above went to university, and both started from nothing.

There is also no need to worry about selling out of an investment position too early. One of the richest men in the US once commented that he made his fortune by selling too early. Money in the bank can always be re-invested later; money that has been lost is generally gone for all time.

Yet people do not learn. My brother-in-law's son has just bought his first house for $250,000, a huge sum for him and with a massive mortgage from some equally foolish bank that is still owed a fortune by his father! Why? He does not need to own a house; he could easily wait to buy one.

I suppose people get caught up in the enthusiasm of the moment, see that others have made money from an investment and think it is not too late for them. Sadly markets do not work that way, and are driven by the rise and ebb of the human spirit, and plain greed and fear.

Caveat emptor: check the position of the market before you invest in anything, this is all that really counts!