When to Take Advantage of Market Anomalies

Throughout history, there have always been unusual changes in markets that turn out to be phenomenal investment opportunities. Wild changes up and down in the prices of stocks, commodities, and real estate can create life changing levels of wealth for the savvy investor. The big challenge is to know if you are in such a moment, and if so, what you can or should do to take advantage of it.

In 1995 and 1996, Manhattan went through a steep decline in residential real estate values. For example, one condominium complex in Battery Park was so hard hit that 300 units were being auctioned off. The minimum bid price for a two bedroom, two bath waterfront condo unit was $60,000, an incredibly low price from a historical perspective. After the auction nearly all the units were pulled off the market and turned into rental units as only a handful sold. In 1997 the prices jumped back up to normal and today, these units sell for over $2,000,000.

For another example, in early 2020 the price of a barrel of oil went below zero, meaning you would get paid to take oil off the hands of anyone selling it. CNBC commentators rightly marveled that they had never heard of a commodity having a negative price prior. The frenzy of being in the height of Covid fear was the driving factor for this oddity. Today, oil is $116 dollars per barrel. Very simple math will illustrate how an incredible profit could have been made by buying when prices were negative.

So how does one take advantage of these rare opportunities? Here are a few critical tips to optimize a future opportunity:

Know Your Market

By being well versed in the item that is undergoing unusual price depression is one of the best ways to profit from anomalous activity. If you were a life-long Manhattan resident in the mid 1990’s, then you likely knew a waterfront condo facing the Statue of Liberty for $60,000 was an incredible bargain. The more you know about the item or marketplace, the better. Conversely, if you really don’t know much about the investment, its usually not ideal to take the risk and you should wait for another opportunity.

Don’t Be Greedy

For anyone who has oil heat, getting paid to take it off someone’s hands is almost a no-brainer. Don’t wait for it to be “more free”, or buy and hold on until the price keeps going up. No one ever got hurt by taking a profit, so if you bought at zero dollars per barrel and sold it at $60 per barrel, you are still an investment hero and should not lose sleep or complain that its now $116.

Know Your Limits

Investing in something that is going through highly unusual prices changes is very close to speculating, and should be done so with great care. Don’t take your entire emergency cash fund to buy X, even if you are incredibly expert in X, because the downside of being wrong could be disastrous and simply not worth it. Cashing out even a small part of your retirement fund is also unwise, because that investment account has a specific purpose and should not be tampered with. Use your fun money, excess cash and the like to take advantage of such opportunities.

As with all important financial decisions, getting your financial advisor to review the opportunity will give you a sober, detached second set of eyes on the investment and allow you to take advantage of the timing without incurring undue risk.

Related: How to Get Your Kids Interested in Investing