Emotions Matter
DON’T MAKE THESE INVESTING MISTAKES
Emotions Matter
According to Sir John Templeton, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die of euphoria.” It’s interesting because we claim to make our investments analytically. But every investment decision is impacted by our emotions, whether or not we care to admit it.
Is this a problem? It can be. Let’s look at three situations.
Motivated Buyers Pay Too Much
Our worst investment happened when we became motivated buyers. The market was euphoric. We really wanted a beach condo. We found one at Myrtle Beach and were really excited. That was before we lost hundreds of thousands of dollars on it. Remember the peak in January 2006? The market seemed to keep going up with no end in sight. We thought that if we didn’t buy then, we would never be able to afford it. FOMO had kicked in.
When looking at investment property we have to remember that this is an investment. It is not a house that you are going to live in. It should be nice, clean, and in a safe environment, but we need to remain emotionally detached. It is the numbers that matter. Cash flow, local market conditions such as population and job growth can be quantified. Does it lie in a path of progress?
Success Breeds Complacency
Sometimes repeated success builds an overabundance of confidence. It seems that nothing has ever gone wrong. All or most investments have gone well.
A rising tide lifts all boats – almost all properties purchased since 2008 have risen significantly in value, even in the first few years. Many people buying real estate during this time can look like they are great investors.
Overconfidence can easily happen when most investing occurs during bull markets. Most real estate market cycles tend to last about 7-14 years. If someone has only been investing since 2010, then they may not have seen the impact of a declining market on their portfolio.
Success in rising markets prior to 2006 led a significant number of investors to become overleveraged, confident that property values would continue to rise. Some of these investors lost their entire portfolios when the cash flow during the recession was not sufficient to cover the mortgage.
Always remember that the market can change quickly with little notice. Just look at how fast the Federal Reserve increased interest rates starting in 2022, starting a decline in commercial property values. Or the Tax Reform Act of 1986 that reduced the value of investment properties, triggering the Savings and Loan crisis. We need to stick to the fundamentals and not become complacent.
Fear Prevents Action
Some people are afraid to invest in real estate.
What if we had said that since we lost money on the condo, we would never invest in real estate again? What opportunities would we have missed?
Some people are afraid of investing in real estate because someone in their family had a bad experience with it.
Others don’t like the thought of being landlords, so they never consider it.
We hear and see news reports of everything that is wrong. Good news doesn’t sell. Dirty laundry does.
Fear keeps many people from investing in real estate and enjoying its returns and benefits. Education and networking with successful people are effective tools to address that fear.
There is a time for fear, but recognize when that is. Don’t let it be from lack of knowledge.
It was around 2007 when Warren Buffett famously said, “Be fearful when others are greedy, and be greedy when others are fearful.”
Conclusion
As much as we like to think we are good analytical investors, our emotions also play a significant part in our decisions. We have to sleep well at night. Don’t become a motivated buyer, stick to the fundamentals and recognize change to avoid complacency, and know how to address fears in the market.
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Mike is a retired aerospace engineer with a passion for real estate investing and teaching financial literacy. He lives with his wife in Daytona Beach, Florida.