5 Surprising Reasons Smart Investors Can Finish Last
We all like to think we’re smart. I may not call myself a genius as often as Ben Leybovich, but it feels good when intelligence and knowledge lead towards real estate investing success.
Unfortunately, however, I’ve learned that intelligence and knowledge alone are not enough to build wealth and make money in real estate. In fact, sometimes they can get in the way.
Here are 5 reasons the smart investors don’t always win.
5 Surprising Reasons Smart Investors Can Finish Last
1. Emotions Make Fools of Us All
In 1720 Sir Isaac Newton went broke after speculating on the stock price of a corporation called the South Sea Company.
As a refresher from high school science, Newton is the genius who created calculus and discovered theories that explained the motions and forces of everything in the universe.
Einstein revised Newton’s theories in the early 1900s, but the brilliance of Newton’s accomplishments are still unquestioned.
Despite all of that, Newton went broke. Why? It seems emotions trumped even the most logical of brains. He got greedy, and that led to unintelligent investing.
After losing everything, Newton allegedly said, “I can calculate the movement of the stars but not the madness of men.”
Newton’s story is one of many, many examples of financial failures by brilliant people.
If you can’t learn to tame your own emotional monsters (anger, greed, fear, etc.), you can’t be a successful investor. Even the most amazing strategies and a brilliant mind won’t save you.
2. We Get Stuck in the Theoretical (Analysis Paralysis)
I love spreadsheets. They are fun. Who needs Suduko puzzles when you can do real estate analysis?!
But if you are too much of an analytical type person, be careful. You might find yourself stuck analyzing instead of making deals.
A preacher named Michael Bernard Beckwith once said theory is just rudimentary. Practice is the advanced form of anything, including investing.
So, if your analysis is paralyzing you, you’re stuck in the rudimentary and the theoretical. At some point you have to become advanced and start taking a risk.
One of my favorite real estate authors, John Schaub, said in the introduction of the very good book Building Wealth One House at a Time:
"The first house I bought I paid retail price for and made a 20 percent down payment. The good news is that I could rent it for a high enough amount to pay the expenses and pay the loan […]
An investor with a doctorate in finance would never have bought that house, and he would never have held it for 30 year without refinancing it. He would have been concerned with his rate of return, his lack of leverage, and his running out of depreciation. He would have never turned a $7,000 investment into more than $300,000, not counting the rent that was collected for 30 years will continue to be collected for the next 30 years."
The point is that you’ll never make money on a deal you never do! Of course, use basic, intelligent analysis, like making sure your net rent covers your mortgage payment. But don’t let a search for a perfect deal get in the way of good enough deal right in front of you.
3. Pride Comes Before the Fall
“Pride goeth before destruction, and a haughty spirit before a fall.”
Book of Proverbs
There is a fine line between confidence and arrogance. Confidence is indispensable. Without it, you’d never even leave your house in the morning.
But arrogance ironically leads to less intelligent decisions. Arrogance causes us to relax our attention and to underestimate challenges.
Even the most intelligent and knowledgeable investors must acknowledge their limits. Humility is not weakness. It’s a form of strength that always maintains a beginner’s mind.
Knowledge itself, without a dose of humility, is dangerous. Why? Because reality is complex. The best we can do is to create good approximations.
Just because a certain direct mail campaign worked yesterday does not mean it will work today. Just because a certain reserve for capital expenses worked on one property does not mean it will work on another.
Change is the only constant in life and in investing. Humility and flexibility allow us to change with the times. Arrogance and pride make us rigid and more likely to fail.
4. We Lack the “Most Valuable Skill”
Warren Buffet, perhaps the most successful investor of all time, once told a group of students that he would pay them $100,000 for 10% of their future earnings. He then told them that he would pay them 50% more, or $150,000, if they improved their communication skills.
To Buffett, it is very clear that good communication skills are extremely valuable. He was willing to bet his money on it.
Buffett should know — because as a recent college grad, he paid $100 to take a Dale Carnegie public speaking course. At the time he was terrified of speaking in public. Today he is known for his folksy wisdom and engaging public speaking style.
Buffett now credits that public speaking course as the most important degree he earned, and he graduated from an Ivy League school.
If you are smart but can’t communicate your ideas, you will face an uphill battle in business and real estate investing.
There are many ways to work on your communication skills, but here are a few to get you started:
- Toastmasters: Practice and learn how to speak in front of others. I was part of a local club for the first decade of my career.
- Dale Carnegie Books and Courses: I like “How to Develop Self-Confidence & Influence by Public Speaking.”
- TED Talks: I like “The Secret Structure of Great Talks” and “How I Beat Stage Fright.”
5. We Underestimate the Power of Habits
Like success with diets or exercise, successful investing really comes down to self-discipline and consistent action. Many people know what to do, but they just don’t do it.
One of my most popular BP articles in 2014 reminded people that finding deals wasn’t always about the most intelligent marketing campaigns. It was more about HUSTLE.
You also know from my earlier section on analysis paralysis that you can’t spend all your time staring at spreadsheets if you want to buy investment real estate. You need to DO something instead of just thinking about it.
Your habits, or your daily behaviors, will ultimately lead to your final results. If your results were bad, likely your habits were bad. If your results were good, likely your habits were good.
For example, when I make a goal to buy a certain number of properties, I like to translate that goal into the behaviors I need to do daily in order to make that happen. This usually involves marketing activities, like sending out direct mail or building relationships with referral sources. It also involves sales activities, like returning seller calls and making offers to homeowners.
If I can get into the habit of marketing and making offers daily, I am bound to do some deals.
The science of habit creation and behavioral psychology is fascinating, so if you’re interested, I recommend you study websites like jamesclear.com, which focus on the subject. But for now I’ll give you a few of my best tips:
- Focus on consistency over intensity: Set the minimum required activity at a very easy level. For example, I like to exercise for 20-30 minutes or more, but my minimum goal is a 5-minute stretching and push-up routine that is very easy. This low intensity fall-back routine allows me to be more consistent and stick to my habit.
- Schedule your important priorities first: Have you heard the story of how to fill a jar with a pile of rocks? You start by putting in the big rocks, and then you put in the small ones. So at the beginning of the week, schedule your most important priorities, and let the rest of your week fill up as it always does with the little (less important) stuff.
- Mistakes Are Ok: The best performers know that mistakes are part of the process. If you miss a day, if you do something wrong, just quickly get back on track and move on. Don’t let one negative infect the entire process.
Smart Investors CAN Win
My point here has not been to discount the importance of knowledge or intelligence. Obviously, those are essential ingredients to our success as real estate investors.
Just don’t ignore the other critical factors at the expense of seeking more and more knowledge. Strategies, ideas and intelligence are not enough.
Get out in the arena. Make mistakes. Communicate. Get some battle scars. Humble yourself by facing uncertainty.
Then come back to your friends at BiggerPockets.com to learn. I promise you that the knowledge you’ll pick up here on this site will be much more valuable when you’ve stirred in all of the other ingredients of success.
I’ll leave you with thoughts from Teddy Roosevelt, an intelligent person who is the epitome of this lesson.
“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man [or woman]who is actually in the arena, whose face is marred by dust and sweat and blood […] who knows the great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”
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[Editor’s Note: We are republishing this article to help out investors newer to BiggerPockets.]
Have you ever fallen prey to the 5 pitfalls listed above?
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