In my last post for BiggerPockets, I introduced the dreaded Shiny Strategy Syndrome and its devastating effects on long term investors’ success.
In that post, I argued that while all investment strategies are effective (for someone), the majority of these strategies will NOT work for your specific goals. Regardless of how simple or sophisticated, your investment strategy is essentially a tool. Therefore, you should follow the strategy (use the tool) that best aligns with the job you are trying to get done (your goal).
Today, I want to go a little deeper on the subject to explain the faulty decision making process used by investors who succumb to the shiny strategy syndrome and the two main reasons why dabbling in the wrong investment strategy can be so devastating for your investment results.
The Any-Benefit vs Craftsman Approaches
The lightbulb went on while reading Cal Newport’s excellent book “Deep Work.” In it, the author’s larger argument is that this generation’s “always on, all the time” hyper-connectivity to attention-fragmenting network tools like email, Facebook, Twitter, etc., undermines our ability to do Deep Work.
Deep Work is defined as “the ability to focus without distraction on a cognitively demanding task.” In other words, deep work allows us tackle and solve larger, more consequential problems that require our full attention for extended periods of time.
The book is fantastic (I strongly recommend that you read it) and its main point is hard to argue against. But, that’s not what caught my attention.
Rather it was this: When deciding to join and use network tools like Facebook and Twitter, people use the “Any Benefit approach” to support their decision. The Any Benefit approach according to the author says that ”you’re justified in using a network tool if you can identify any possible benefit to its use, or anything you might possibly miss out on if you don’t use it.”
Instead of that misguided approach, the author offers the alternative Craftsman approach. In this approach you “identify the core factors that determine success and happiness in your professional and personal life – adopt a tool only if its positive impacts on these factors substantially outweigh its negative impacts.”
Now isn’t that a deja vu from a few paragraphs ago?
Regardless of how simple or sophisticated, your investment strategy is essentially a tool. Therefore, you should follow the strategy (use the tool) that best aligns with the job you are trying to get done (your goal).
Long term investors that succumb to the dreaded Shiny Strategy Syndrome take the “Any Benefit” approach to make their investment decisions. For instance, you may look at a strategy like flipping homes and adopt it because it provides a benefit (the opportunity to make quick money) despite the fact that it’s not an appropriate tool for your goals (long term income). You watch TV shows and read rags-to-riches articles and you fear missing out on the windfalls that other strategies may offer.
Reasons why the wrong investment strategy is detrimental to your goals
Adopting an investment strategy that isn’t aligned with your goals can be devastating to their attainment for two main reasons:
1. Loss of focus
The investment “population” can be divided into two broad categories. The wide majority belong to the “sporadic” group. Investors that belong to this group make sporadic investments here and there usually due to external impulses like low interest rates, abundant foreclosures, investment trends, etc. The minority belong to the “deliberate plan” group. They set a goal followed by a deliberate plan and execute their plan despite those external impulses. To avoid any misunderstanding, the deliberate plan crowd is still conscious of market conditions, pivots and adapts to optimize results. But the main direction they’re headed remains the same. External impulses are viewed as either wind on your back (when positive) or obstacles to overcome (when negative).
The investment results between these two categories are vastly different. Sporadic investors typically make good investments but in the large scheme of things, these investments don’t change an investor’s life by their very nature. Let’s say you purchase a couple of properties to flip over the years and get excellent deals on both. You purchase them for $100k a piece and after some renovation you sell them for $175k a piece. After all it’s said and done you make $75k in short term profit before Uncle Sam skims some cream off the top. Great outcome but it won’t change your life. It won’t produce a stream of income that allows you to live the life you want to live. On the other hand, deliberate plan investors make a plan that is fueled by their goals and their resources. After executing it with discipline and consistency, they find themselves with six figure positive cash flow from free and clear real estate portfolios worth a couple of million dollars.
The main cause for the difference in results is focus. Something magical happens with real estate when a coherent long term plan, the corresponding goals and diligent execution are brought together in focus. Like the often quoted anecdote about the power of sun rays focused on a single point by a magnifying glass, focus activates the power of long term real estate.
2. Failure to count the true cost
The thought process of an investor that decides to use an investment strategy because it provides any benefit has one major bias: It looks exclusively at the benefit without counting the true cost (negative consequences).
Namely the main cost that the investor doesn’t consider is opportunity cost. In long term real estate, time is the most valuable resource. Surely, other resources like income and capital play an important role. But above a baseline level of income and capital, time is critical because it’s not a renewable resource. If you have the skills to put them to good use you can always find more capital and earn more income. However, neither of those can be used to buy back time.
Therefore, when you decide to dabble in a different strategy because of a benefit you are expecting (i.e profit from a flip) be sure to count the cost. How much will those two years cost you in terms of your long term strategy results? A few hundred thousand dollars? Four years of additional work till retirement? How does that benefit look now in comparison to those costs?
Have you narrowed your focus and become more successful?