Investing is Like Tubing down a River
Last weekend, my wife, our two kids, and I went camping in West Virginia with some friends. We stayed at Big Bend Campground, situated in the Smoke Hole Canyon on the South Branch of the Potomac River. To say the area is beautiful would not do it justice. For those who appreciate mountains, canyons, rivers, cliffs, and nature in general, I highly recommend checking it out.
While there, our primary activity for fun was tubing down this section of the Potomac. While on a tube, floating down the river, I was struck by just how similar tubing is to investing, and note investing in particular. Below are five similarities.
#1 - Experience often matters more than effort
Thankfully, we were tubing with some people who had done this many times before. They knew exactly how to get from the campsite to the river, where to put in our tubes, where to get out, and when to be on which side of the river. Knowing which side of the river to be on was imperative. Positioning yourself to avoid the rocky, shallow waters and instead aligning your tube in the powerful current proved to be profoundly more effective than simply paddling hard.
Had we not been able to benefit from their experience, we probably would have floundered around for the better part of the first day. Worse, had we not known where to get out, we may have actually ended up stranded miles down the river and not having a clue how to get back.
Instead, we were able to enjoy a fun trip down the river with both exciting and relaxing moments. We stopped to enjoy the rope swing and ended up getting out very close to where we had put in, even after tubing for close to 2 hours. (The river does a loop, or what some might call a “big bend.”)
When it comes to note investing, the same tenet holds true. Experience and knowledge often trump raw effort. If you overpay for a note, for example, you are very unlikely to make a high return regardless of the effort you put in.
As with any endeavor, taking action is key, but jumping in to the note-investing space without the proper background and training can be devastating. There are joker brokers out there who will even try to sell you your own note—that you already own--to you. And there are gurus in the water who will sell you an expensive training program but have little to no experience themselves. Hustle is certainly important, but you need to have the proper knowledge and systems in place first. And this can come only from experience.
#2 - Your rate of progress is ever changing
One thing that really stuck with me from the tubing experience was the fact that at times it seemed like we were barely moving, and at other times the current carried us rapid-ly (pun intended). I think this was the takeaway that actually gave me the idea to write this article.
Another takeaway from tubing was that my rate of progress was never identical to that of someone else. In fact, my son (whose weight is less than 25% of mine) often made it through the shallower areas faster than I did because his tube and derriere didn’t scrape the rocks. However, I seemed to move a little faster than he did in the deeper areas. (I also moved faster because there is no way I am letting my 9-year-old son beat me. He did crush me in Madden the other day, but I digress.)
Here, the parallels to note investing are palpable. Sometimes, it may seem you are making little to no progress. Then, all of a sudden, you get an unexpected payoff and double your money. It happens. One thing is certain (especially if you focus primarily on the non-performing space), your returns and level of growth will not progress in a boring, predictable fashion.
Further, it may seem like every note investor around you is making it rain while you are stalled. These are the times to be sure to learn, focus, and position yourself appropriately for the next section of rapids. My guess is that when we have the next market downturn, the supply of delinquent mortgages will rise. If your note investing seems to be progressing sluggishly, take the time to further educate yourself and improve your systems in order to better capitalize when that supply does rise.
#3 - Things will go wrong
Several things went wrong during our tubing excursion. For example, a few tubes developed slow leaks, one father inadvertently hooked himself in his biceps while fishing, another person (possibly me) flipped his tube upside down under a massive tree in some rather legit rapids, and thunderstorms rolled in just as we put in to begin a trip.
Make no mistake, things will go wrong if you get into the note game. A performing note can become non-performing at any point. You can miss something during your due-diligence phase. You may be forced to foreclose and the process could take a year or more. Someone could sue you.
Your borrower may say he can’t sign documents or pay his mortgage because he will be on vacation for 3 weeks. Another borrower may ignore a water leak that turns into a $10,000 water bill from the city. Or the house--that was your collateral--may burn down. By the way, these three hypotheticals are not that at all.
You can never prepare for every possible scenario that you will come across in note investing (and frankly, that’s one of the aspects about notes that appeals to me), but it certainly would behoove you to assume you will face challenges.
#4 – Teamwork is critical
Because we didn’t travel down the river individually, we were certainly safer. Parents obviously kept a close eye on their kids, and kids also looked out for each other. We were able to pair up and physically link two tubes if that made sense given the circumstances. Further, tubing with a group is a lot more fun than going by yourself.
The same can be said for note investing: it is safer and more fun to travel and grow as a team. Teamwork in note investing can take on many forms, such as joint ventures, partnerships, relationships with trusted vendors, and information-sharing with fellow investors.
#5 – It’s best to enjoy the ride
Our goal with tubing was not to get to the end as quickly as possible. Instead, we chose to stop and smell the flowers. Actually, instead of smelling flowers, we enjoyed the rope swing and we stopped to let the kids swim for a while. Moreover, we were sure to simply take in our surroundings, especially during the slower, more tranquil sections. After all, God’s creation in this part of the country is simply breathtaking.
The same advice should be heeded with note investing. As mentioned above, you will certainly deal with some crazy real-life stories about borrowers and properties. Yes, you should take your investing seriously. Your future depends on it. But if you don’t enjoy the investing ride, you are probably better off not getting in to the note space. (And that will leave more notes for the rest of us.)