Risk is a word that gets thrown around a lot, but is probably the most difficult concept for the human mind to process. We investors try to get a handle on it by using numbers, quantifying current conditions, make reasonable predictions, etc. But at its core, risk is an emotional sentiment that really can’t account for what the future holds.
Just look at the recent failures at adjudicating risk that have effected us all. Investment banks dissolved into bankruptcy virtually overnight, mortgage market destroyed, companies and individuals falling into insolvency, seniors having to work out their lives instead of having a retirement, and the list goes on and on.
How to Purchase Real Estate With No (or Low) Money!
One of the biggest struggles that many new investors have is in coming up with the money to purchase their first real estate properties. Well, BiggerPockets can help with that too. The Book on Investing in Real Estate with No (and Low) Money Down can give you the tools you need to get started in real estate, even if you don’t have tons of cash lying around.
Judging Risk by Performance
Recently, for the first time ever a freshman won the Heisman Trophy for the best college football player. His name was Johnny Manziel. He plays football at Texas A&M University. Here’s the funny thing, you would think that a player of this obvious ability would have been chased by college footballs best teams, the elite. But he wasn’t. No Alabama, no Florida State, no Texas, nor Oklahoma recruited him. Was he one of these guys that was below the radar in HS? No, his senior year he had eye-popping statistics. For you football fans, as a HS quarterback, his senior year he passed for 3,609 yards with 45 TDs and only 5 interceptions. So why did college football’s royalty ignore him?
Well he is a little small for a college QB. Texas A&M coaches decided to pay attention to actual performance numbers, while coaches at those elite schools recruited others that were taller and bigger, but had worse actual performance numbers. Risk is within the beholder! Or, more succinctly, how could the best college coaches in the country ignore actual performance in favor of a couple of inches? Because they lost sight of the ball or in this case that football players should be judged on how well they play football not how they look in a football uniform.
We, as investors, need to pay attention to what is right in front of our face, actual performance, rather than trying to find the perfect LOOKING investment that SHOULD be great.
Our brains are hardwired to react defensively against bad news more so than act proactively when we hear good news. This extends to our ability to accept what looks good too. How often do we drive ourselves crazy with the “what if’s” questions. As a result, we create a crisis in our minds. And we know that bad decisions are made in the middle of a crisis. Stocks are sold at their lowest, decisions are put off making indecision the order of the day, companies and investments that were thought of as solid just yesterday are now doubted, needed expansion or upgrades are placed somewhere into the future, all because of that crisis we created in our minds.
Additionally, our brain has recency bias hard wired into it. That means whatever our most recent experience dominates our thinking and leads our decision making. When we start from a place of looking for the bad in everything, we rarely get to the place of reasonable analysis.
Planning Your Retirement With Fear
Most of us have been given the responsibility for our own retirement. We are the first generation that has had that responsibility thrust upon us. Many times my conversations with clients start like this:
“What do you do now for your retirement?”
I have a 401K at work and am not satisfied with its performance.
“How long has this been going on?”
As investors we need to learn how to train our brains to ignore much of its natural inclinations. We need to tame the fear. We need to take a look at the actual performance numbers. We need to learn what the important questions are. We need to have the courage to make changes from strategies that aren’t working.
The unknown is hard for people. Frankly, our brains have never been good at deciphering what we don’t know. One minute you are your family are sitting on a beach in a foreign land, the next you have been swept away by a Tsunami, separated from all that you know and love.
It is in that dark place, the unknown, where our imagination runs wildest. But that is where the joy of living resides. We no longer have a daily existence where there is fatal danger around every corner. That saber tooth tiger is unlikely to grab you as you leave your house this morning! Maybe this is why so many of us let the unknowns paralyze us. Maybe this is why we try so hard to use reason to predict the unknown, when reason has such limited ability in this matter.
Human Behavior Is Hard to Predict
In my training as a social scientist I learned that if you could explain [and therefore predict]one third of any human behavior, you were doing well. That leaves 2/3 of human behavior beyond our advanced mathematics, beyond our rationality. So much of life is luck, timing, and just being present to what comes your way. To us investors, that sounds terrible because we can’t rationally predict it. But, if you really think about it, isn’t that what makes life interesting?
We need to stop worrying about things we can’t control, and paying more attention to things we can.
You’ve heard it from others. Real estate investing is too risky. I’ve never heard of an Equity Indexed Life Insurance policy, so it can’t be good. I’m scared to make changes, so I won’t. Everything is bad now, you can’t trust anything.
Those are the emotional laments of folks who haven’t tamed their fears, who haven’t done the work, who haven’t accepted the responsibility for their own purposeful plan.
We need to be better than that if we are to find success.