How to Become a Billionaire by Being “Approximately Right”

by | BiggerPockets.com

Have you ever confidently stated something you were absolutely sure of… that turned out to be flat-out wrong?

As I’ve gotten older, I’ve had more and more opportunities to look back on the things I was “absolutely sure of” as a youth—things that I later (hours or years) discovered were actually false.

A Lesson in Arrogance

Like the evening I gathered about 18 friends in my living room to tell them about my exciting new business venture. (Yes, I was trying to recruit them to help. And no, it wasn’t multi-level.)

I stood up with a confident smile, raising my right index finger to the ceiling, and said, “My friends, this cannot fail.”

I had a mountain of data to prove my idea would work. And I was, well, a little arrogant. (OK, not a little.)

Eighteen months later I shut down that business after only making a handful of sales and losing a whole lot of precious time. And one friendship. My business partner with eight kids had even quit a good job to launch this. (Thankfully, we’re still good friends.)

There are plenty of “bulletproof” business opportunities that result in nothing more than bullet holes. Most successful entrepreneurs and investors have survived a bout with over-confidence at least a time or two in the past.

We all make decisions with our gut (a technical term for our “wanters”). Then we consult our analytical center for the data (the reasons we tell our spouse). So whether we really utilize it or not, we believe that detailed data is useful for our process.

Sometimes, the bigger the decision, the more data we gather, analyze, and ponder to back up our initial decision. And we think that more in-depth data lends more valid proof to our argument.

Related: This Simple Advice From Warren Buffet Guides Me to Deals No One Else is Finding

Learning From Warren Buffet

I’ve shared that I’m remotely mentoring under Warren Buffett. Sort of. He’s never heard of me, but I’ve joined my BiggerPockets friends Bryan Taylor and John Jacobus to analyze Buffett’s investment theses to apply them to real estate. You’ll only get this analysis on BiggerPockets, so if you love real estate and want to learn from the world’s greatest investor, you’re in the right place.

So does Mr. Buffett have anything to say about our obsession with data and precision and our desire for endless analysis? Why of course he does.

From Buffett’s 1993 annual letter to shareholders:

“Academics, however, like to define investment ‘risk’ differently, averring that it is the relative volatility of a stock or portfolio of stocks — that is, their volatility as compared to that of a large universe of stocks. Employing databases and statistical skills, these academics compute with precision the ‘beta’ of a stock — its relative volatility in the past — and then build arcane investment and capital-allocation theories around this calculation. In their hunger for a single statistic to measure risk, however, they forget a fundamental principle: It is better to be approximately right than precisely wrong.

He continues:

For owners of a business — and that’s the way we think of shareholders — the academics’ definition of risk is far off the mark, so much so that it produces absurdities.”

And from a 2012 Interview with Charlie Rose:

“I only get into situations where I know the value. There are thousands of companies whose value I don’t know. But I know the ones that I know. And incidentally, you don’t pinpoint things. If somebody walks in this door and they weigh between 300 and 350 pounds, I don’t need to say they weigh 327 to say that they’re fat.”

What Does Buffett Mean By This?

Warren Buffett recommends that investors discover the one or two critical items in an investment that make all the difference. Then, focus on those items relentlessly. Understand them thoroughly and do not compromise on them.

“It’s better to be approximately right than precisely wrong.” There’s no need to spend all your time and effort on every detailed aspect of an investment. Focus on the one or two critical items of importance and get them right.

A Personal Example

I received my undergraduate degree in petroleum engineering. One summer, I interned for an oil company in the lovely city of Denver. I ran detailed projections to calculate the amount and value of oil we could produce in a particular Rocky Mountain oilfield.

These calculations were based on one assumption piled on top of another. When I was done, I believed the calculation was no more accurate than throwing a dart against a dartboard in the dark dead of night.

I shared my frustrations with my boss, but he encouraged me to keep going. He asked me to put it all together for my big presentation to the vice president of the company.

Then he wanted me to carry out my calculations to another decimal point or two.

I did it. But I was disgusted inside. My assumptions and guesses caused my calculations to be questionable by a factor of 100 times or more. But hey, the presentation looked great. Right down to the hundredth decimal place.

My heart sank as I realized that my summer of hard work wasn’t worth the transparency plastic I presented it on. And I felt sick knowing that the company could spend a fortune acting on my data. I was glad to get out of town and back to college.

How Does This Buffet Nugget Apply to Real Estate?

Do you do this with your real estate calculations? Do you project IRR, ROI, and breakeven occupancy twenty years from now out to the tenths or hundredths? Why do you do this when it is based on so many assumptions about the future?

“It’s better to be approximately right than precisely wrong.”

This is not an excuse to avoid detailed underwriting. Rather, I’m saying to use your underwriting to inform the one or two key items about a real estate investment that will allow you to make a shrewd decision.

In real estate, the key items that make the difference are often things like purchase price, location, your business partners/vendors, and the economics of the local area. Get these things right and often the rest will follow to create a successful investment.

Related: What Warren Buffett Just Told Me About Real Estate is Great News for Investors

What Are Your Main Investment Drivers?

I’ve shared this often: My firm believes that the location plus the choice of a professional property manager drive about two-thirds of the success of our multifamily real estate acquisitions.

The locations we are seeking have:

  • Positive net population migration
  • Low unemployment
  • A diverse and growing economy
  • Affordable rents compared with home prices
  • Low crime, average schools, and average incomes over 3 times our projected rents

The property management firm we’re seeking:

  • Doesn’t own competing properties
  • Has a regional or national presence with upward mobility for employees
  • Uses top tier property management software
  • Has strict policies and accountability they enforce at all multifamily assets
  • Integrates well with our Apartment Life (or similar) programs to care for our tenants

As a multifamily syndicator, author, and BiggerPockets blogger, I talk to a lot of people each week. I’ve spoken with more than one or two people with analysis paralysis. I hope that’s not you.

Could taking Buffett’s advice to relentlessly pursue being right about a few critical things cure you of analysis paralysis forever?

What about you? What are your critical success factors? How do you approach them?

Share below!

About Author

Paul Moore

Paul is author of The Perfect Investment – Create Enduring Wealth from the Historic Shift to Multifamily Housing, which you should probably get if you want to learn to invest in multifamily. He leads Wellings Capital, a multifamily investment firm, and hosts the How to Lose Money podcast. Paul was 2-time Finalist for MI Entrepreneur of the Year, has flipped 60 homes and 30 waterfront lots, developed a subdivision, and appeared on HGTV. Paul’s firm invests heavily to fight human trafficking and rescue its victims.

31 Comments

    • Paul Moore

      Great question, Steve. Actually, oil prices dropped from the upper teens to about $12 per barrel right after my analysis, and the company shut down all new drilling efforts Wyoming and other Rocky Mountain states. So it was really an exercise in futility. (But I had a fun and memorable summer in the Rockies!)

  1. JL Hut

    Paul, another great post. It reminded me that I suffered a fair amount in my youth, having to tell people how sure I was about being right. I still suffer today with having opinions, but am better at letting others have theirs now. I Just read a great quote, uttered by Lord Chesterfield. He said “Be wiser that other people if you can, but do not tell them so.”

  2. sunny shakhawala

    Paul, Love when you write about the lessons you learned from WB. Would love it if you housed them all in one place. If you do already, pls lmk where!

    I have a question non-related to this article but falls well within your expertise. It’s about Cost Seg. Some people don’t see the value in cost seg unless they’re sure they’re going to 1031 out into their next deal. But when you have a syndication with…10s if not 100s of investors – it’s kind of hard to “guarantee” that all investors will want to join you on the next one. So I guess my question is…is there a hold period threshold where it makes more sense to cost seg? Like..if you’re going to hold the property for 3 years only, does it make sense to cost seg? @ 5years ? @ 10years ? How short is too short? Or how long is long enough? Not sure if this question makes sense the way i framed it but hoping you can shed some light.

    I may also be wrong in assuming a 1031 protects you from dep. recap. so if I am please don’t hesitate to enlighten me.

    • Paul Moore

      Hi Sunny, appreciate your kind words. Here is a link to all my articles: https://www.biggerpockets.com/renewsblog/author/paulmoore/

      This question requires a detailed answer that varies depending on the situation. We just had a firm complete a cost segregation study on a 125 unit property we have in Lexington, KY. There is definitely great value in that for our investors, even if we don’t 1031. We typically outline a hold period of 4-7 years, though that may change going forward. The company we used are experts and could add more color to my basic answer here. We are happy with the company we used so feel free to send me a colleague request and I can get you their info.

  3. Taylor Hosick

    Paul,
    Thank you so much for sharing your knowledge when it doesn’t directly impact your bottom line. It’s a worthy cause to derive the principles from winning people and apply it to our own goals. Thank you also for sharing some of your investment drivers. It will be a big help for my clarity of mind to boil things down after all of the numbers when I’m evaluating a multifamily property.

    Thanks again!
    Taylor

  4. Naveen Vavilala

    Paul, Another great article. I like the way you have laid out your personal experiences. I have few of my own and true as you get older and a little bit wiser, we all can tweak our approach. Definitely, I would call them life’s way of teaching us. I am glad now we have platforms like biggerpockets which help the newbies (I am one too) to learn from GURUS like you all.

  5. Luis F.

    One of the best posts I’ve read here.

    The antithesis of the “analysis paralysis” crowd is the “just do it” crowd. Investing for the sake of investing can be worse.

    Understanding value and the fundamental factors that drive it and acting when those meet a specific criteria will setup the foundations of a successful investment.

  6. Kent Petschow on

    Another great article Paul. I also appreciated your article for the Appropriate Investment prior to this. Good to hear down to earth, common sense real estate investing advice.

  7. Alina T.

    Paul,
    Thanks a lot for raising a very common issue! A lot of us have suffered from analysis paralysis at one point in life or the other. By bringing it up again you’re raising an awareness and helping people to overcome it!
    Thank you for your contribution to the community!

  8. John Murray

    I believe in this very same philosophy. Being in the ballpark is more important than sitting in the parking lot calculating who is going to win with all the statistics to calculate. Just knowing what sport is being played helps the person understand what ballpark to be in. I became a multimillionaire by knowing what ballpark to be in and what sport was being played.

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