Investors: Your Optimism Could Become A Money-Draining

When I quit my job at Ford 25 years ago, I was so excited to tell my friends that I was “an entrepreneur.” That evolved to “serial entrepreneur and investor.” And sometimes it devolved to, “Honey, how are we gonna pay our mortgage this month?”

Over the years, it’s provided lots of memorable moments. Like:

Leaving behind great health insurance, a 401(k), and a host of other benefits—when my wife was seven months pregnant with our first child (don’t worry, she forgave me years ago).
My young daughter asking me, “Are you going to make some more money soon, so we won’t be poor anymore?”
Going from almost $2 million in the bank to $2.5 million in debt in one decade (don’t try that one at home).
Being taken for $100,000 by a brilliant “investor” with a program to make 3 percent per month trading currency. (Now he’s trading his years for time in the federal pen. And he still won’t tell the FBI and 2,000 investors where he hid the $18 million he bilked us out of.)

As we were planning to sell my first company to a publicly traded firm in 1997, my more experienced business partner said, “When we go from making $100,000 or so per year to putting a few million each in the bank, investment opportunities we only dreamed of will open up to us. People with financial resources have opportunities to invest in deals the general public doesn’t have access to.”

He Spoke the Truth!

What he didn’t say is that those with significant financial resources also have opportunities to be swindled and taken advantage of in ways that those who invest in the broad stock market, the bond market, etc., will never have to bear. (Yes, they bear the less-obvious pain of investment advisors acting in their own self-interest and lining their pockets with high fees and such. But that’s another story.)

Additionally, entrepreneurs bear the side effects caused by…

The Curse of Optimism

I’m a super-optimistic person. Studies show that the importance of optimism cannot be overstated.

The August 1991 edition of Reader’s Digest featured an article entitled “Patient Knows Best.” It reported the following:

“A person’s answer to the question, ‘Is your health excellent, good, fair, or poor?’ is a remarkable predictor of who will die over the next four years, according to new findings.”
“A study of more than 2,800 men and women 65 and older found that those who rate their health ‘poor’ are four to five times more likely to die in the next four years than those who rate their health as ‘excellent.’ This was the case even if examinations show the respondents to be in comparable health.”
“These findings are supported by a review of five other large studies, totaling 23,000 people, which reached similar conclusions, according to Ellen Idler, a sociologist at Rutgers University, and epidemiologist Stanislav Kasl of Yale University School of Medicine, co-authors of the new study.”

It is clear to me that what we believe and speak about our health affects our immune system. We were designed with incredible power to determine our physical destinies. And it’s also clear that optimism will lead to greater success in your life and business.

Josh Martin of Wealthy Gorilla discusses four reasons that optimistic people are more successful:

Positive work environments lead to better performance.
Optomistic people get noticed.
Positive thinkers are good problem solvers.
Being positive fosters self-development.

Being involved on BiggerPockets actually fuels my optimism and brings me joy and greater success. I’m super-grateful to Josh Dorkin, Allison Leung, and others for the platform they have built. If you have yet to dive in deep here, I invite you to take the plunge. Being a Pro member accelerated my success and fun here!

I try to live out each day with a positive mindset. My morning declarations include quite a few that remind me to live with optimism, joy, and enthusiasm.

But Optimism Also Has a Dark Side

The greatest investor of our time, Warren Buffett, said that “optimism is the enemy of the rational investor.”

Prominent economist Peter Bernstein said, “The riskiest moment is when you think you are right.”

Real estate mogul Luke Skywalker said, “Your over-confidence is your weakness.”

This entrepreneurial optimism has led to a lot of “brilliant” assumptions in my real estate career. Like:

Assuming that because flipping a $50,000 house generated $20,000 in profit, flipping a $200,000 house could generate $80,000 in profit.
Assuming that if I made money flipping homes, that I’d make much more money buying dirt and building them from the ground up. (It’s not good for someone who doesn’t know how to install a doorknob to build houses, but that’s for another post.)
Assuming that if flipping one-acre waterfront lots was churning $80,000 to $100,000 in profit each, that a five-acre lot would profit up to $500,000 (that one actually worked out as planned).

I’ve said it often, but it bears repeating here…

Don’t Fall in Love!

I’ve been married for 31 years, and I’m all about love. That’s not what I’m talking about. I’m referring to real estate.

But speaking of love and marriage, note how similar this process can be to the gap between many people’s view of their significant other while dating versus those views after being married awhile. Those negative character traits that seemed cute during the courting process can come back to bite the married with painful intensity.

“She’s adorable when she gets angry! I love the way she looks when her face is purple.”
“He never opens doors for me. I think he respects me too much to make me look weak.”
“Her parents won’t speak to me, but her mom makes the best semi-boneless ham I’ve had in years!”

If you fall in love with a real estate deal you’re considering, your brain will similarly begin to look for everything good about the deal and screen out, ignore, or even reverse everything negative.

“Check out this one-bedroom house. This will be perfect for the growing minimalist movement. A tiny house before they were in style!”
“The neighborhood’s not the greatest. But that means it can only get better. Besides, I always had a heart for the poor and downtrodden.”
“I’m pretty sure spiral staircases are coming back into style.”
“Maybe that leaky basement can double as a wading pool! That’s a really nice feature, ya know?”

Seriously, if you fall in love with a deal, you’re sure to get burned. So…

Don’t Fall in Love With the Deal — Fall in Love with the Numbers

Brandon Turner has been preaching this for years, and you would be wise to heed his advice. Most real estate investors have sad stories about the times they ignored this critical principle. I don’t want you to be among them.

Falling in love with the numbers means not getting emotionally invested in a deal. You can guess you’re doing this when your left brain starts using logic to convince yourself and others to do what your right brain desires.

Remember that we all act based on desire — from the right brain. Then we use our left brain to come up with reasons to sell our spouse on it (wink wink).

Train yourself to desire good numbers first. To be objective and accountable. And please don’t fall in love with your real estate deal.

In Conclusion

To win friends and influence people, succeed in real estate, and live a long healthy life you need to be an optimist.

But if you want to be wise and avoid the curse of optimism, you’ll listen to a guy who has gotten it wrong many times in the past two decades.

(I’m much better at this now. Really. And I think my wife’s issues are really cute again. Since she forgave me about the health insurance thing and all.)

So, what about you? Do you have any tips for remaining a real estate optimist while avoiding its deadly curse?

I’d love to hear from you below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.