The World’s Least-Followed Investment Advice (& How it can Make You a Millionaire)

by | BiggerPockets.com

“Be greedy when others are fearful and fearful when others are greedy.” —Warren Buffett

Wait, don’t click that back button. (I saw you look at it.) You probably think you know where this article is going. You’ve heard this famous Buffett quote before, and you assume you know what you need to apply it to your situation.

No offense, but you probably don’t really know how to apply this rule to your investing career. But you will if you invest the time to read this post.

Did I hear you say, “How dare he make such an arrogant claim? He doesn’t know anything about me.”

You’re right. I don’t know about you. But I do know about human nature. And I do know about me.

As a Finalist for Michigan Entrepreneur of the Year, a two-time author, and a real investor for two decades, I know how many times I’ve failed at this. And though I’ve been aware of and quoted this many times, I didn’t know what I didn’t know about it until I dug in deeper. And that’s exactly what we’re going to do below.

This post is the 5th in a series that Bryan Taylor, John Jacobus, and I are affectionately calling “Warren Buffett is my Real Estate Mentor.” I like them all, but I think this is the weightiest of the posts to date. We hope you enjoy it!

Did You Know?

  • In the wake of the Great Financial Crisis, Buffett made several investments that illustrated he acts and lives by his famous saying to “be greedy when others are fearful.”
  • These investments were in Bank of America and Goldman Sachs when no one else was willing to touch financial firms with a 39½-foot pole.
  • The returns associated with these investments (still unrealized to-date) prove that you can be very successful by ignoring the crowd and being greedy when the time is right.

Great News: You Don’t Have to Predict the Next Downturn to Profit by It

Here’s how Buffett phrased it in his 1986 Letter to Shareholders:

“What we do know, however, is that occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

college-grad-advice

Related: Advice From a Boomer: 5 Timeless Lessons Every Millennial Investor Should Read

4 Takeaways From This Epic Buffett Quote

  1. Fear and greed (aka market cycles) are as sure as death and taxes. Just because the last financial crisis was a decade ago does not mean we are cured of the fear contagion.
  2. Predicting when and how bad (or good) these market cycles are is a fool’s game. And Buffett says it’s easier than that. Just act appropriately when the time is right.
  3. As an investor, you simply need to know that these cycles will come, and when they do, you need to be prepared to act counter-intuitively from most other market participants and pundits.
  4. Here’s the problem: Your psychology and instincts will try their best to persuade you not to act counter-intuitively. Reading and agreeing with my mentor (Buffett) is worlds apart from acting like him when faced with a situation like investing in banks right after the largest financial crisis in our country’s history.

So, What Does This Mean for Real Estate Investors?

  • Where are we now? Recognize and understand where we are in the market cycle. Don’t try to predict the top, nor anticipate the bottom, but rather have an objective view of prices, values, and your instinctual “fear and greed” meter.
  • Be prepared. If you truly want to be greedy when everyone else is fearful, then you’d better have the capital available to deploy and you’d better have your buying criteria and target assets identified. And it won’t hurt to get some experience under your belt before then to convince the lenders that you’re credible.
  • Stick to your principles. Staying true to your principles as a disciplined investor will serve you well in times of excessive fear or greed. Never straying from your principles will help ensure that you are not persuaded by the fear of others or the showboating greed of your neighbors. (So, when you see me pass you in my Ferrari, keep your eyes fixed on the road. That was a joke. I drive a Ford Flex.)

Smart Doesn’t Equal Rational

From a Buffett talk with students in 2005:

“How people react will not change—their psychological makeup stays constant. You need to divorce your mind from the crowd. The herd mentality causes all these IQs to become paralyzed. I don’t think investors are now acting more intelligently, despite the intelligence. Smart doesn’t always equal rational. To be a successful investor you must divorce yourself from the fears and greed of the people around you, although it is almost impossible.”

My friends, this is why I urged you not to hit that back button. It’s not enough to know these truths. Our brains (at least mine) have a funny way of tricking us into thinking that just because we read a book, went to the seminar, or bought the t-shirt that we will act accordingly. But that’s rarely the case. Buffett himself says this is almost impossible to pull off.

3 Takeaways From This Buffett Quote

  1. Buffett’s antidote to the fear/greed contagion is to act rational at all times. But this is harder than it seems due to the innate psychology already hardwired into your brain.
  2. You cannot always outsmart a situation that calls for rationality. But staying rational helps to divorce you from succumbing to fear or over-extending yourself (and your capital) through greed.
  3. Don’t be part of the herd. Rather, recognize when the herd exists and when you could fall prey to it—then run the other way with all your energy.

So How Does This Apply to You, Mr. and Mrs. Real Estate Investor?

  • Don’t get wrapped up in comparing yourself to others in your network. This will only feed your greed and cause you to not act rationally. I’m all for networking, mentoring, brainstorming and the like. BiggerPockets is a great place to do that. But I’m urging you to keep your cool and follow your principles at every point in the cycle.
  • Read stories and examples when rationality (not excessive greed or fear) prevailed in a deal. Talk with your mentors and contacts about the deals they passed on due to rational thoughts as opposed to focusing home-run deals that were caused by more luck than rationality.
  • Prepare yourself for fearful times. Your mind must be conditioned to act rationally… so test it. What would you do if a property that you’re looking at dropped price by 30% and all other buyers walked away? And your lender became more discriminating? How would you react?

Related: The Best Advice I’ve Ever Gotten (For Life and Business)

“If Something Can’t Go on Forever, It Will End.”

From Buffett’s 1988 Annual Letter:

“We have no idea how long the excesses will last, nor do we know what will change the attitudes of government, lender and buyer that fuel them. But we do know that the less the prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs. We have no desire to arbitrage transactions that reflect the unbridled—and, in our view, often unwarranted—optimism of both buyers and lenders.  In our activities, we will heed the wisdom of Herb Stein: ‘If something can’t go on forever, it will end.'”

My friends, in our heart of hearts, most of us knew the run-up that led to the 2008 meltdown would not last forever. But many of us ignored this fact.

Are we in a similar situation today? Or is this just the “new normal” for multifamily and single-family investing? Some demographics would suggest that we are in the new normal, and this is not really a bubble.

But I’m not even sure I believe that myself. There will be no way to be certain of market timing except in a rearview mirror.

The great news is that you and I don’t have to predict market timing to benefit from the market today. Mr. Buffett has taught us well!

I Am Making a Pivot

I learned my lesson in the last recession. I recently told my multifamily investing team that if we are the high bidder on any deal, even an off-market deal, then there is something wrong. I just spoke to a wonderful lady from Denver, and I told her that if a broker is courting her (as a relative newbie) to buy an off-market multifamily deal, the broker may be looking for a sucker.

I spoke about this in detail in a recent post. It’s been painful for a guy who wrote a book on multifamily, but our firm is making a pivot. We are expanding our portfolio outside of multifamily. We are investing in self-storage.

We made this initially painful move because investor optimism and competitive pressure in multifamily signaled us that it may be time to be “fearful when others are greedy.”

Though self-storage is heating up as well, the ownership is highly fragmented on a national basis. And there are thousands of facilities that are not professionally run and can be upgraded. This has provided a significant opportunity for relatively low risk, highly profitable investment opportunities for us and our investors.

While I was researching self-storage, I came across a story told by self-storage expert and fellow BiggerPockets brother, Scott Meyers. This brief story shows the power of 1) self-storage value-adds, 2) acquiring self-storage right, and 3) acting according to the greed and fear cycles we’ve just discussed.

Scott and his team acquired the Indianapolis Enterprise Center for $1.5 Million in 2005. He financed 80% and raised 20% ($300k) in equity. He proceeded to raise $400k more to convert this warehouse space to storage, with a little bit of office space, then leased it up.

The real estate market was near the top in 2007, and he sold it for $3.9 million, a $1.9 million profit. Keep in mind there was only $700k in equity invested, so the return on equity was 170%, or 2.7x ($1.9mm ÷ $700k) in about two years. An 85% annual ROI if my numbers are right. He took some risk to get there, but this is obviously a great return for investors.

But This Story Wasn’t Over

This deal was the gift that keeps on giving.

The crash of 2008 happened. The new owner’s optimism had turned to fear. He apparently had a portfolio that wasn’t performing well overall, and he had allowed this facility to fall into mis-management and disrepair.

He offered to sell it back to Scott’s group in 2012 for—wait for it—$545,000. (Recall he had recently paid Scott $3.9 million).

The owner had really let the facility slide over five years, so Scott raised $200k extra ($750,000 total) and purchased it for cash (another lesson from this post—have cash available for down cycles). Scott installed LED lighting and made other improvements, significantly increased lease rates, and leased it up again.

When Scott acquired it in 2012, the net operating income (NOI) was only $39,000 per year. At the time of this post, in 2018, the NOI is $278,000 annually and the facility is currently listed for sale at $3,004,000.

Another lesson is the power of commercial real estate. The value is based on the income and cap rate, not neighborhood comps like the residential world.

If Scott refinanced it along the way, his investors were probably paid out long ago and stand to make a stunning profit when this sells. (Most syndicators leave investors in when refinancing.) Even if the investors still have their cash in, their profit will be very substantial.

Scott and his investors learned a valuable lesson from Warren Buffett: “Be greedy when others are fearful and fearful when others are greedy.”

Let’s Apply This

Right now, times are booming for most real estate sectors—some say at an unprecedented level.

Earlier in the post, we said, “Prepare yourself for fearful times. Your mind must be conditioned to act rationally… so test it. What would you do if a property that you’re looking at dropped price by 30% and all other buyers walked away? And your lender became more discriminating? How would you respond?

So, tell us—how you would respond? (I realize you may have to know a lot more details, but either make some up or answer in general terms.)

I’m really eager to hear from you!

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 is a Managing Partner at Wellings Capital, a multifamily and self-storage 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.

30 Comments

  1. Curt Smith

    Figure out what everyone is doing, then do the opposite. So what does this mean?

    At your local REIA, everyone agrees re some deal scenario is the way to go. You are in the back of the room,,, what should you plan on doing tomorrow? LOL what ever the room said but the opposite. IE if they said 2000 sq ft 4/2’s, you need to look for 1100 sqft 3/1s. 🙂

    If you offered your idea of a deal type you are interested in and you got cat calls, coughs and laughs,,, yoiu have a possibly great idea. 🙂 I bought 18 double wide mobile homes on their own land between 2014-15 for $35k all in that rent for $900. They thought I was crazy!!! Ya right: 30% cap rate crazy. This deal is dead today no inventory that meets my strict buying rulls (like Buffets strict buying rules!!).

    What is ugly you can become the expert at making beautiful (profit wise beautiful?). What deal type does everyone hate, just through up hate? small 2 bed/1 baths? So hated they sell for $25k? Or disproportionately cheaper then any other deal? Yet can be rented just fine and because so cheap cap rate much better then other deal types. 🙂

  2. Christopher Smith

    No matter how many times you explain this concepr the result is always the same for most people. Panic ensues, primal fear dominates and they run to hit the chicken switch every time.

    You need the mental and emotional discipline of a Spartan warrior or else you end being as a sheep quivering like a bowl of jello.

  3. Cindy Larsen

    Great article Paul. To answer your question, I would wonder why all other buyers had fled. I would ask my real estate agent to ask the sellers agent why that happned, and ask for disclosures, including any recent disclosures. I would take the sellers agents’ information a grain of salt. Then, with that information (or lack of information if that is the case) I would analyze the deal, and, if possible, walk through the property. If it looked like a good deal, I would make an offer, for the new reduced asking price, and get it under contract. My excellent home inspector would then find out is wrong with the property, I would then get estimates on repairs, and ask the seller for a price reduction. At the end of that negotiation, if it still cashflows, I would buy it. If it doesnt cash flow, I would walk away.

    In other words, I would follw my normal process, without letting either fear or greed influence my decisions. The only time I find this difficult to do is when an investment is also going to be my eventual long term home. Then, if I am in love with a property, it is hard to walk away. In that situation, it is easy to find myself rationalizing why I should buy it even though it is not a good deal. Fortunately I can stop myself from making that kind of foolish mistake because I have tools I believe in and people on my team whose advice I value, that I use as a sanity check for my decisions.

    As my Daddy used to say “Man is not a rational animal, he is a rationalizing animal”
    But, that is the point of your article, right? That acting rationally, against your gut instincts, and against the common wisdom, is difficult and requires self control and practice in making rational decisions.
    I have process that defines what the rational thing to do is, and I practice following it, and checking my decisions against it, every step,of the way.

  4. Andy Le

    Great article Paul. To your question: and I assume the 30% you mention here is the original purchase price, then I’d probably start looking to find the real problems (the story behind that cause price dropped) through the broker, PM, other competitor PMs. At the end of the day, I like and always follow the advices in one of the post you had: “rather acquire great multifamily assets in excellent locations for a fair price… than to overpay for home run properties in marginal locations and bank on their appreciation.”

  5. Matt Millard

    I try to follow this advice even when others are not greedy by investing in recession proof investments like mobile homes & self storage. It’s best to have a little liquidity too for times when everyone is fearful!

    Hard assets from real estate to silver are a good line of defense in any scenario including the worse case.

    • Paul Moore

      Matt, thanks for your comment. I just saw on CNBC this morning that Mark Cuban has a lot of cash on the sidelines just in case a correction happens. He didn’t say he thought a correction was right around the corner, but the general sentiment is that real estate and stocks can’t be this good forever. I like the consistent cash flow of commercial real estate over gold/silver in recessions, but always interested to hear different viewpoints.

  6. Roger Steciak

    Rather than follow the crowd or do the opposite of the crowd, I ignore the crowd and do what makes sense to accomplish my goals. Of course, if everyone is selling when I want to buy (and vice versa), I ask myself what does the crowd know that I don’t know (the crowd is right more often than it is wrong), which for good measure, forces me to double-check my analysis.

  7. Jeff M.

    The “problem” is when you have to buy during a frothy frenzy. Next week, the clock starts ticking on my 1031…45 days to pick a couple replacement properties. I realize some money will get left on the table due to the current climate, but as long as the numbers work, opportunities can still be had during any market cycle. It just takes more legwork. Paul, I’d love to hear your thoughts on this. For everyone who MUST invest at a time when greedy newbies are running the streets, where you look for ‘safe’ shelter?

    • kelly meadows

      Jeff,
      I’m in your exact position. Sold my rental home to a friend and now need to reinvest. Land in AZ is still pretty affordable so I’m considering buying land to hold until there is some kind of housing/multi-family correction. We have family in FL and it would be nice to have a beach rental to stay in (that is also income producing) but if feels overpriced… I’m hoping to find a wholesaler in the Clearwater Beach area. p.s. this is my first post/comment!!
      Paul,
      Thank you for the article. I’ve been feeling the same thoughts you wrote about…you just put them into words better than I could!

      • Paul Moore

        Thanks for the kind words, Kelly! If you are doing a 1031 exchange and don’t have somewhere to place the funds, you may want to look into Delaware Statutory Trusts. These are not for everyone, but it could be an option.

    • Elizabeth Grahsl

      That’s just it. You don’t “have” to invest at high valuations, but it’s very hard to leave cash on the sidelines during hot markets – which is what Buffet has repeatedly done. Of course that doesn’t mean you have to move everything to cash, and buying and holding forever will probably work out just fine. But buying low and selling high only works when you’re actually willing to sell at some point. 1031 exchanges have caused many investors to ignore fundamentals and buy overpriced properties over the years. Don’t let the tax tail wag the dog! It’s ok to pay some capital gains taxes and sit on cash while you wait for a really good deal.

  8. Rhonda Wilson

    Paul, I think that an important point you’re missing is that Warren Buffett continues to buy stocks even in a massive bull market like we are experiencing in the stock market right now. I just read that he continues to increase his share in Apple. Mr Buffett knows that buying stock with strong fundamentals is a good investment regardless of the business cycle.

    In income real estate, the key is to continue to invest only when the cash flow warrants the price. Yes, it’s getting really hard to find properties that instantly deliver strong cash flow.

    • Paul Moore

      Rhonda, that’s a great point. Thanks for bringing that up. There are many multifamily syndicators and other people in real estate who are finding deals that work for them at this point in the market cycle. We are still looking at multifamily deals that come our way. We are not moving away from that, but it is more difficult to find multifamily deals than it was 5 years ago. Thanks for the comment!

  9. Eric V.

    Yes Great to Hear this Over and Over. Now put yourself in that situation. Right NOW, The market crashes Today 2008 style, Where do you stand and what do You do!

    I’ve done both at top and bottom.

    In 1987 i just graduated from College and in the Fall of 1987, put 5k down and borrowed 190K at around 16% on a SFH fixer. The banker told me that “Real Estate was Gold” and that’s why he lent to me (and had my dad cosign).
    Late 1987 was at the very top just before the 1988 crash. I was forced to sell due to 2,000+ month payments i could not come close to paying, and sold for 130K 3 years later. I lost about 130K in rehab and interest costs. That real estate market took 15 years to get back to 1987 prices.

    I was so burned i stayed away from real estate for 13 or so years when i bought my home that i still live in.

    After wanting to invest in a vacation SFH fixer for many years, and looking at many houses in utah ski country i saw house prices increase at an absurd rate over 1 or 2 years in the mid 2000’s. I gave up hope as i was priced out. Then came 2007-2008. And that market, with many 2nd homes, tanked. In late 2009 i went back to the same area i looked at years earlier so knew exactly what areas i liked. We found a foreclosure and after winning the bid at an “auction” the bank actually rejected it. So we negotiated for a month and i ended up getting it for about 5-10K more that our “Winning Bid”. That sale was 1 of only 2 or 3 houses that sold in that town that year. People were scared and the market was petrified. 2nd homes are the first thing people sell when in financial crisis.

    I bought it for 1/3 of what the bank lent on it to the past owner. AND i was scared that i was overpaying!! The only guy who was positive was a long term landlord, friend, investor, who said “Years from now people will tell you what a great purchase that was”.

    Buying at the Top was Easy
    Buying at the Bottom was Hard, Worrying, Self Doubt, Going against what everyone else was doing,

    And Most Critical at the Bottom was i paid in Cash. Nobody was lending, certainly not for Trashed Vacation Homes. And i knew what was area to buy.

    So in 2018 i just 1031’d into a 4/3 SFH Rental that’s 15 minutes from the 2nd home and i’m still working on it (yes i love it).

    The new rental is in a working class family neighborhood. It works great for the 1031 But to get it i had to beat 8 other offers. i paid Cash, 10 k over ask, no contingencies, closed in 3 weeks, let owner stay rent free for 2 weeks. It all worked out fine but sure feels like the top to me.

  10. Christy Browning

    Paul, great article all around!! Very thought provoking, helpful, and valuable. I admire your open willingness to help us out, especially newbies like me who have much to learn! Thank you for all that you do, and for the excellent advice.

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