Even the savviest of us make mistakes with investing – trading too often, refusing to sell losing stocks or chasing past performance. These errors, and many more, are common among investors.
The next time you are at the casino I want you to count how many times you hear the words “Good Luck.”
Whether you are checking into your room, cashing in some chips, or simply getting a drink, you will be pleasantly told, “Good Luck.”
There are a couple of reasons casinos do this:
1. First, they want you to believe they are on your side. They are rooting for you. In a way, they are. If you go to their casino and lose every time, they know eventually you will stop returning.
They want you to win from time to time to keep you coming back. Saying, “Good Luck”, and cheering when you win, are their ways of trying to convince you they’re on your team.
2. The second reason for their use of these two words is a bit more deceptive. The average gambler believes you must be lucky to be a good gambler. The casino is more than happy to perpetuate this myth.
There are no guarantees on any path to success in life, business or investments. The unknown is always looming. Therefore, risk and education are often the mechanisms necessary for knowing more clearly if you’re on the right path.
Here we look at 8 common mistakes property investors make – and how to avoid them.
1. Over-hungry for investments
Everyone knows you should not go food shopping when hungry. And having said that, you should also avoid investing when hungry – Make financial decisions with a full stomach.
When we are hungry we tend to make more rash decisions. Make sure you are not in a rush and are giving yourself plenty of time to make your decision.
2. Cockiness and arrogance
Cocky is one thing. Smart is another. Just because someone is ultra-rich it doesn’t mean that they are also smart investors.
People can feel more confident about their own judgment – sometimes overconfidence and arrogance do mean the same thing.
This overconfidence could lead to trading too much in investment portfolios, believing that you can time the markets, and to chasing past performance.
Another trait called “activity bias” is part of this, when human beings think that doing something is positive, and so are prompted, for example, to tinker with their investments. But doing something can cause more damage than doing nothing.
Of course, as mentioned above, inactivity can also be harmful at times. The key is to have a rational process behind your investment decisions and to stick to it.
3. Do nothing but expect something in return
“Auto Pilot” property management is idiocrasy.
Simply hire a property manager or ask the salesman to recommend one if you lack connections. Sit back and relax and the money will flow in automatically. How nice.
It’s not smart and it’s not true. It is complete idiocrasy if you believe your property manager has your full interest at heart. They don’t and they never will.
Property expenses are easily inflated without you knowing. And for all you know living in your ivory tower 10,000 miles away, your property is tenanted by a wanted criminal and your property manager never know or care.
Property managers are bull-sh*t. They are a smokescreen to cover the complexities of investing in a complete foreign market.
It’s the lazy way of investment. It’s not investing. It’s punting your property will see capital growth to cover likely rental losses and over-run property expenses.
It’s like paying someone hoping to run your start-up company profitably while you sit at home watching Netflix.
That said, until you get to the scale of Disney or Novotel, you certainly aren’t getting a good deal out of foreign property managers.
4. Confirmation Bias
People like to be proved right, and so seek out information that supports their theories.
This is called “confirmation bias”. An investor will make a decision and then find information that backs it up.
Social media platforms such as Twitter and Facebook are making it harder to escape this profound human weakness.
Much of this content gives the user the illusion of being informed but, partly through the power of confirmation bias, it’s largely false confidence.
5. The gambler
When you toss a coin three times and get heads, many people believe the fourth time will be a head.
Investors who have been quite successful in volatile markets are more keen to make a risky decision as they have had a very positive experience. Because they have been lucky two or three times they become arrogant, which leads to them making poor decisions, as they underestimate the investment risk.
The reverse is also true: those who have had a bad run of investment returns often lose all their confidence and discount good investments, purely on the basis that their previous choices under-performed.
6. Reluctant to cut losses
The same mental focus on losses can make investors who have made a bad call reluctant to cut their losses and move on.
Investors hang on to losing investments when they should have long been rid of them when the thought of crystallising that loss is too painful.
7. Focus on negativity
People tend to focus on losses rather than gains.
When presented with an equal opportunity for loss and for gain, an individual will disproportionately focus on the loss, meaning they can miss out on the investment opportunity.
An example is looking to buy a property for $1m. The buyer is then told that if the market falls they could lose $100,000 in the next two years, but if it rises they could gain $100,000.
In this scenario, the buyer is a lot more alerted by the loss than by the gain, even if it is equivalent.
8. Penny wise, pound foolish
Everyone loves a bargain, but the impulse can hurt investors. People use a mental process called “anchoring” to determine whether an offer is good value.
If you are offered something at a cost of $20, that becomes your measuring stick for all other offers, often without investigating whether $20 was actually a good price.
This means that when the same item is offered for $17 it appears to be good value. Sales people often exploit this fact to make people think they are getting a bargain
This is the biggest investment failure people make: they make an investment decision simply because they think they are getting it for a lower price.
How can you avoid these mistakes
Be wary of other people’s advice. People who are giving you advice are the chicken at the ham and eggs breakfast and you’re the pig.
The first kind of specific thing I would like people to have in their heads is that your mind is always tricking you into thinking the world is a more certain and noble place than it is.
It is not.
It’s doing various things to make you comfortable with the fact that it isn’t certain and that leads to misjudgments.
Be very wary of people who come at you with lots of confidence and predictions about what is going to happen whether those people are investment advisors or property “experts” or doctors.
ANYONE can build sustainable wealth in property… if they want it badly enough.
Author, entrepreneur, professional investor and loving father, runs crei-academy.com with a tongue-in-cheek approach to property investment - and himself. He is widely regarded in the industry as 'The Common-Sense' Investor. Gerald writes with passion and straight-forwardness, disclaiming wild claims and impractical investment strategies behind lies and ignorance pervasive in the property industry for vested interests. His well-known statement, "All I did is to value my investments with science, logic and common sense.'
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