Sometimes ignorance is bliss.
Success can be spoiled by learning additional information. It might be preferable to just not know, continuing to believe whatever you choose to believe.
For example, what if you were a baseball player in the late 90’s when everyone was using steroids, but you stayed away. You didn’t want to cheat. Everyone knows you didn’t take them. It is a large part of your identity and how people remember your time in the game.
Then you come to find out that protein powder your trainer was giving you actually included a whole bunch of stuff that is illegal and performance enhancing. And it shatters your clean image you have of yourself.
Wouldn’t it be better to just not ever know?
Is a 90’s baseball player really the intended audience of this article? Brian, how about you write something people can actually relate to…
Ok let’s try again.
You are one of the top salesmen at your company and work extremely hard to reach your numbers year after year. And you go about it the right way – no lying or tricking people, for you it is all about building a trusting relationship and selling exactly what they need, nothing more.
Your character means everything to you. But it turns out all your success is built on a lie.
You accidentally open a spreadsheet on the corporate file and see all your accounts listed. There is a column for the sale price, which you are very proud of, and another that is roughly 10% of it.
The mystery unravels when you start asking questions. Your corrupt company budgets a certain amount for bribes. It turns out your boss has been giving kick backs to the decision maker on almost all your sales, and hardly any of the other sales. Why yours? He is racist and sexist, deciding to help you, the white male on the sales team.
Are you actually good at your job or did they just buy because they got money under the table? Are you a good person for keeping all those commissions for the last few years? You already spent the money on your kid’s private school education or donated it to the poor, so it’s not like you could just give it back.
You quit, your identity is shattered, you never trust a company again, can’t hold a job, lose all sense of self-worth, and your family leaves you. Sometimes ignorance is bliss.
What About Investing?
If you have success as an investor, you will believe you had a large part to do with that success. Your intellect and skill led you to success.
But is that true?
What if you view investing through the lens of a casino? Just because you are betting on red and the ball lands on red 30% more than black, you wouldn’t think that’s because of your skill. You wouldn’t think you are smart because you had the foresight to choose red over black. You know it will even out with a long enough time horizon.
What if your investing success is just luck over a short time frame?
Even if you have been in the stock market for 20 years, it is possible a big crash is right around the corner. 20 years certainly sounds like a long time, but it isn’t enough to see the big picture.
From 1980 to 2000 the Dow Jones went up 1290% – if you picked individual stocks in 1980 and died in 2000, you left the earth thinking you were a stock picking genius. The annual growth rate was 14%!
From 1996 to 2016 the Dow Jones went up 230%, roughly 6% per year. Not a horrible average yearly return, but there were a couple huge crashes that were truly frightening. You sure wouldn’t think of yourself as a stock wizard.
What about for Rental Property Investors?
There are the same issues with market cycles – for a 10 or even 20 year time period you might get lucky (check out How to Visualize the Real Estate Cycle).
The expenses are also inconsistent, which complicates things as well. The first year you own a property, its AC unit could die. Does that mean you should expect to replace it every year? No, of course not. You’d visit a site like castlehomecomfort.com/service-areas/philo/ and ask for a repair quote. Having it fixed would be much more affordable than replacing the whole system. But, at the same time, does this mean you will never have to pay out on the AC unit again? Afraid not! Regular tune-ups are essential – just ask First American – and there will no doubt be problems in the future that will cost money. That’s just life.
Or you could be in my position, 5 years in as an investor without any huge expenses (roof, HVAC, water heater, appliances). Does that mean this will always be the case? No, of course not. I know that one day I’ll more than likely need to get in contact with a repair company for something, such as an AC repair company should my AC units eventually break down.
I was actually talking to a friend of mine about this the other day. She has recently had a new roof fitted on one of her properties. You see, she decided to replace the roof before it got a chance to become any more damaged. In the long run, paying to have the roof repaired now, has probably saved her some bigger costs further down the line. Besides, it is no secret that small issues with a roof can lead to bigger, more expensive problems in the future. With this in mind, you can learn more about the benefits of tackling any roofing issues as soon as they arise by taking a look at roofing websites like https://carolinahomespecialists.com/areas-we-serve/durham-nc/.
Ultimately, it is hard to get the complete picture with a small sample size. Right now I am at 7 “property-years”, because I have had my Atlanta property 5 years and my Memphis property 2 years. It might take 100 property-years to have a clear view of the frequency of large expenses for rental properties.
Get In the Game
There is no substitute for experiencing something on your own. You could learn all about the stock market and the huge swings in the past to come away with a very logical view of it all. But until you go through a crash with a significant portion of your savings quickly evaporating, you won’t know how you will behave.
It is wise to have the learning happen now with a smaller chunk of money. Don’t make the mistake of thinking you can sit on the sidelines perfecting your education without any skin in the game – it’s not the same.
With rental properties there is even more to learn – each property-year bring additional experience. Simply testing the waters with one property will deliver a different type of knowledge than books, podcasts, and blogs.
So get going.
Do you agree first-hand experience is necessary for investing? How do you avoid reading too much into your investing success even over a couple decades?
I think firsthand experience is necessary, but I hope newbie investors aren’t scared off by thinking they will fail just because they don’t have that experience yet. Jump in, newbies! Give it a shot.
But if you’re just starting out, make sure the numbers are conservative for your first investment property. You don’t want to over-leverage because of your assumptions about how the property’s financials are going to shake out, and then end up losing your shirt.
Great points about investors assuming that their successes are all a result of their brilliance, no matter how little experience they have! The way I combat those thoughts is by acknowledging that luck was a part of it and being thankful for luck’s role in the good result. Sometimes luck is 10% of it, and sometimes luck is 90% of it, but I think it’s naïve to assume that it was all skill.
There is definitely a leap of faith at the beginning, but that is how to get experience. Hopefully they can make that leap as small as possible by being conservative.
One of my favorite sayings: better lucky than good!