As our property markets move into the upswing phase of the property cycle there will be more and more positive news.
You've probably noticed how the media has changed its message over the last year or so - no more stories about real estate Armageddon or forced mortgagee sales.
Now there are stories about strong auction results, markets reaching new highs, and skyrocketing rents.
The problem is this will give some investors a false sense of confidence.
They will think they can just go out and buy any property and it will increase in value over time - not true.
Less than 4% of the properties currently on the market are what I would call "investment grade."
But the rising market and positive media will lull many investors into a false sense of security – of overconfidence - and this will be their downfall.
Remember that 92% of property investors never get past their first or second property – which means they never get the financial freedom they’re looking for.
In general, they don’t get sufficient capital growth to get the deposit for the next property or rental growth to service their loans.
They have either bought the wrong property or not set up their finance correctly and they never achieve the financial independence they are looking for.
However, our brain plays tricks on us…
I’ve found most property investors are overconfident and don’t realise how poor their investments are performing.
Note: It’s a bit like something I recently read: the vast majority of drivers claim they have above-average driving skills.
Apparently, this even holds true for drivers surveyed in the hospital after being injured in car accidents that they caused.
Similarly, overconfidence affects property investors.
When we meet potential new clients at Metropole one of the questions we ask them is “How have you done at investing?”
Just like the drivers I just mentioned, more than half assumed they outperformed the average investor.But as we dig deeper we tend to find something even more disturbing- many investors are quite literally clueless about how to select investment-grade properties while others overestimate how their investments performed.
It’s much the same with beginning investors who believe much of what they read on the internet.
At worst, they think they’ll become real estate moguls overnight and at best think they know how to outperform the market.
But when we ask them questions like:
- How well do you understand and apply the 5 to 7 fundamental disciplines of investment to your decisions?
- How many local markets do you know intimately?
- Where do you get your market research from when making a property purchasing decision?
- How well do you understand the three essential requirements of ownership structures?
- What criteria do you use to buy properties to outperform the averages and deliver wealth-producing rates of return?
..they suddenly realise the gap between their overconfidence and reality.
This is understandable
Investing is hard.
We spend untold hours reading articles online, researching new ideas, watching videos, and listening to podcasts.
Yet most investors have uncomfortably little to show for their effort, so they resort to convincing themselves otherwise.
In his book, Your Money and Your Brain Jason Zweig writes:
“By fibbing to ourselves, we can give a needed boost to our self-esteem."
After all, none of us is perfect, and daily life brings us into constant collision with our own incompetence and inadequacies.
- Also read:Latest property price forecasts for 2025 revealed. What’s ahead in our housing markets in the next year or two?
- Also read:Melbourne property market forecast for 2025
- Also read:Sydney property market forecast for 2025
- Also read:Brisbane’s property market forecast for 2025
- Also read:This week’s Australian Property Market Update – Latest Data, State by State December 10th 2024
If we did not ignore most of that negative feedback - and counteract it by creating what psychologists call "positive illusions" - our self-esteem would go through the floor.”
The problem is...
When you are overconfident, all sorts of dangerous behaviours arise that throw your investing results off track.
For one, your forecasts of what’s likely to happen to the markets are likely to become less accurate.
And as your confidence rises, your perception of risk diminishes.
Financial advisor Carl Richards says, "Risk is what's left over when you think you've thought of everything else."
That's why I have expectations rather than forecasts since I recognise the world is more nuanced and I’m constantly amending my views.
Now there’s a big difference between forecasts and expectations.
- I expect there to be another recession in the next decade. But I don’t know when it will come.
- I expect the property market to boom over the next few years and then prices will tumble again. But I don’t know exactly when.
- I expect that some investments I will make won’t do well. But I don’t know which ones they will be.
- I expect interest rates will fall. Probably not for a few more months. In fact, I don’t know when.
- And I expect another world financial crisis. But I have no idea when it will come.
Now these are not contradictions or a form of a cop-out.
As I said…there’s a big difference between an expectation and a forecast.
An expectation is an anticipation of how things are likely to play out in the future based on my perspective of how things worked in the past.
A forecast is putting a time frame to that expectation.
Of course, in an ideal world, we would be able to forecast what’s ahead for our property markets with a level of accuracy.
But we can’t because there are just too many moving parts.
Sure, there are all those statistics that are easy to quantify, but what is hard to identify is exactly when and how millions of strangers will act in response to the prevailing economic and political environment.
Then there will always be those X factors that crop up.
But I’m a better investor because I am not overconfident and don’t really believe I know exactly what’s ahead.
Overcoming overconfidence is not easy
Every investor needs confidence, to take on debt and the risks involved, but two things might stop you from becoming overconfident.
1. Become objective when measuring your success as an investor.
Don't just assume you've done well because the property markets are performing strongly.
Measure exactly how you've done.
You may be surprised – hopefully pleasantly, but some people will be brought back to reality rather than being overconfident.
2. Get an independent team of property professionals around you.
If you’re the smartest person in your team you’re in trouble, but make sure your advisors don’t have a vested interest.
Get a good team of independent people around you who can see your blind spots and look at your investment performance subjectively (rather emotionally.)
