The mood for our property markets has definitely changed.
If I were to ask you what moves our property markets, what would you say? Finance? Supply and demand?
Today I’m going to discuss one of the major factors that move our property markets.
It’s one that most people don’t talk about or understand.
In my mindset moment I’m going to discuss ways to fail.
This show is usually more about success than failure, but if you understand how to fail, you’ll better understand what not to do so that you can become more successful.
Finally, I will have a chat with Ken Raiss about some finance hacks about getting more financially fit.
How investor mindset moves the markets
Market movements are far from an exact science.
The fundamentals are easy to monitor. Things like population growth, supply and demand, employment levels, interest rates, affordability, and inflationary pressures.
However, one overriding factor that the experts have difficulty quantifying is investor sentiment.
And that’s what’s really been behind market movements of late.
We’re not rational
I’ve found that investors often suffer lapses of logic when investing and many of their investment decisions are driven by emotion.
For example, we tend to extrapolate the present in the future.
When things are booming we tend to think the good times will never end and when the market mood is glum, we have difficulty seeing the light at the end of the tunnel.
Can you see how investor psychology, drives booms and busts?
Can you see how the dominant investor mentality of the time helps drive the property cycle?
Just to make things clear…homebuyers, who make up around 70% of property transactions drive our property markets. But investor activity creates our booms and busts.
We follow the herd.
Obviously, one or two misguided investors won’t be able to influence property prices, but investor psychology is infectious.
People tend to want to do what others are doing – they ‘follow the herd’ because going against popular opinion is perceived as risky. What if you make a mistake? What if “the crowd” is right and you are wrong?
This behaviour stems back to the days of our ancestors when it was safer to remain part of the herd rather than leave the security of the pack and be eaten by a Saber-toothed Tiger.
This “herd behaviour” is magnified by several things including;
- Mass communication enabling the behaviour to become infectious. Now more than ever we are bombarded with messages from the media that influence how we think and feel about things. When we hear that real estate is doomed, all but a handful of sophisticated investors get scared out of the game. And when the media tells us housing markets are booming everyone wants a piece of the action.
- Pressure to conform. If your friends or family are doing it, it must be right. Right? Human nature makes us reluctant to do the opposite of what our peers are doing.
- A major precipitating event can give rise to a general belief that motivates investor behaviour. The Global Financial Crisis that saw waves of investors scared out of the share and property markets. On the other hand, the resource boom enticed thousands of investors into mining town housing markets to cash in on the resulting property boom.
- A general belief that grows and spreads. When the belief that property values can only go one way, and that is up, spreads through an uneducated new generation of investors the enter the market pushing up prices, perpetuating the belief and helping make it a reality! Similarly, when the herd believes the market is going to crash, they steer clear, this gets reported in the media and the negative sentiment feeds on itself.
When investor sentiment is positive, the crowd jumps in feet first, pushes up demand and places upward pressure on prices – causing boom conditions.
Conversely, when sentiment is negative, the crowd backs off and frequently sells out of the game due to concerns that they’re about to lose everything – causing market slumps.
What can an investor learn from this?
- Our property markets aren’t only driven by fundamentals, but also by the often irrational and erratic behaviour of unstable crowd investors.
- Booms never last forever, and neither do busts. Don’t be surprised when they come around and don’t overreact. This will stop you from getting sucked into the booms and spat out during the busts.
- Treat your property investments like a business and stick to a proven strategy to help take the emotion out of your decisions.
- Recognise that property is a long-term play and set up financial buffers to help you ride the property cycles.
Invest counter cyclically
I’ve always been an advocate of counter-cyclical investing because moving against the crowd often produces the best results and can mean the difference between outstanding gains in the property market and average ones.
Sure, it takes some courage to do the opposite of what everyone else is doing, but the results of your contrary behaviour will ultimately speak for themselves.
Now seems the best time in almost a decade to invest counter-cyclically.
Tips to gain financial fitness – Ken Raiss
- Have a plan. You need to identify where you are now and what your goal is, then put a plan in place to achieve those goals.
- Have a savings regime. Deposit money from your income in savings before you see the money.
- Reinvest for growth. Compound growth helps you get a better result.
- Invest in capital growth assets. That capital base will give you the ultimate choice when you need to live on your investments in the future.
- Borrow, because it’s leverage that will help you create wealth
- Find a good coach and mentor, and build a team around yourself.
- Find a winning formula and stick to it
- Don’t beat yourself up for things you can’t control. Make a plan that has some room for flexibility and safety nets for unexpected negatives.
- Think big and don’t restrict your dreams. Get people around you who will help you achieve your dreams.
Links and Resources:
Metropole’s Strategic Property Plan – to help both beginning and experienced investors
Some of our favourite quotes from the show:
“To grow as a human being requires work, and more often than not, it requires embracing the unknown.” –Michael Yardney
“It comes up every time you speak with successful people about what you need to do to get there. Having goals and then having written plans comes up every time.” – Michael Yardney
“Building wealth isn’t a solo game.” –Michael Yardney
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