How I Hired Warren Buffett as My Property Mentor
Have you been looking for a great property mentor?
I remember early in my investing career when I was keen to find a mentor I found the perfect one.
I was mentored by Warren Buffett.
In fact, Warren’s been mentoring me for quite some time now and it’s been inspiring.
But to be honest… I’ve never actually spoken to him.
And he’s never called or emailed me.
Now Warren Buffett isn’t really a property expert, but you’d have to agree that he’s the greatest investor of our time.
And he’s generously created a means for me to get inside his head and learn how he thinks about investing.
Fortunately we have access to Buffett’s thoughts through his many clever quotes and musings – he’s probably the most quoted investor of all time.
And we have access to his way of thinking through his annual letter to the shareholders of his company Berkshire Hathaway.
One of the early lessons I learned from my mentor was:
“Be greedy when others are fearful (like now) and fearful when others are greedy.”
I’m sure you’ve read this quote before but before you click the back button thinking you fully understand its meaning may I suggest you invest the time to read my thoughts on this, because they have changed over the years.
Initially I took Warren Buffet’s words literally and though that I had to buy counter cyclically.
But I was wrong…
Doing some research I found the origins of this well-worn quote and learned that Buffet actually suggested that to profit in the market you don’t really have to predict downturns.
Of course that’s not how I initially understood his words.
In his 1986 Annual Letter to the Shareholders of Berkshire Hathaway Buffet said:
“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.”
Now that I saw the true context…
Here are three lessons I took from his thoughts:
1. Fear and greed (amongst many other factors) drive our markets and cause them to cycles – all too often too far in both directions – on the upside (when people are greedy) as well as on the downside (when people are fearful.)
2. Trying to predict these market cycles are is a fool’s game. The evidence is overwhelming that we know much less than we think we do, even when we’re armed with all the data and reports.
3. As an investor, you simply need to know that these cycles keep recurring and be prepared not surprised and not to overreact because when emotions affect our investment decisions this clouds our judgement and even the most rational investor reacts irrationally.
But 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 is worlds apart from acting like him when faced with a situation like many investors are at present, with all the negative talk in the media.
For example, many investors find it hard to see feel greedy at present with all the negative headlines in the media.
My advice to them would be to understand that the property market is behaving normally.
We’ve experienced a number of consecutive years of booming property markets, especially in Sydney and Melbourne and now the cycle has moved on to the next phase.
The market is behaving normally.
It’s catching its breath in some locations, falling in value a little in certain areas and holding firm in others.
If you’re a home owner or investor with a long-term perspective (as you should be), if you’re not planning to buy or sell in the near future – these markets ups and downs shouldn’t worry you.
On the other hand, if you’re planning to buy – don’t try and predict the bottom.
Instead – be prepared.
If you truly want to be greedy when everyone else is, then get your finances in place and have a strategy that is market tested.
My view on this lesson has changed over the years.
The lesson I initially took from my mentor was that understanding the recurring relationship between the different stages in the market cycle was critical to maximising the returns on my investment dollar, while at the same time exposing myself to minimum risk.
And at the time it seemed to make sense – if you know where things are heading and buy before the crowd does – before prices start to rise strongly – you were likely to make big profits!
But over time I realised that that was not always the case.
In fact, if you wait for the right opportunity counter cyclically, you’ll often be left behind.
So I’m no longer such a big believer in countercyclical investing because I realised that…
Timing is one of the most misunderstood concepts with regard to investing
The truth is successful investors know how to create wealth at any point in a cycle.
Timing definitely matters.
Of course you don’t want to buy a property at the peak of the property boom, just to wait three or four years before its value starts to rise again.
But successful investors find that timing isn’t really that important.
Have you noticed how some investors seem to do well in good times and do even better in bad times?
Market timing isn’t really important to them?
On the other hand, others do poorly in good times and even worse in bad times?
Market timing seems to have very little effect on them either.
Interesting isn’t it?
So what is it that differentiates that small group of successful investors from the crowd?
The fact that at the same stage of the property cycle successful investors manage to make money while unsuccessful investors lose money suggests that’s it’s not our external world that determines whether we make or lose money, it’s something inside us.
Many would argue that it’s knowledge that differentiates these two classes of investors, but I don’t think that’s quite right.
Sure, the successful investors have a level of knowledge and financial fluency that the average investor lacks; yet knowledge alone doesn’t make them successful investors.
However what allows some people to become super successful investors is their mindset – the way they think about money and wealth.
In his book, A Tale of Two Cities, Charles Dickens famously wrote:
“It was the best of times, it was the worst of times; it was the age of wisdom, it was the age of foolishness.”
Amazingly things haven’t changed much since Dickens wrote that in 1859.
For some people the current stage of the property cycle makes these the best of times.
For savvy investors the current times are an opportunity to buy top class property assets that will help them set up their financial independence in the future.
These people see abundance.
For others, these are the worst of times.
Some only see the negatives in the media; property prices tumbling (when in reality we’re experiencing a soft landing), banks are tightening the screws on property investors and lower or no capital growth is being predicted.
Others are saddled with investment debt secured against the wrong type of investment such as a property – one’s with limited long term growth potential.
These people don’t see the available opportunities, they don’t see abundance.
They see scarcity and they feel fear.
You need more than knowledge and facts
As I explained, knowledge alone won’t assure your success…
I’ve seen some very knowledgeable people make some foolish investment decisions.
Interestingly while some investors are still getting in the game at this stage of the property cycle and buying great investment properties to help secure their financial future, others are waiting for the timing to be perfect.
Only late last week I spoke with Ben who had been waiting for close to 10 years for the timing to be ‘just right’ to start investing in property.
Of course, the timing will never be ‘just right.’
There will always be challenges, situations, circumstances, obstacles, fears, doubts and things that you are going to have to overcome.
The timing is never going to be perfect.
Ten years ago Ben saw some obstacles and didn’t get into property investment.
If he did, chances are that if he bought a well located capital city property it would have close to doubled in value by now, even if he had paid a little bit too much or bought at the wrong time of the cycle.
Wealth is attracted to people who are decisive and committed.
If you are waiting for the timing to be perfect – the timing will never be perfect to you.
Currently property investors are being given some great opportunities to buy properties as the markets have slowed a little from their frenetic pace of the last few years.
Personally, I’m adding to my property portfolio at present – as I did last year and interestingly the year before.
Now let me share another concept with you…
When to vs how to investments.
Now I know that many advisers recommend ‘when-to’ investments, which means you have to know when to buy and when to sell.
The problem is that timing is crucial with these investments: if you buy low and sell high, you do well.
However, if you get your timing wrong, your money can be wiped out.
Shares, commodities and futures tend to be ‘when-to’ investments.
And so is chasing the next property “hot spot.”
I’d rather put my money into a ‘how-to’ investment such as established capital city real estate, which increases steadily in value and doesn’t have the wild variations in price, yet is still powerful enough to generate wealth producing rates of return through the benefits of leverage.
While timing is still important in ‘how-to’ investments, it’s nowhere near as important as how you buy them and how you add value.
‘How-to’ investments are rarely liquid but produce real wealth.
Most ‘when-to’ investment vehicles produce only a handful of large winners but there tends to be many of losers.
On the other hand, investing in well located capital city residential real estate produces many wealthy people (both home owners and investors) and only a handful of losers.