In my experience, the difference between success and failure in real estate and note investing comes from the lessons we learn when lookin’ at judgement versus principles.
Transcript: Ever since as a young man I switched from listing and selling homes to being an investment guy, I’ve been impressed with the big winners in real estate investment. I followed them. I watched them get really big and get bigger, and I watched them go broke. I watched what they did, where they did it, why they stopped going here and start going over there, and why they switched from this vehicle to that vehicle. They switched the way they bought things. All those, I watched them all. I came away with a false understanding, and that was that what separates the men from the boys, the professionals from the wannabes, is judgment, the ability to judge what’s going to happen in a market. Actually, pretending that they could tell you what’s coming next, which to an extent, people with a lot of experience can. I know. I’ve seen the movies, and I get too much credit many times for being smarter than I am, only because I’ve seen all the movies, and so I sound like I know more than I do. I’ve just seen it before. When you’ve seen that movie before, people say, oh, he knows more than the other guy. No, I’ve just seen it. But I don’t translate that into, I have the ability to see into the future. Because the mistake that I found, trying to pick the best investors for me to model when I was a young man, was that I thought it depended upon, like I said earlier, judgment. And it’s not. To the extent that it’s their judgment that makes the difference in everything. In my experience, and I’m speaking for myself only, my 2 biggest mentors, as far as how to do things on a grand scale in investment as a topic, are Graham and Buffet. Now Graham’s book, called The Intelligent Investor, is the only book I’ve ever recommended to anybody, and I don’t recommend it to most people, because it’s a whole bunch of writing at a very high level. Because that’s the way they wrote back in the 30s. He wrote it again back in the 60s or early 70s. I’ve been real estate-reading it lately. It’s the most chock full of dense wisdom you’ll ever get. But here’s the point here. It’s not judgment. Because judgment implies that the investor with the better judgment can pick stocks, can pick real estate, can pick this note or that note, can pick this company or that company. When the real geniuses will tell you it’s not that they’re that brilliant, although in my opinion guys like Buffet and Graham are, it’s that they understand the principles inside and out. Because the principles in investing are much like physics, the laws of physics. You can do all you want with wings and power and lift and drag, and you can put a 747 with 300 or 400 people in the air. But that plane’s coming down. Because gravity wins every time. Even if you go out of gravity into orbit, you mess that orbit up, you’re coming back down, because you can’t violate the laws of physics. Same with investments. It’s about following the principles. It’s not our judgment, because that implies we can do better than the market, and we can’t. We can appear to, because our competition thinks it’s about judgment. This is why people try to pick stocks and wonder why they lose. You can’t be a stock picker. You look at real estate, like you can’t be a real estate picker. You look at the region. Do I want to invest in this region? Well, there’s all kinds of principles that should be followed, and if that region doesn’t align with those principles to your satisfaction, you don’t have to do the smaller micro analysis of the neighborhoods, and this builder versus that builder, or that kind of property, whatever, all the little small areas you can be in, because the region didn’t pass muster. That’s not a judgment call. That’s knowing black from white. That’s knowing big from small, right from wrong. It’s principle. It’s like leverage. People think the principle of leverage is how much down did you put on an investment. That’s the last definition. The real definition, and the principle you follow is, leverage can be positive, neutral, or negative. It’s based on the fact, did you make more yield on your investment, the money you put in, than it cost you for the money you may have borrowed. If your yield is 50, but your cost of money is 52, you had negative leverage. I don’t care if you put 10% down and you’re bragging. You didn’t do it. Now, that’s bad judgment. But the key is to understand, your success or failure, long term, in investment, no matter what it is, for me it’s real estate and notes, is going to be that it’s founded upon the rock of these principles. Not my judgment, not your judgement. Human judgment doesn’t do it. What we do is we follow the real estate investor’s version of the laws of physics. As long as we do our best to successfully ensure that we don’t break those laws, we will succeed. When we succeed over and over, we tend to succeed on bigger levels, at higher net worths, at larger cash flows. When we do that, we appear like we had better judgment. But it’s only compared to the people who thought in terms of investment, to keep the analogy going, that they could defy gravity. They found out that their wings got tired. They can’t stay in the air. It wasn’t their judgment. It’s all about the principles. Once an investor understands that, they’re going to succeed. It’s almost ensured.
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