How often do you reevaluate your investment doctrines? And how radically?

Published on 2016/04/05

Do you know why a majority of investors fail with the investments they make? It’s because 99% of the time they spend thinking about investment-related subjects is spent on concrete investments and their performances, rather than considering the doctrines by which they invest in the first place. And this is despite the fact that a person’s investment doctrines are a crucial factor in the success or failure of their investments.

When did you last reflect upon your investment doctrines? Of course, by “reflect”, I mean reflect in writing. Private investors clearly have an advantage here, given the complete freedom they have in their investment-making decisions, in contrast to institutional investors who have to abide by a whole host of regulations. As a private investor, make the most of your freedom to reevaluate your investment doctrines! And as an institutional investor, take maximum advantage of any freedom you have within the limits of your role.

When reconsidering your investment doctrines, you need to be radical and totally unprejudiced. Question everything, and I really do mean everything. Above all: You need to first become aware of which investment doctrines you follow. Below, I outline a number of widely-propagated doctrines, both from the world of real estate and from other sectors. I will go on to show you why it is worth seriously questioning them.

It may well be that the doctrines I analyse here are not actually misplaced. Most of them even contain a grain of truth. Feel free to tear down my arguments against these doctrines – you may even be right to do so. All I want to do is show you what I mean by a “radical” reevaluation of your investment doctrines.

“I only make my investment decisions after thorough analysis.” Right? Who could possibly say anything against thorough analysis? I am currently writing my second PhD thesis, and on no less a subject than the personalities and behavioral patterns of high net worth individuals – i.e. self-made millionaires with net wealth in at least the tens and hundreds of millions. Just one third of the millionaires I have interviewed said that they predominantly take decisions “analytically.” A clear majority said that they decide with their “gut.” Personally, I have a tendency towards the analytical. But take some time to think about whether it wouldn’t be better to listen more to your “gut” from time to time. If you want to read more on this subject, Gigerenzer has written some very intelligent books that are a great place to start.

“We only buy core real estate in the best locations.” This was long the position of open-ended real estate funds. They happily acquired core office properties in prime locations. And everybody knows what happened next. Today’s core objects are tomorrow’s value-add objects. Doesn’t it make more sense to buy value-add real estate and turn it into core real estate, rather than watching your beautiful core investment turn into a value-add object and then, at some point in the future, an opportunistic investment? I have never bought core real estate. I am currently in the process of selling the properties I picked up from a near-bankrupt Berlin developer in 1999 – at a rent-to-price multiplier of 37. Back then, nobody else was interested. They’re just basic apartments that were built in 1959. Nothing special. But I have increased my invested capital eighteenfold. I’m pretty sure that’s not something that clever core investors manage to do all that often. And the best property I have ever bought was in the worst possible location – it generated limitless returns on my investment.

“Real estate is so cheap right now because the spread to risk-free interest rates has never been so wide.” That’s right, the spread between real estate yields and the “yields” on ten-year German government bonds is enticingly high. But does it help to look at a watch if the watch is broken? Is the established and trusted benchmark still the right one to use?

“Nobody ever died from profit-taking.” This doctrine – pretty much the opposite of the one above – is particularly dumb. Maybe nobody has ever died from profit-taking, but people have certainly lost money because they sold too early or their follow-up investment turned out a lot worse. Studies have shown that shares sold by private investors typically go on to perform better than the shares the investors buy from the proceeds to replace them.

“We only buy at volumes above xxx million euro, otherwise due diligence simply isn’t worth the effort.” This was the explanation given to me recently by one of the largest institutional investors in Germany. Sure, even this argument has something to it. But who can afford to be so picky in such an expensive market and not even consider perhaps the last few investment opportunities, just because they are below an arbitrary volume threshold? Can you really afford such a luxury?

“High volatility equals high risk.” This is without a doubt one of the most widespread nonsense doctrines. It is nevertheless repeatedly used by most financial analysts and asset allocation advisors.

“As an investor, you should diversify as much as possible.” Warren Buffett has spent his life opposing this investment doctrine and stated: “Diversification is protection against ignorance. It makes little sense if you know what you are doing.”

“Think and grow rich” is the name of the classic book by Napoleon Hill. A great motto. Think more often, for longer and more radically about all of your investment doctrines. What will that achieve? Maybe you’ll realise that many of your doctrines are right after all? Who knows? Maybe you’ll actually realise that the exact opposite is the case.

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