Dumb Money Still Buying? One of my recent blog entries (January 18) discussed hedge funds and their vast research materials including computer programs designed to screen for investment opportunities. One reasons small investors are often considered at a huge disadvantage is that they lack access to these sophisticated tools to manage their investments. Sounds pretty hopeless for the little guy doesn't it? Fortunately, as I said in that post, I am not convinced that is the case.
One Problem With The Information Age. The main problem with the information age is that we think we need vast amounts of information to make any kind of decision. When I completed a commercial real estate certification 25 years ago, I learned to carry out all kinds of calculations to evaluate real estate investments. We did everything from discounted cash flow analysis to sensitivity risk analyses. I was enthusiastic about trying these. I had high hopes that I could add them to determination of cap rate, GRM, expense ratios, and a whole host of other information I had previously learned how to collect. One place I hoped to use this was with a good friend from Germany who had developed a million + net worth in real estate. Using one of the first property acquisition candidates we located, I went back to my office and spent an afternoon applying all my new techniques. The next day I met with my client and showed him all these new analyses. He didn't compliment me on my thorough analyses, he just sort of ignored it.
The Same Thing Happened Again. The information was difficult to understand and few clients paid a lot of attention to it. Since my attempts to use this to communicate with with clients were unsuccessful, I decided to develop the information for myself in order to become a better consultant. After a year of using this information, I decided it had limited use. Why was that the case? 1. Most experienced investor clients made their decision relying heavily on intuition. While, many academics and consultants make fun of intuition, many clients have relied on it for some time and become very successful using it. 2. There are already dozens of quantitative tools to evaluate real estate investment. These can be done in minutes instead of hours and tell you 95% of what you need to know to make a successful investment. The more sophisticated tools involved making assumptions and projections about the future. Even if the more complex calculations can be carried out successfully, the assumptions you make about the long-term future are subject to wide variation and are unlikely to be accurate over longer periods.
Blink. This is the title of a book on this subject by Malcolm Gladwell, a writer for The New Yorker magazine. He studied several situations where it turned out that gathering too much sophisticated information did more harm than good. One of these was an east coast hospital emergency room. Whenever they had a patient come in with chest pains, they had a set of tests designed to determine whether or not it was a cardiac event. The series of tests was quite reliable; however, the time required to conduct all these tests was time that treatment had to be delayed. A statistical analysis of all the tests showed that they could cut the number of tests by 75% and do almost as well as with the full battery. The new, abbreviated test scheme saved money and lives. Gladwell cites several other examples in his book. Fortunately, this example could be statistically validated. Some of the other examples were totally based on intuition. Intuition that could not be taught because the person using it didn't really know how he was doing it. An example of this came from a tennis fan who could predict with amazing accuracy whenever the server was going to double fault. His results were statistically validated over a long period but the predictor couldn't tell you any observation that allowed him to make such a prediction. One of the main observations in Gladwell's book is that often we don't need more information, what we need is understanding. I believe this is an area that we need to think about in the information age when we can be so busy collecting and organizing information that we don't stop and look at what we are collecting in a critical fashion. The term "paralysis by analysis" comes to mind.
Still In Colorado. Learning some things here as I try to tackle a couple of problems using the same principles I have talked about here. Call my cell phone 303-902-3940 if you have any questions or comments.
Sunday, February 20, 2011
Friday, February 11, 2011
BOREDOM, DEPRESSION, AND GROWING OLD.
A Blessing Or A Curse. I still don't know whether my exceptional ability to recall things that happened years ago is a blessing or a curse. I may not know where I left my keys last night but I can tell you about my first day of school when they asked us to count as far as we could. I stopped at 13 because I was embarrassed at all the attention. Donald cried, Melvin counted to 100. These flashbacks come to me when I least expect them. I remember one of my first classes when I was a psychology grad student in the 70's. I was assigned a paper about the problems males face in adjusting to changes in the social environment. I wrote a paper entitled Chauvinist Pigs. I thought one of the problems men face would be growing old and losing their physical strength. I was in my 30's at the time but it was one of my fears. I knew I would eventually have to face it but for now I would do what I could to live each day to the fullest without worrying about the future.
The Future Is now. I can no longer avoid it. I am a totally different person now than I was then. I have financial independence and freedom that I never dreamed of. (Not as abundant as a couple of years ago). I live in surrounded by nature with wildlife, vegetation, warm weather, and I can cool off in the summer and keep warm in the winter. Still, there is occasional boredom. How can I be bored in a place like this? I guess its time to call a spade a spade (Not a damned shovel like 40 years ago). It ain't really boredom folks, it's depression. Another memory just flashed through my mind as I heard the voice of Lou Holtz, former Notre Dame football coach at a motivational speech in San Diego. "Nobody wants to hear you whine."
He was right. I am not going to take anti-depressants nor ECT (electro convulsive therapy). That's what Earnest Hemingway did in 1961 just before he committed suicide. It might work for some folks but it didn't work for him and I don't think it would work for me.
This Is my Existence. Flash back to 1976. As a psychology graduate student, I was working as an assistant to a professor doing group therapy. Most of the participants in the group were in their early 30's and in the midst of some life crisis. The group leader asked each one to tell of all the things bothering them. As each one finished, he had them repeat the phrase, "and this is the existence I have created for myself. I remember this phrase to this day and I tend to repeat it to myself when I find myself complaining about something. I am living the path I chose. I created it for myself. I can change it if I wish. One thing I can't totally control is that I have a finite time left to exist and my body is a device that will wear out. We all face that fact and none of us can change it.
What About The Next Life? There is some evidence of an existence after this one. I have studied this issue and I must admit there is more evidence that it is true than not, but it is not the kind of evidence my scientific training has taught me to require before accepting something as fact. Frankly, I don't expect to find a concrete answer but I must continue to look. I don't believe anyone can know the answer beyond a shadow of a doubt. I have decided the best strategy for coping with the aging process is one of living in the here and now. Another principle I learned in my psychology training was the tendency towards "catastrophic expectations." Many times we imagine some future event as much worse than it turns out to be. That tendency keeps us from enjoying the present. Like the picture above. There is a beautiful woodpecker and if you look closely, you can see a cardinal in the lower left hand corner. Those lush green leaves are Magnolia leaves. Betty took this one a few days ago, somewhere around the day I was bored/depressed. On that day, I didn't allow myself to appreciate that scene. I may fall into that trap again some day but I will minimize it by appreciating the existance I have created for myself. On my next post, I will talk about personal financial strategies again. Thanks for reading.
Sunday, February 06, 2011
CONFLICT. AN UNAVOIDABLE PART OF LIFE.
It Starts Right Away. Before we learn to walk and talk we are exposed to conflict. It may start with our first experience with solid food. We love applesauce but our caregivers want to feed us pureed spinach. It tastes awful and we reject it by spitting it out, even though we are hungry. We do our best to make our wishes known but they continue to to force that sickening green stuff on us. We can't communicate well enough to tell them we don't want that and we don't even know that it is our best interest to go ahead and eat our vegetables. Neither of us can understand the other but we do the best we can to manipulate the outcome until we either get what we want or capitulate. We have just had our first experience with conflict and there will be many more throughout our lifetime. This first experience and those to follow will serve to help us develop what is known as our "conflict style."
What Is Your Conflict Style. Without going into how it is developed (no one really knows for sure), we all have our own style for dealing with conflict. There are aggressive/assertive styles, passive styles, and avoidance styles. Undoubtedly there are others and some that combine several styles. It is best for each of us to study our own particular style and recognize what we do as we face various types of conflicts. In my own case, I am a conflict avoider. I tend to do whatever I can do to keep from getting into a conflict. This works in some instances but it also will tend to keep me from accomplishing my objectives if I allow it to take total control. Some weeks ago, I told you about receiving a lawsuit summons from a firm representing a home owner association for money they claimed I owed. The suit was for more than $2,000 and it was my belief that it was totally without merit. After several letters were exchanged, neither of us had budged. I was also aware that there was a lien on the property involving a judgement against the prior owner that was of record prior to my owning the property. That lien was for $4,800. It was questionable as to whether that lien was collectible. I believed that I would have probably won in court but, in reality, neither side would win because of the costs of the suit. If I followed my usual avoidance style and allowed them to proceed in court without my resistance, I would definitely lose by default. If I hired an attorney to do battle in my behalf, attorney fees would be more than the amount of the dispute. If I contacted them with an emotional outburst, I might force them to go to court for the principle of the thing. I had no choice but to prepare the best argument I could and confront the issue. The bottom line was that I gave them $1,000 that I didn't think I owed them to drop the suit and release the lien. It was the only practical way to get it over with. This is an abbreviated version of what happens in disputes between individuals, business entities, and countries. Here are some typical steps involved in resolution of conflicts.
1. Assessment. Take an objective look at what's going on. Try to keep your emotions out of it. One thing I learned in graduate school was that the first side to get emotional in an argument is usually the loser. It signals that they have run out of logical arguments and are forced to resort to tactics like name calling, yelling, and threats. If you know this and are able to keep your wits, you have a good chance of winning. Take a really close look and try to assess your odds of a favorable outcome.
2. Look At The Other Side's Position. Steven Covey has written that we are well advised to "Seek first to understand and then to be understood. Try to understand the motivation of the other side, what they stand to gain and what they stand to lose. By knowing this, you will demonstrate that you are willing to consider their arguments. This will make them more likely to listen to your side as well. It will also let you know what issues they are likely to yield on and what they will probably stand firm on.
3. Be Soft on People Issues. Treat the other side with respect. Look them in the eye, smile occasionally and let them know its about the issues and not the people. Give them an opportunity to save face whenever possible.
4. Be Firm On The Issues. In case you were thinking that this is an article on "Negotiations For Wimps." you should know that its OK to be firm on the issues. Before beginning, it is a good idea to make a list of all the issues involved. I am most familiar with real estate negotiations where some of the issues are purchase price, financing, inspections, needed repairs, closing costs and a whole host of others. Some of these may be less important to you and, while you may offer concessions on others, it is a good policy to ask for something in return before making the offer.
5. Be Careful of Strictly Positional Bargaining. It's typical that each side starts with more than they want with each making slight concessions until they meet in the middle. While this can work, its so common that both sides know that the other side is asking for more than they want with the intent of meeting in the middle. This may end up with an agreement that may be somewhat worthwhile with neither side accomplishing their objectives. Look for something more creative than this.
6. Be Patient. In many real estate transactions, there is a formal written offer. Often with a date in which a response is required. Within that time frame, a counter offer is often received with a date in which a response is required. Real estate agents and generally push for a response within the required time frame but it is often a good opportunity to reduce the other side's expectations by failing to respond in time. In reality, the person making the offer may withdraw it at any time before it is accepted and not be bound by it. Sometimes, it is better to wait and let the other side wonder what you are likely to do. This extends to other types of transactions in which it is better to build tension rather than another counter offer right away.
8. Look At Other Avenues. The focus of this is that the principals are negotiating between themselves. Our approach is transactional but many disputes aren't. When a negotiated settlement is not forthcoming, it may be best to utilize the help of a mediator who is trained at advising both sides from a neutral position. Rather than go into detail on this, it is best that either sides investigate how this works and determine of it is applicable. This is often used in divorce and other very contentious situations.
Hopefully, This Helps. Too often we jump into conflicts with little preparation. If this article causes you to think twice and prepare to to seek a resolution in your best interest, it will have accomplished my objective. I welcome your feedback.
What Is Your Conflict Style. Without going into how it is developed (no one really knows for sure), we all have our own style for dealing with conflict. There are aggressive/assertive styles, passive styles, and avoidance styles. Undoubtedly there are others and some that combine several styles. It is best for each of us to study our own particular style and recognize what we do as we face various types of conflicts. In my own case, I am a conflict avoider. I tend to do whatever I can do to keep from getting into a conflict. This works in some instances but it also will tend to keep me from accomplishing my objectives if I allow it to take total control. Some weeks ago, I told you about receiving a lawsuit summons from a firm representing a home owner association for money they claimed I owed. The suit was for more than $2,000 and it was my belief that it was totally without merit. After several letters were exchanged, neither of us had budged. I was also aware that there was a lien on the property involving a judgement against the prior owner that was of record prior to my owning the property. That lien was for $4,800. It was questionable as to whether that lien was collectible. I believed that I would have probably won in court but, in reality, neither side would win because of the costs of the suit. If I followed my usual avoidance style and allowed them to proceed in court without my resistance, I would definitely lose by default. If I hired an attorney to do battle in my behalf, attorney fees would be more than the amount of the dispute. If I contacted them with an emotional outburst, I might force them to go to court for the principle of the thing. I had no choice but to prepare the best argument I could and confront the issue. The bottom line was that I gave them $1,000 that I didn't think I owed them to drop the suit and release the lien. It was the only practical way to get it over with. This is an abbreviated version of what happens in disputes between individuals, business entities, and countries. Here are some typical steps involved in resolution of conflicts.
1. Assessment. Take an objective look at what's going on. Try to keep your emotions out of it. One thing I learned in graduate school was that the first side to get emotional in an argument is usually the loser. It signals that they have run out of logical arguments and are forced to resort to tactics like name calling, yelling, and threats. If you know this and are able to keep your wits, you have a good chance of winning. Take a really close look and try to assess your odds of a favorable outcome.
2. Look At The Other Side's Position. Steven Covey has written that we are well advised to "Seek first to understand and then to be understood. Try to understand the motivation of the other side, what they stand to gain and what they stand to lose. By knowing this, you will demonstrate that you are willing to consider their arguments. This will make them more likely to listen to your side as well. It will also let you know what issues they are likely to yield on and what they will probably stand firm on.
3. Be Soft on People Issues. Treat the other side with respect. Look them in the eye, smile occasionally and let them know its about the issues and not the people. Give them an opportunity to save face whenever possible.
4. Be Firm On The Issues. In case you were thinking that this is an article on "Negotiations For Wimps." you should know that its OK to be firm on the issues. Before beginning, it is a good idea to make a list of all the issues involved. I am most familiar with real estate negotiations where some of the issues are purchase price, financing, inspections, needed repairs, closing costs and a whole host of others. Some of these may be less important to you and, while you may offer concessions on others, it is a good policy to ask for something in return before making the offer.
5. Be Careful of Strictly Positional Bargaining. It's typical that each side starts with more than they want with each making slight concessions until they meet in the middle. While this can work, its so common that both sides know that the other side is asking for more than they want with the intent of meeting in the middle. This may end up with an agreement that may be somewhat worthwhile with neither side accomplishing their objectives. Look for something more creative than this.
6. Be Patient. In many real estate transactions, there is a formal written offer. Often with a date in which a response is required. Within that time frame, a counter offer is often received with a date in which a response is required. Real estate agents and generally push for a response within the required time frame but it is often a good opportunity to reduce the other side's expectations by failing to respond in time. In reality, the person making the offer may withdraw it at any time before it is accepted and not be bound by it. Sometimes, it is better to wait and let the other side wonder what you are likely to do. This extends to other types of transactions in which it is better to build tension rather than another counter offer right away.
8. Look At Other Avenues. The focus of this is that the principals are negotiating between themselves. Our approach is transactional but many disputes aren't. When a negotiated settlement is not forthcoming, it may be best to utilize the help of a mediator who is trained at advising both sides from a neutral position. Rather than go into detail on this, it is best that either sides investigate how this works and determine of it is applicable. This is often used in divorce and other very contentious situations.
Hopefully, This Helps. Too often we jump into conflicts with little preparation. If this article causes you to think twice and prepare to to seek a resolution in your best interest, it will have accomplished my objective. I welcome your feedback.
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