Tag Archive for 'Fear'

It’s no secret that fear and greed drive all investment decisions.

Case in point: I met with a private investor of mine last week for a nice evening out. This gentleman has over $300k invested in my company and is a valued investor. Needless to say, I do as much as I can to make him comfortable with his investment at all times. If he has questions about anything, I do my best to help him.

We had a great time over the course of the evening. But, one particular aspect of the conversation really stood out in my mind (and still does over 1 week later). He asked me if he could: “move some money around so that he could take more risk for higher returns.”

I was floored.

After all, just one year before (as the stock market was in a free fall and media pundits were speculating on the apocalypse) most regular investors (those with money in the stock market or other paper assets) were cashing out their money in droves. Mutual funds and hedge funds faced heavy redemptions.

The fear and panic of the stock market was a ‘boom’ in raising private money for me.

And now, just one year later, people were hungry to “take risks” again.

Quite interesting, don’t you think?

First of all, the thought process is completely reversed. The time to be “greedy” and want to “get in” is when there is fear and panic and pandemonium. The time to put your chips in is when all the media talking heads are telling you to invest in bullets and bomb shelters.

Admittedly, this is counter to how most human brains are wired. (But, hey, we’re real estate investors, we’re supposed to be wired different, right?!)

Secondly, the “take more risk” thing just doesn’t resonate with me. I believe that there is ABSOLUTELY NO CORRELATION BETWEEN RISK AND REWARD with investing.  I believe that there are differences between PRICE and VALUE. Price is what you pay, value is what you get (yes, I stole this from Warren Buffett – I’m past due on my royalties to him, anyway).

To tell a private investor that I would “take more risk” would be crazy – I cannot change my investing approach. Period. Why fix something that is not broken? You don’t tinker with an Indy 500 race car that is 3 laps ahead of the race – you let it roll. Just the same, I can’t change my mindset and take wild swings for just the possibility of a few percentage points more return.

But, most of your private investors will have this mindset.

Most of your private investors will swing on the pendulum between fear and greed. Hopefully, they stay peacefully in the middle.

Going back to my private investor – he was looking for a few percentage points more per year. While he did have a valid point that even 2-3% per year compounded adds up over time, he was overlooking the core fundamentals of good investing. He was already getting a nice, double digit return with us. He was getting good tax benefits for that investment. He was also able to invest with a company that he could talk to the owners, get updated financial information and have 100% transparency (something he would have never gotten with another investment).  In short, he was winning big by investing with me.

Fortunately, all it took was to remind him of these things and a brief discussion and he was quite content. Investor management will be an important part of your business as you raise six and seven figure private money sums. But, it’s well worth it.

When it comes to fear and greed, BOTH will play a vital role when you’re hooking private money. Depending on where the pendulum is, you’ll have to adjust your approach and your communications.

My advice: whatever the media pundits are saying or whatever is going on, stick to your principles. If you have a good foundation, nothing can rock it- and THAT is what will really pull the money in for you.