Real estate books are a mixed batch. There are those that I recommend, such as Eldred and McLean’s excellent Investing in Real Estate, now in it’s fifth edition. On the other end of the spectrum is Robert Kiyosaki’s bestselling fable Rich Dad Poor Dad, a dangerous and misleading book if ever there was one.
In discussing books for investors I often end up recommending books that aren’t really real estate books, but which hold some insights that investors would be wise to heed. Nassim Nicholas Taleb’s recent release The Black Swan falls into this category.
The Black Swan discusses highly improbable events - like the occurrence of a black swan in nature – and how they impact our society. Taleb comments on our collective overestimation of what we know (and our underestimation of what we don’t), our reliance on phony experts and the general folly of forecasting.
The book isn’t without it’s drawbacks. First and foremost is Taleb’s unsufferable tone; one gets the distinct impression from reading Taleb’s prose that he’s one of those types that’s entirely too fond of the sound of his own voice. Much of the book is spent ridiculing famous figures whose theories he disagrees with - including Nobel prize winners Myron Scholes and Harry Markowitz. He lauds the guys who “get it” (from street-savvy traders to literary sophisticates) while heaping scorn on the squares (from tenured academics to pencil pushers in corporate America). It would appear that Mr. Taleb’s intention is to syle himself as an out-of-the-box intellectual maverick, but unfortunately he comes across as preening and petty.
And that indeed is unfortunate, because beneath these annoyances there is a lot to like about The Black Swan. Many of the book’s revelations are relevant to real estate investors. Among them:
We’re hooked on phony experts.
Taleb calls this the “empty suit” problem; he opines that there are many fields in which the “experts” are no better at predicting the future or producing effective results than a reasonably informed layman.
According to Taleb, there are experts who tend to be true experts and experts who tend to be…not experts.
- In the “real experts” category fall (among others): livestock judges, astronomers, test pilots, physicists, and accountants...
- In the “empty suit” (faux experts) category fall (among others): stockbrokers, psychiatrists, college admissions officers, intelligence analysts, economists, and personal financial advisers...
He poses the following thought experiment: Would you rather have your upcoming brain surgery performed by a newspaper’s science reporter or by a certified brain surgeon? The answer to this question is obvious – but it can’t automatically be projected on all professions. His follow-up question is whether one would rather listen to an economic forecast from a prominent academic with a PhD from a respected institution, or from a newspaper business writer. The answer here isn’t obvious.
This example will sound familiar to most real estate investors. Chances are you’ve heard it before – from a Realtor. Your average Realtor will consider herself closer to the brain surgeon analogy. I disagree. There certainly are notable exceptions, but for a well prepared investor with at least one deal under his belt the vast majority of Realtors will offer little or nothing in terms of expert real estate investing advice. A Realtor can be extremely useful in helping you to get through the myriad steps to get to closing on time, but be careful about relying on him for “advice” on which market is gonna be hot, which one isn’t, and when to buy/sell. He’ll tell you that he knows, but he doesn’t. You are every bit as good as "the expert."
So the next time you’re listening to an outook on housing prices, consider the fact that your prediction about what’s gonna happen is every bit as valid as the one you're listening to.
We don’t know what we don’t know.
We often tend to overestimate how much we know and underestimate our ignorance. This error tends to increase as we get more educated, meaning that an educated person has an even more unrealistic view of what he knows than an uneducated one. Chalk it up to our educational system’s focus on building self esteem. This has lots of implications for investors.
All industry groups produce reams of forecasts about future price movements. This is all a bunch of hooey – made even worse by the fact that industry groups aren’t unbiased observers.
This also gives investors something to think about when using a real estate investment evaluation software package – including the one offered here at EquityScout.com. All evaluation software packages rely on assumptions – the old garbage-in-garbage-out phenomenon. The primary use of a real estate evaluation software package should be to force you to consider and weigh your assumptions and think about the fundamentals of the deal. One way to do this is to look at what your assumptions mean in terms of future results, but bear in mind that this isn’t a forecast.
The only thing you know about your assumption around property appreciation rates over the next ten years is that it will be wrong. But, it’s vital to know if your investment will yield a reasonable return at a 3% rate of appreciation (as it will in many undervalued areas or if you grab a bargain) or if you’ll need a 10% or 15% rate of appreciation in order to break even (as is the case if you’re buying in many overheated areas, such as areas of California, Florida and Nevada).
You can’t see the future, but on the other hand you shouldn’t make a decision without knowing how various future scenarios might impact your investment.
Summary: I got some interesting insights from this book. Taleb takes many positions that I disagree with, but he’s a persuasive author who takes a stand, and some portions of this book changed the way that I think about certain things.
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