Investor Myopia vs The Big Picture

In a society where instant gratification is the norm, it may be tough to think about long-term planning and the benefits of delayed gratification. But as investors that is precisely what we should be doing. Taking the time to consider the consequences will almost always benefit us in the long run.

Myopic behavior – or short-sightedness -- often drives people to make impulsive decisions or to take unnecessary risks. To avoid such behavior, you must learn to consider the long-term implications of your actions.

One of the most common examples of myopic behavior is the housing provider deciding to rent to a marginally qualified renter. Vacancies are financially painful. So, to avoid the short-term pain of paying the bills without the income from rent, the housing provider makes the gamble to rent to someone that has a high probability of failure. The short-term benefit of no vacancy may lead to the longer-term cost and pain of an eviction and all the loss and damage that comes with it. Experienced housing providers will always tell you to wait for the well qualified applicant. The quick fix rarely is the right choice.

Buying an inferior part or tool because it is cheaper is another example of myopic behavior. If the plumbing part breaks, when will it have to be replaced? What is the cost to have it replaced, and even worse, what is the cost to repair the damage caused by the failure? These costs need to be considered in your decision.

Cheaper is not always cheaper in the long run.

Ignoring small “leaks” in your cash flow is a big mistake. Let’s say you are spending $100 per month more than you could be on your insurance. If you made the needed change to the insurance and invested that newfound cash flow savings at 10% interest, over the course of the next 10 years you would have $20,484.50. If instead you invested it over 30 years you would have $226,048.79. The myopic behavior of not finding the time to fix the “leak” can be very costly long term.

Survival in the real estate business involves avoiding unforced errors. Ignoring market conditions is one such error. Ignoring governmental imperatives is another. Violating the precautionary advice of long-term investors is yet another. You will need to think long term and be willing to adapt your strategies to survive long term.

We have seen investors who seemed to be very successfully rehabbing and reselling property while interest rates were low and buyers were competing for properties. In order to find deals to bring to market, some of these investors started making decisions that were only viable in ideal market conditions. They shrunk their profit margins, started counting on market appreciation, bought houses in undesirable locations, or with undesirable floor plans, cut corners on the rehabs to save money, and other similar things. These myopic behaviors eventually lead to trouble when the market shifts.

In some areas of the country the rental property business is under attack. Housing providers are being asked to take risks on potential residents who have a high risk of not being able to meet their obligations under the lease terms. Rents are being regulated via rent control and other measures. Taxes and regulatory expenses are increasing, shrinking profitability. There is myopic behavior in these instances by government as well as the investors that choose to continue their operations in these areas.

Legislation that discourages investment may bring a short-term benefit to the current residents, but in the long run housing shortages will hurt everyone. Investors who choose to stay in an area where their business is under attack are like the ostrich with its head buried in the sand. Trouble is upon them, and they are either blissfully unaware, or think that if they can’t see it, it can’t see them. This myopic behavior can be disastrous.

In the excitement of learning about investing, cautionary advice from long-time investors can seem discouraging. Some newbies don’t want to hear it or see it – like the ostrich with its head in the sand. This advice can give you a long-term perspective and will dramatically increase your chances of long-term survival in this business.

Navigating the waters of market shifts is best done with some guidance. Join your local investor association and spend some time getting to know the long-time investors. Their wisdom will help you make wiser decisions that do consider the long-term effects.

Learning about alternative strategies that can help you adapt to changes in the market is another thing that myopic thinkers ignore. The time to learn is before you need them. Making sure you have back-up plans for your investments is important. Real estate is not as liquid as many other investments, so we need to know how to adapt, and be able to shift our strategy when things aren’t working. Many office, mall, and other commercial
properties have major vacancy issues right now. In some areas short term rentals are under legislative attack. The investors who have alternative use plans have a better chance of surviving these shifts.

Diversification is another important part of long-term survival. A variety of investments in a variety of property types in a variety of locations will lessen the risks. You should still take the time to regularly look at the continued viability of your holdings and the markets they are in. This approach will allow you to make the shifts needed when problems are on the horizon.

Think Long-Term, Act Long-Term, Survive Long-Term and Profit Long-Term

Jane Garvey is President of the Chicago Creative Investors Association.