The story goes that in ancient India, the natives used a clever technique to catch monkeys. Unable to catch them outright since the monkeys were much faster, they dug a hole in a tree trunk that was just big enough to fit the monkey’s open hand. Inside that hole, they placed some nuts to lure the monkey and hid. When the monkey would reach in and grab the food, he would make a fist that was bigger than the hole in the tree. The monkey was trapped and the natives would come out of hiding and catch him with ease. This technique worked because it would never occur to the monkey that if he just let go of the food, he could pull his hand out again and run away.
We can derive three essential real estate investing lessons from that story.
First, when you’re faced with an important real estate investing decision, there are almost always more options than what’s readily apparent at that moment. As an illustration, last week an investor asked me for my opinion on a dilemma he was facing: In the price range where he was looking, there were only two viable locations and neither of them would serve the investor well. But he kept insisting that he had thought this through backwards and forwards and there were no other options. He had painted himself into a corner then continuously went over those same two steps that corner allowed him to take. When I pointed out that he could purchase an excellent property in a high quality location at a slightly higher price while maintaining solid returns, there was a long pause on the line. His assumption that the property had to be restricted to a certain price range wasn’t based on data or reason – he just held it to be true and it negatively affected his decision making process. So next time you are faced with a similar situation don’t just accept the readily apparent options – there are always other alternatives. You aren’t restricted to either going hungry or being trapped – You can just pull out your hand with no food and live to eat another day.
Second, everything that shines isn’t necessarily gold. In the real estate investing world, we are constantly taught to “keep an open mind” and not turn down a deal that might not fit all our criteria exactly. “Sometimes you just have to be creative” – the advice usually goes. I’m certainly not against open minds or creativity. But sometimes when the only tool you have is a hammer, everything starts to look like a nail. When you have a solid investment plan that produces specific investment criteria, it inevitably eliminates some deals from your consideration. But in the end, that’s a good thing. Because it’s fine to be an open minded, creative investor as long as that flexibility does not lead you down a path that isn’t aligned with or (worse) goes against your goals. Next time you see that tree trunk full of goodies, it’s perfectly fine to whistle past it if your plan advises your to stay away from that type of tree.
Last, you can’t make money in this business if you don’t take risks but as Warren Buffet says: Don’t ever test the depth of the river with both feet. It’s not the end of the world if you pass on a deal that might have made you money if it ensures that you don’t go all in and get wiped out. In Wall St they have a saying: Bulls and bears make money but pigs get slaughtered. It’s a fine line between ambition or drive – both necessary ingredients to a successful investor- and greed. The stories of successful investors ending up in bankruptcy court due to greed are too numerous to mention. If you ask them, they will tell you that absent the greed, they could have taken a completely different path towards a prosperous retirement. But instead they kept chasing the next deal and the next one after that losing sight of risk in the process. Like the monkey found out, sometimes what might look like a “great meal”, may be the trap that seals our demise.