ID-100216099Real estate has a ton of ups and downs. There aren’t a lot of other businesses that can have higher highs and lower lows. If you flip a house and make $40,000, it’s a high unlike any other.

On the other hand, if you put months into a flip and then lose $10,000, it’s hard to get much lower. And the worrying that precedes that loss (or even gain) can be emotionally devastating.

Such rollers coasters can lead one to burn out. That’s why, if you’re in real estate for the long haul, a critical skill to attain is level-headedness; don’t get too high in the good times, or too low in the bad times.

My brother is a former poker player and he likes to bring up variance. Namely, no matter how well you play a hand, sometimes the cards won’t fall and you’ll lose. Statistically, you’ll win more often than not when you play right, but not always. You have to be prepared for that. You have to accept that sometimes you will lose. And don’t change your strategy just because you lose. In fact, don’t change your strategy if you win either. Daniel Kahneman highlights this point when discussing stock brokers in his excellent book Thinking Fast and Slow,

“Individual investors like to lock in their gains by selling “winners,” stocks that have appreciated since they were purchased, and they hog on to their losers. Unfortunately, for them, recent winners tend to do better than recent losers in the short run, so individuals sell the wrong stocks. They also buy the wrong stocks.” (pg. 214)

In other words, people try to hang onto their mistakes in hopes they will get better and sell short their wins because they’re afraid of it turning into a loss. This is cutting the game short. It’s getting off the roller coaster in the middle of the ride. Stay true to your strategy in good times and bad. That doesn’t mean you shouldn’t adjust. You should adjust. But you should do it in a controlled manner based on good evidence and careful reflection, not as a reaction to what could just be variance.

In addition, you also have to be prepared to make mistakes. They happen. Don’t fear them, expect them and embrace them. Then learn from them and move on.

The important thing is to understand that mistakes and variance happen. Don’t just go with the ebb and flow of the tides, be prepared for the bad times and while I’m not saying you shouldn’t celebrate the good times, make sure to always keep things in perspective.

Your Comments: