Data Driven or Theme Driven Investing

[Nicholas Varner]

The Serenity Prayer of Reinhold Niebuhr, 

"God grant me the serenity to accept the things I cannot change; courage to change the things I can; and wisdom to know the difference.

Living one day at a time; enjoying one moment at a time; accepting hardships as the pathway to peace; taking, as He did, this sinful world as it is, not as I would have it; trusting that He will make all things right if I surrender to His Will; that I may be reasonably happy in this life and supremely happy with Him forever in the next. Amen."

Any investment that we make is leap of faith, a leap into the unknown. Making data-driven decisions has never been more en vogue. It's progress, but far from perfect. We look at more data than ever before and it's exploding all over the place. In 2012, CSC predicted that data is estimated to grow by 4300% by 2020. In 2013 Science Daily noted that 90% of the total data in the world had been produced in the last two years. Data is no longer "Employee ID, 1001" or "Sales Price, $100,000". Data is pictures, video, sound, XML text files that are thousands of pages. New ways to quantify what was once considered purely qualitative data now means new ways to analyze what data washes up onto our hard drives and into our cloud storage centers. This is a very exciting development for industries across a variety of verticals with some extremely tangible value-adds to many larger enterprises. In a future blog post, I will detail how Big Data can be used to grow a mid-size or small real estate business into a enterprise-level business. 

For today, I would like to return to the Serenity Prayer and discuss how new investors who are beginning their careers in real estate can use data and themes to make decisions. There are things you can change in this business and things you cannot change. Understanding the difference is a great first step. Additionally, data can only tell you so much as past performance does not equal future results. It's a moving target. Understanding who you are and what risks you are really willing to accept is more important than any property you will ever buy. Losers blame others for decisions that they themselves make. Losers fashion themselves victims. Greedy investors only form I win, win, win; you lose, lose, lose deals. Greedy people and losers really are doing themselves a disservice. In the short-term they may feel better about themselves or do a deal here and there, but in the long run bridges are burned, money will be lost, and then it's on to the next endeavor to repeat the process. Service providers should be on the lookout for these types of clients and reject their business. The relationship will never be equitable, it will be flawed, and it will ultimately frustrate all parties.  

I'll provide examples. Buyer A makes an offer on a property that was purchased 2 years ago for 20% more than his offer, the property is in great shape, the current owners has made many updates, comps in the area are much higher than the proposed purchase price, the property meets all cash flow objectives for the Buyer. The seller does not counter the proposed purchase price, but notes will make no further repairs. The seller is going to lose, big. The Buyer refuses to sign the counter offer noting that seller is going to make any repairs we will are necessary. The property is in good condition. That Buyer could very well lose out on a great deal over minimal repairs that may need to be made. Stop shooting three pointers when you are up 40 with two minutes to go in the fourth quarter. You've already won.

Example 2. Investor A decided to buy a commercial building in a C or D area where she is responsible for paying heat, water, sewage, and trash. One year later, she is angry at her property manager. Why are the water bills so high? Why is the gas bill so high? Is this really the property manager's fault or is this the investor's fault. Investor A fully new what type of property she was buying. Many of the existing tenants were on Section 8 and were in their units all day, every day. Costs certainly would be higher than a consultant who was never home and always working. Anytime something goes wrong, your first move should always be to start with the man in the mirror. This is the only way growth happens. Stop blaming others for your own failures. 

Every buyer and seller should look at comps and other pertinent data to make great decisions. However, there are other types of data that can cause investors to start to micro-manage their own thinking. A Buyer looks at two homes in similar areas at similar price points. The properties are nearly identical. Both properties have older furnaces but both are still running. Can you reasonably predict when a roof or a furnace is going to go out? By all means, do your due diligence, but at a certain point we cannot predict the future. Some things will manage to hold on longer than you may think, other items flop. These are things out of our control that at a certain point, we have to accept that we are not in total control. Warren Buffett once said, "the market does not care about at what price you purchased your shares." Mother nature does not care about our cash flow. Accept the things we cannot change, do your homework on everything else, and know thyself. 

What's the most important data to consider when buying or selling. Start by asking yourself these questions. 

How much risk am I ready to take on? Am I ready to buy or sell? Can I reasonably buy or sell right now? Does this sale or purchase meet my investment criteria? Based on the data available, is this a reasonable deal for both sides? What is the worst possible scenario? What is the best possible scenario? When I talk about this idea with people that I trust, what is their reaction?

You noticed little quantitative analysis here and that's by design. Data can drown you or paralyze unless you really know how to use it. Happy investing!