The Turkey Problem For Real Estate Investors

Happy Thanksgiving y'all! This is my favorite holiday of the year. It's all about appreciating what you have. There are no gifts to give or receive, we simply feast, in gratitude, with our family and friends.

Thanksgiving was always a great time for trading stocks. This is the first time in 6 years I'm not participating.

The transition to the real estate business over the last 6 months has been incredible, but the trading calendar is still running in my head!

It jogged my memory about a philosophical problem from one of my favorite authors. I think it applies to real estate investors. It just so happens to be about a Turkey.

What is the Turkey Problem?

It's a metaphor taken from Nassim Taleb's book Antifragile. Here's how he describes it...

A turkey is fed for 1,000 days by a butcher, and every day confirms to the turkey that the butcher loves turkeys, and every day brings more confidence to the statement. but on day 1,001, there will be a surprise for the Turkey.

The turkey is mistaken in his beliefs. The butcher isn't feeding him because he loves turkeys. On day 1,001 he learns the truth, a little too late. The turkey didn't know what he didn't know.

What's the point?

His point is mostly about forecasting. It's not just that the turkey made an incorrect forecast, it's also that he placed complete faith in this forecast.

Imagine you asked the turkey on day 1000 what his forecast of the future was. He would probably project that he'll keep getting fatter and happier. The butcher has fed him every day, continually improving his confidence. Why wouldn't he believe that?

He was in a feedback loop, constantly reinforcing his false belief that the butcher loves turkeys. The eventual outcome was unimaginable to the turkey.

Real Estate and Turkeys

The Turkey chart above looks very similar to the net worth of many over-leveraged real estate investors during the 08' financial crisis.

They were doing well, but could never have seen the coming crisis. The more 0% down properties they bought the better they were doing. Until day 1001.

Debt turned them into turkeys. Debt destabilizes. As a rule of thumb, the more debt you use, the more likely you are the Turkey.

I'm not saying don't use debt. I'm saying you need to understand it.

In my time as a professional trader, we often leveraged positions 20x our account size.

The key was that we had risk management strategies in place to avoid looking like the turkey chart. We were always positioned for a 20% drop in the market.

As an Investor, the best way to avoid looking like the turkey is to control and understand your risks.

Real estate, as an asset class, has different characteristics. Understanding these characteristics and their implications allows you to manage risk. If you can manage risk, you can more safely use debt. If you can safely use debt, you'll grow your business without looking like a turkey in the next recession.

Thanks for reading,

Rob Drum

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