The difference between knowledge and wisdom: Don’t overpay…Duh

There are certain investing principles that I know, but I do not act like I know. I read books, analyze data and seek advice. I am an educated, intelligent dude. One such principle is: when buying an investment one should negotiate the lowest price they can get. Obviously this is true. But living in a consumer marketplace of “fixed pricing” haggling is just not in my blood. Still I thought I was a good at figuring out a good price and negotiating a deal. I realize now that I do not actually implement this principle. I know I shouldn’t overpay, but I do anyway.

I realized my behavior while playing the Cashflow board game. If you are not familiar with this game, one of the components is drawing deal cards (for example, an opportunity to purchase a 3/2 house). The player that draws the deal card can take the deal or sell the opportunity to another player. This particular deal, drawn by Jeremy, was a house for $50,000 fully financed (no down payment). A free investment is good, but the downside was that the monthly cashflow was -$100. Because the underlying goal of the game is to build up passive investment income, which was negative for this deal, no one wanted this card.

Yet, I wanted this card. My thought was I could buy the card from Jeremy, and pay the monthly $100. I figured I would make about five payments before someone drew a market card with a home buyer offering $65,000. With other game opportunities, I did not want to speculate like this unless I could get a tenfold return. If I offered Jeremy $1000 for the deal and made $500 in monthly payments, then sold the house for a $15,000 gain it would be worth it. Jeremy said something like “negative cashflow, no one wants this right?” and he started putting it back in the deck. I offered him $1,000 for the deal he was throwing away. He asked why I would possibly want the card and in the same breath tried to bid me up “how about $2,000.” The card was literally worthless to him, yet he was trying to get the best price he could. At first I was annoyed, the gall, bid me up when he doesn’t even want it. Later after thinking about it, I realized I was being an idiot and he was the smart one. He was not thinking about what it was worth to him, he was trying to get the best price. I, on the other hand, thought about what it was worth to me and offered that much.

After thinking more, I realized I do this in real life also. I have two rental properties. The first I purchased there actually was some back and forth, but it was really only over a few thousand dollars. The second property I purchased, the seller accepted my first offer. I have made two offers and have two properties. How much money did I leave on the table? What better opportunities did I miss because of purchasing these? I will never know. Both of these properties have been good to me, but would I be happier if I paid $10,000 less, or $50,000 less; HECK YA. I can tell myself, to offer a low price, but the fact is I am hard wired, to offer a “fair” price. How do I combat this internal nature? Two quotes come to mind (I do not know the source) “if you are not embarrassed by your offer, it is too high” and “look at 100 investments, offer on 10 and buy 1”

The next offer I make needs to be so low, I am embarrassed. I must get a counter-offer or rejection. By the 100-10-1 rule, I need nine rejections before I close on another deal.

Investing has so much to do with emotions and how we are programmed. You cannot just say that you are going to be an analytical Vulcan. It is good in theory, but our preconceptions and emotions can undermine us while we are totally unaware. Try to pay attention to how you are wired, and how you act as an investor.

God bless and keep moving forward.