Stop Trying to Run Your Business with a Crystal Ball

I've got a mailbag of venerable burning questions this week. Most of it has to do with peering into the future to get a handle on what's going to happen in the real estate market.

"How is the home buyer tax credit going to affect the real estate market?"

"How much is the Fed going to raise interest rates by?"

"When is the Fed going raise interest rates?

"When is the market going to appreciate again?"

All of these are what I call good "cocktail party" questions. They're quite fun to talk about and pontificate on at parties and gatherings of other like minded folk. They make for good fodder for talking heads on media television channels.

And they don't do you one dang bit of good in terms of running a successful and profitable business.

Let me explain...

You see,  you can take all the market data you want: home inventory, sales prices, spec houses built, foreclosure filings and if you mash it all up and put it together, you might get a picture for where the market is right now. Two problems with this:

1. Where the market is now doesn't necessarily mean anything about where it will be in the future

2. The second problem is the "predictability" factor - interpreting this information in terms of what will happen in the future has been keeping soothsayer economists and court jesters employed for generations.

Court Jesters and "Seers"

Ancient kings used to have people stand around them and tell them the future (who said being born into the right family meant having brain cells?)

What I'm saying is: since the beginning of time people have tried to predict the future and the same result has happened over and over again: they realize the future is unpredictable.

Even if you lined up all the variables and everything looked just like it was supposed to in the text book, un-anticipated future events often come up that render everything else moot.

I'll bet everybody thought their predictor models were working just fine until two planes crashed into the World Trade Center on 9/11. Everything changed instantly.

The best "experts" and financial minds in the world thought that their fancy debt models could allow for unlimited sub-prime loan underwriting. Oops. That didn't work out to well, did it?

Well, maybe that one did for real estate investors who are in the foreclosure game (me). But it sure hurt a lot of people, too.

Be Like Mike? Um..I'll Pass

Big Businesses can work this way. They can have armies of analysts and economists and any other "ist" look at data and numbers all day and try to make management decisions from that. More often than not, this doesn't work out anyway. Big companies make mass layoffs and then realize that they cut too quickly and they lose business because the customers got made that stuff didn't ship and nobody was there to answer their questions.

And I thought all these MBA corporate types had it figured out. I almost went down that road. Thankfully someone pulled me out of the fog.

If you're a small business (don't take offense to this term - if you have under $100,000,000 in sales you are a small business, worry not). You have to deal with facts and reality. You have to deal with raw numbers and make the best real estate investing decisions you can with what you've got.

The best advice to run your business by comes from none other than Mr. Warren E. Buffett (billionaire 40 times over). I'm going to paraphrase him a bit: "If you are looking at an investment decision and you can't decide if you should do it because it's at the margin - pass on it. The great thing about investing is that you don't have to swing at every pitch."

In Motion

Let's look at an example for interpretation.

Say you're going to buy an apartment building. It's 40 units and provides some cash flow. When you take a close look at the numbers (real numbers, not "I hope everything lines up right on this one" numbers) you see that you can service your debt on the building and pay your private investors off only if you maintain a high rate of occupancy that is several percentage points over what the rest of the market does.

Hmm....

Looking at it further, you're on the fence. You hem and haw. You start thinking: "well, if the market improves and I can raise rents, everything will be Ok." And, it's marginal even at that.

Stop right there.

If you move ahead with those kind of doubts in your mind, you just violated Warren Buffetts advice. If you're on the fence with an investment based on the numbers, give it a pass.

How does does this all tie in to trying to run your business with a crystal ball?

Easy. If you invest in deals that are "fat pitches" right down the middle of the plate, you don't have to worry about what will happen in the market or in the economy next week or next month. You buy investment properties (either for flip or hold) that are very profitable right now. Avoid investing on the hope that an event(s) far outside of your control will make your deal a success.

Smash the Crystal Ball

If your stuck on using forecasts and predictors in your business, best of luck to you. To me, there are plenty of better things I could do with my time (like marketing my investment opportunity, chasing down deals). Forecasts are just that: guesses. Half the time the dang weather forecast is off. Have you ever been mad at the TV weatherman because he called for sunshine and you got popped on the head with a piece of hail the size of a cantaloupe?

Me too.

The sooner you start running your business by swinging at only the fat pitches and letting everything else go, the sooner you'll start seeing the zero's add up in your bank account.

No secret.

Just implement.