How many investment opportunities that you’ve missed because you didn’t act on time? Paralysis by analysis is a common pitfall that many educated investors fall into. We talk about 5 tricks to prevent paralysis by analysis in your investment decisions.
After studying the world of investment with a few self-help books, I was ready to make my first real estate investment, which was my biggest investment ever. By that time, I knew that the value of commercial properties grow faster and they yielded a higher rent. I had no hesitation to go for a big one as I got savings ready and qualified for a property loan.
The quote “It’s far better to buy a wonderful property at a fair price than a fair property at a wonderful price” was on my head and I was looking for a good property for sale at a price below the market price, a bargain!
But, when the hunt started I realized that it was extremely hard to find one. I may have spent 5–6 months exploring properties within my budget. I found a few fair ones initially, I have passed them expecting better ones. Properties that were lower than the market price were either in bad areas or needed heavy fixing. When the property was in a good location and a good condition, it was always 20% or higher than the market price. I collected stats, and analyzed them well hence I knew its a value trap.
I was sure the dream property is there at a bargain price, I just have to find it. So, I waited — another six months, and another six months, ‘exploring’ more properties. Some I liked, but they were expensive, most I didn’t like were cheap. The same thing — over and over again! Property brokers who brought me leads thought I’m not serious. And to make things worse, the property prices in the neighborhood moved up fast. Many times I got myself reminded of the fairly valued properties that I’ve decided to pass and I regretted it!
How bad things can go? well, this was the same time when the loan interest rates started going up. I was frustrated! For the first time, I started seeing the negative side of my approach as an ‘educated investor’. I was keeping money in the bank for 18 months for nothing. Property prices have gone up a lot and now the loan rates are going up too. Stacked-up frustration grew into a panic attack! My dream of becoming a successful investor and growing wealth using commercial real estate was doomed just like that.
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Years later, I observed that one of my mentees was also on the same journey — well known as “Paralysis by analysis” I brought up this story with him. He thanked me for the eye-opener and started asking a lot of questions.
Why do Investors Hesitate?
When we are faced with a choice, we fear the worst case — what if I make a wrong decision? I believe this is the main reason why many people hesitate to make a decision. Most often, you may be afraid of failure or sometimes the consequences of success. If you are wrong, what your family and friends will think of you? Perfectionism may be getting in your way. This is especially true if you haven’t made many big decisions in your life.
It’s also common if the investor has a sound educational background or professional experience. In other words, book-smart people hesitate compared to street smart. Based on my experience, book smarts believe in an information-based analytical approach where street smarts go by their gut and can make quick investment decisions with minimal structured analysis.
During the same period, when I was stuck at my first real estate investment, one of my classmates who started doing a car sale business just after senior school bought two properties at bargain prices. Both properties were on my radar and I rejected them as they were in bad environments. For him, those were obvious good choices as he anticipated the environment to be better over the years when there was no evidence at that time.
Is Indecision bad?
Hesitation isn’t always bad. Sometimes hesitation gives you valuable time to think about the choice thoroughly; gather more information and weigh the facts. If there are second thoughts about a decision, it might be a warning that we are likely to make the wrong decision.
It’s the timing that matters. If you are weighing options and exploring for a few months before your first big investment in a new asset type, there is nothing wrong with that. One should explore the depth of the water before jumping in. But, if you are stuck forever without taking a decision, that’s what we need to avoid.
The opportunity cost of Indecision
“More is lost by indecision than wrong decision. Indecision is the thief of opportunity. It will steal you blind.”
– Marcus Tullius Cicero
In most investment situations, not making a decision is worse than making a bad decision. This is because of the opportunity cost that you’ll have to pay for not taking any of the paths.
What’s the cost of not buying a good property at a higher price on day 1 for me? I missed the capital appreciation and the rent for 18 months.
How to manage indecision?
1. Timebox decision-making
prolonged hesitation can be cured by timeboxing the decision-making. In this way, you will be committing to the best choice at the end of that time. e.g. in the example, I could have a timebox for 6 months or the first 30 properties.
Timeboxing is a great method to push our brains to converge on a decision. Generally speaking, in investing there are multiple right decisions. At the end of the timebox, you’ll have to pick the best at hand.
2. Ask, ‘Will this matter in another 10–15 years?’
Continuing my story, after 18 months I finally went for a great property in a highly demanded neighborhood. I bought it 20% higher than the market valuation.
But, will this 20% matter in 10–15 years?
It certainly didn’t much in the context in which I operated. Property prices have skyrocketed and grew three times in value in 10 years without burning much cash from my pocket. Also, occupancy was nearly 100% due to the great demand associated with the location.
I have experienced the same with stocks. Whether you buy a growth stock at 20 or 25 doesn’t matter in 10 years when it hits 250. Statistics show that timing the market is impossible — so, why bother?
The underlying principle here is that great bargains are rare, although bargains take headlines when someone hit them. All of us can’t catch the best bargain investment most of the time by timing the market. Settling for something reasonable faster will be fruitful, as there will be not much long-term impact.
2. Start Small
You need to practice to become an expert at anything and investing is no exception! We all know making little decisions is easier than making big ones. Why not practice decision-making starting small?
Let me explain via an example. Years later, I was again looking for an acre of land in an area near an attractive urban development project. While I was on the lookout, I found a lot of small plots, but not many bigger plots. When I realized it’ll take some time to settle in the land of my choice, I decided to buy two small residential plots for a fraction of my budget. While I was visiting these plots, I met a lot of nearby people and made connections with them. It took me just two months to find the plot of my choice which was within walking distance from those small plots.
Later, I disposed the small plots as they didn’t add value to my long-term strategy. But, they paved the path to finding what I was looking for. Investing is about learning about the market — not from a distance; having skin in the game.
The same is very true for other assets which can be accumulated in small amounts such as stocks and precious metals. Here is a little trick to starting small and defying hesitation for stocks. The day that I’ve decided that a given company is a worthy investment, I buy a few shares and start learning about it even though the desired entry price is not available in the market. How does the company react to the market trends? How the market reacts to the company’s performance variations? etc. These learnings are real and they carry no downside risk — so no need to hesitate! When the price is right, you can jump in big into the tested waters!
4. Talk to a mentor
If you can’t make a decision, there’s a good chance that you’re afraid of something. Figuring out that is easier if you can bounce your thoughts with someone else.
Thanks to the mentors, and the seasoned investors, who bump my feeling of fears and troubles, this is one of my personal favorite options. Their fresh perspectives can help change your perception. And sometimes answers just surface while explaining trouble — without a word from your mentor!
5. Pick from your gut
After reaching the time limit on your fact-finding, list-making, and pondering, ask yourself: “What would bring me closer to my goal: A or B or C?” Rate each option with a number from 1 to 5. Don’t analyze, just go with your gut. Pick the option with the highest number.
One thing that occurred to me multiple times — my gut feeling is much better and faster at choosing the best option compared to my logical brain, especially for real-estate investments. This is less true for stocks — where spreadsheets have done better justice. That’s probably because stocks are a structured asset class with less ambiguity and I’m not experienced enough with stocks.
Please let me know what you think about this content. I’m glad to learn from your feedback on my journey to financial freedom!
Written by Lilan Priyashantha