As apartment building investors it’s easy to get so deep into the trenches of our market sector that we get blindsided by political events that don’t make any sense from an economic or investment perspective. With every market being so local and at the same time now subject to institutional interest it’s a stretch just to be able to track what’s happening in the lending environment at the same time. But this is the biggest risk we face; how to avoid Nassim Taleb’s ‘Black Swans’ that could destroy our investment plans. As an options trader Taleb could very easily have been overtaken by black swans if his vision was limited to the distance from his eyeballs to the trading screens he stared at. How wide is yours?
Short of an asteroid strike from another time dimension there really aren’t as many black swans as there are limited perspectives. Many people considered the mortgage meltdown a black swan but there were also quite a number with wider vision who understood how it would all end and some of them made fortunes putting their insights to work. Since we’re multifamily and CRE investors, not leveraged derivative traders we probably don’t spend a lot of time thinking about how to go short the apartment building in that bad neighborhood but how do we develop that wider perspective and still have time to do any investing?
The easy answer is there is no easy answer, but there are two things that can make avoiding that asteroid strike in your investments much more likely. The first is knowing a bit of history. History is the stuff that happened before we started investing and before the people we learned it from started investing. Knowing history is how Ben Bernanke kept the Great Recession from being the Great Depression 2.0. Love him or hate him but because he studied the Depression we still have a financial system and back in the dark days when all the ATMs in the world were hours from shutting down that wasn’t an easy bet to make.
Nihil est in mundo, sed in historia nova nescis. – Harry Truman
Learning history takes time and most often reading time but it’s filled with pretty interesting characters doing some pretty audacious things and many of those themes are the same ones we see today. One of the best places to start is a book called This Time Is Different: Eight Centuries of Financial Folly by Reinhart and Rogoff (On Amazon, http://amzn.to/JwXegl also available through our Reference Library section below in the right hand column). If you do nothing other than read and remember the title to this book you’ll be better prepared to deal with the next generation of dubious financial ‘innovation’ when it comes along.
Historia non repetit sed is poema poematis. – Samuel Clemens
The other thing is how today’s news and events should be interpreted for their potential threats to our investments. With a thousand fire hoses of news and information coming at us every day the challenge of how to get what we need without having to read and watch everything is a big one. The best way to do that is to have a set of frameworks for decoding the major themes from history as they replay themselves in the headlines today. The first of those is Game Theory, the study of how people interact to achieve what they want.
Fortunately there is a great source for viewing today’s news through a game theory lens and it’s available for free. Ben Hunt over at Salient Partners publishes Epsilon Theory and just did an interview with another guy I follow for his wider perspective, Grant Williams* who writes Things That Make You Go Hmmm from his perch in Asia. In the interview Hunt explains how game theory applies as he and Williams cover the political and economic themes swirling around today. See the video here: Ben Hunt on Real Vision For a more in depth piece on how Ben Hunt uses game theory see this: Epsilon Theory Manifesto
Note I don’t get any compensation for recommending either of them (and besides they’re free) but they significantly reduce the number of fire hoses I need to stick my face in front of to make sure I’m not missing anything important.
*You won’t read very much from Grant before you get the feeling he’s a gold guy but most people outside the US and Western Europe are too and even former Fed Chairman Alan Greenspan admits that gold is money now: “Gold Is Currency; No Fiat Currency, Including the Dollar, Can Match It”