Why is it that some property investors fall by the wayside while others maintain and even grow their wealth in the long term? The difference between successful and unsuccessful investors tends to boil down to their mindset. Everyone has biases: it’s only human. But some ways of thinking can cause you to act in ways that are not conducive to investment success. We make decisions that are not optimal and our goals suffer as a result. Successful property investors both know what they are and how to get rid of them. To give you the same advantage, here are four of the top biases and what you can do to prevent them from impacting your judgment.
Confirmation BiasWith confirmation bias, we seek confirmation of what we believe to be true. We even go out of our way to validate it. For example, if you believe that homes are a better investment opportunity than flats, you will seek and find evidence to back up this view. Many investors also assume that London is the only place to invest, and can easily find loads of data to support their assumption when there are other towns and cities with equally attractive properties available. Having confirmation bias will hurt you as an investor because it can motivate you to make poor decisions. Becoming fixated on an incorrect belief can cost you a lot in the future, so when it comes to investing in property, keep your prospects- and your mind- open. To tackle confirmation bias, find those who challenge your beliefs. The most successful people love being challenged. They also enjoy being proven wrong, especially if they profit as a result. When you hear something contrary that’s to your view, don't just write it off straight away. Instead be open to it. You're probably going to learn something.
Recency BiasRecency bias is basically the same thing as having a short memory. You tend to fixate on what is happening now instead of further into the past. If, for example, the last couple of years have been good for property investment, you’re going to the assume that the trend won’t change any time soon. It is emotionally easier to invest this way, but it's not wise. Successful property investors ignore what the media is claiming, as it tends to be driven by a recency bias. You almost never see news stories that put things into a wider context or reflect back to the way things were in the past.Once you understand that things tend to be cyclical and neither good not bad times last forever, you will make much smarter investment decisions.
Home BiasHome bias is easy to slip into because it's comfortable. Investors will limit their scope to their own communities because they love that they know and fear the unknown. When you only invest in one town, and in one type of property, you limit yourself to a possibly dangerous extent. It can prevent you from spotting opportunities elsewhere. Home bias does not have to oriented around location. It can even cause you to use the same methods over and over. While there’s something to be said for sticking to a successful formula, you risk confining yourself to a strategy that worked in the past but doesn't apply to the changing market. Luckily, there’s a simple fix for home bias. Once you’re aware that you have it, explore investment opportunities outside your immediate area. You might be pleasantly surprised by what you find.
GreedIn this context, ‘greedy’ investors are not evil people, but they are chasing the quick wins because they want to realize profits now. They want money and success now. they want the money now. These people will believe in unrealistic promises because they want it to be true, and shut off their common sense radar. While there could be a big return if everything goes absolutely perfectly, there's also a higher probability of losing everything. To get rid of the greed bias, start being cynical and stop chasing figurative bright shiny objects. Acknowledge that property is not a get-rich-quick scheme, and if an opportunity sounds too good to be true it probably is.
About Living Smart
At Living Smart we help investors achieve better returns on their capital through investment in lucrative property development projects. Our expertise lies in identifying opportunities, securing and maximising the correct planning consent and determining the best exit.
We are flexible in our approach and tailor our investment packages to the individual needs of investors. Please contact us for a free 30-minute consultation and the opportunity to meet us and take a tour of our current and completed projects.
About The Author
With a diverse background in digital marketing, property development, sales, and customer relationship management Ben handles recruitment, sourcing, sales, and lettings at Living Smart.