What Not To Do In Investing

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The famous football coach Nick Saban, retired of late, has one of my favorite quotes about the importance of learning.  He says that there is, in fact, something worse than failure–it’s being successful without knowing why.  That’s a great take on judging success vs. failure in both the short and long term, and it also critically (at least to me) implies that in understanding the causes of our success we are able to replicate it over time.  It came to mind this morning as I read a good article via Morningstar about the late Charlie Munger’s advice about what not to do in investing.

To his point, anyone who has been in business for any length of time has learned a great deal in the distance from their starting point–especially over the past several years with this historically remarkable collision of the pandemic, technology, and government fiscal policy.  

That’s a broad comment, but applicable to frame a more specific and practical thought–what have vacation rental markets taught us about success and failure, and how have we learned from them?

Let’s start with some fundamentals around pricing, for example.  Pricing has become, as we’ve talked about before, an art and science all its own even within the complex landscape of real estate.  When we see complexity, it’s key to solve for simplicity if we are to comprehend it and here’s the simple “lessons learned” facet of pricing a given week, in a given home, at a given time with a goal of outperforming a market average:

There are three facets to pricing as we generally discuss it; the ability to formulate a price as a kind of forward guidance based on data, experience, and an understanding of both micro and macro trends (think controllable vs. uncontrollable).  Second, there is the price discovery phase, to use a legal term–this is the experiment of testing guidance in the market every day and rapidly comparing our guidance to the market movements against a wide range of benchmarks and comparisons.  Third is the ability–the conviction–to respond quickly and accurately to what we’re learning (we’ll call this a true price strategy).  It’s the ecosystem of these three facets that preoccupy a good amount–and rightly so–of our mental real estate as we judge the success or failure of our real estate investment.

There is a fourth component, however, and it is the most quietly compelling of them all–duration.  In other words, product time on the market.  The ability to position a home over time with value relevance to your core audience.  In a world where we don’t seem to be able to agree on anything, the data surrounding what we’ll call a “duration advantage” is difficult to argue against–simply put, there is little, if any, price outperformance over time without first committing to a duration advantage (think of duration as a kind of interest rate, in a way, or–for a football analogy–scoring a lot of points in the first quarter as a way to win a game in the fourth quarter).  

So–we have the four components of pricing and, in the art form, the knowledge that any one or three of them are necessary but not sufficient to achieve a superior result over time.  In our thinking, we’re often best advised to secure duration first and then, by extension, pricing.  Experience teaches that hesitation around pricing, at the expense of duration, means an increasing likelihood of–our football analogy again–a hail mary being part of the game plan.  There’s nothing wrong with a hail mary, of course, and it makes for exciting football.  But we’ve learned that if we have to rely on them, we’re reminded of the data behind the great excitement of watching them–most of the time, they don’t work and it’s better the great majority of the time to score more points early.  

That means duration counts with bringing a home to market–the expert move is almost always to position your home to be available to your guests when they are inclined to make a purchase decision and that means, in many cases, while they are enjoying an experience in your home this very moment.  From a behavioral finance lens, that’s understanding both the opportunity to generate revenue (receptiveness to gains) and the responsibility to your guests (aversion to loss) as keys to a successful strategy in the long-term.  And that, in the end, is what Nick Saban is most famous for–he just won more often, for longer,  and for more teams than anyone else. 

Published on Friday, May 24, 2024