Trust-based Decision Making versus informed/educated Decision Making

Share on facebook
Share on twitter
Share on linkedin

In a recent blog post the CEO of BiggerPockets.com, Scott Trench, provided an interesting perspective about the suitability of investing into real estate or the use of real estate as a retirement investment option.

Scott Trench is a perpetual student of personal finance, real estate investing, sales, business, and personal development. He is a real estate investor, and author of the best-selling book Set for Life. The link to his post is shown at the end of this article

I found the article to be a great thought and conversation starter although it also shows what I would consider an unintentional bias. When you have a great background in real estate it is almost impossible to be neutral compared to a stock investor or gold/commodity investor, etc.

I often say: “you can’t ‘un-know’ what you know”.

Trust or Learn?

Scott argued that part of the decision to choose an investment option has to do with the amount of time it would take to learn enough about it to make an informed and educated decision. He suggested that a minimum of 500 hours would be needed (I would probably suggest much more than that).

Assuming that 500 hours is a valid or minimum amount it would make a difference for a comparison how valuable a person sees his or her time. If you say an hour of your time is worth $50, you might say a $25000 investment of time to decide to invest in real estate is reasonable. If your hourly value is $150, then you might conclude that $75000 to learn enough to make an educated decision is too much.

Time is the most valuable commodity we have – no doubt.

What I find to be of almost equal value is trust.

Managing Risk

When Scott describes the suitability of investments in real estate and the need to know enough to limit the risk of getting burned, he points to the need to learn. Compared to stock market investments he seems to suggest that you can just buy an index fund or similar option and spend much less time.

To come to that conclusion means, at least for me, that you decide to trust someone who successfully convinces you (or Scott) that investments in index funds are safe enough and you only take the risk that the whole market might go up and down.

I agree that this in principle limits the risk but it is still trusting someone that index fund investing is appropriate. I would argue that you as the investor cold also find a real estate agent, ask what is the best real estate investment that is only influences by the overall market and invest in it – no 500 hours needed.

To me you always should be aiming to make an informed and educated decision when it comes to investing your money, especially when the investment is earmarked to support your retirement.

If that is true I submit that investing 500 hours (or more) of time to become educated and informed should be true for real estate, stock markets, commodities and all other forms of investment

In his blog post Scott also points to the risk from a perspective of buying a house versus investing in an index fund or other basket of stocks (i.e. mutual fund). It’s true that a house can have repairs, the tenant might not pay on time, etc.

The comparison, on the other hand is not really fitting very well. An index fund or mutual fund is much more aligned with what I am working on – a real estate portfolio of houses that is goring until I retire. When you have 7,8,10, 15 houses, the risk is lowered that all of them are in need of repair at the same time, all tenants not paying rent, etc. Admittedly it takes much more than 500 hours to get really knowledgeable in that area.

Luckily one doesn’t have to learn everything upfront and then begin investing. I learn and keep learning over time, and I am sure any serious investor in any type of investment is always learning new things about that market. The need to learn and know more and more about an investment option should not mean that ne can’t invest at all until at least 500 (or more) hours have bene invested.

If you have someone you can trust and who is mentoring you, its possible to start pretty quickly.

The last part to illuminate when it comes to decision making based on time spent to learn is the aspect of focus.

In many areas I find that we have become prone to suffer from “shiny object syndrome”. We get involved into something and if it isn’t immediately giving us above average returns and someone promises better results in a different opportunity there is a tendency to want to switch or jump.

For real estate investing, especially to build for retirement, I found that there is so much to learn that focus becomes a very important discipline. As in many industries there are many options. Scott points to mutual funds, index funds, international spider options, etc. for investments in stock markets.

In real estate you can focus on single family homes, apartment complexes, commercial real estate, business complexes, agricultural real estate, and many more.

If you decide to select real estate investing instead of or as supplement to other investments, I strongly recommend learning about the pros and cons of each of the available options and then select the one you are most comfortable with. To be that is single family homes (up to a 4-plex) because it is the biggest market and I am most familiar with the variables that need to be considered.

Just because I have chosen this market and a strategy about it doesn’t make it the right or better one over any of the other options. The important part is to stick with a strategy and keep learning about it more and more. I have probably invested thousands of hours and keep adding to that total as there is always something new to discover as my portfolio grows.

Yes, there is temptations every once in a while, to look at something else in the market. When I feel that temptation in my tummy I ask myself:

“Do I know someone I trust who knows as much about this alternative opportunity as I know about my chosen field and strategy (ideally even more than me)?”

So far, the answer has always been “No”.

If you are looking at the opportunities in front of you when it comes to markets to invest your money into, I recommend asking the same question. If you can say “Yes”, then you don’t need to spend 500 hours or more.

If your answer is “No”, pick a field and become an expert in it and you will not only make educated and informed decisions, you will also feel really good about your investments because you know what you are doing.

Link to Scott’s post:

https://www.biggerpockets.com/blog/is-the-500-hours-to-learn-investing-worth-it?utm_source=newsletter

AMC is an international consulting firm that serves the corporate and private sectors in two prime areas:

  • Project management of change initiatives
  • Facilitation and teaching to implement learning designs

Recent Posts

Follow Us