What’s luck gotta do with it?

By
I’ve always discredited the concept of a person being generally lucky or unlucky, as if they’ve been blessed with some magical power or cursed by a witch. I know that, statistically speaking, it is nonsense.
 
Every time something goes wrong for me by chance, there is going to be a time when it goes right by chance too. There will be times when I’ll say, “That was lucky”,and times when I’ll say, “That was unlucky”. So long as my perspective is level, the number of lucky and unlucky occasions should balance out over time.
 
But sometimes when I’m tired or stressed, it appears as if ‘everything’is going wrong. But that is just a matter of my attitude. Surely a bad attitude doesn’t create bad luck. Nor does a positive attitude create good luck. Our attitude can bias our appraisal of events to make it appear that we’re having either bad luck or good luck. In  other words, you can’t make your own luck, right?
 
The lucky dog
I saw an interesting TV show featuring British illusionist Derren Brown. He conducted an experiment in a town in England over a few months. He spread a rumour that by  touching a statue of a dog in one of the town’s parks a person would have good luck. He set up a hidden camera to watch people touch the dog, and then he and his team rigged a few events to make them believe they were lucky.
 
One of the fascinating outcomes of the experiment was how people who believed they were having good luck would have even more fortuitous events happen to them that had not  been orchestrated by Derren Brown or his team. It was as if these people were manufacturing more good luck for themselves. Was it just their attitude distorting their perception, or was something else happening? 
 
Even Brown admitted he was surprised at some of the reports. 
 
But there was one man in the town who believed his life was plagued with bad luck; he had a very pessimistic attitude. Brown targeted this man in particular. Hesent him a winning scratchy, but the manjust threw it out.  Money was left on the street in his path,and he walked straight past it. Every opportunity offered to him was not taken,and as a result Brown was unable to influence his pessimism.
 
Attitude creates opportunity
In my opinion, the experiment didn’t prove there was any such thing as luck. But it did highlight how a change in attitude can affect our decision-making. A positive attitude may place us in more circumstances that result in a favourable outcome. And this effect may make it look like we’re lucky. We’re actually making our own luck, so to speak. And the key can be as simple as making a decision to explore an opportunity. That decision won’t come if we have a bad attitude.
 
I’ve been guilty of having a poor attitude in the past. I’ve shut down potential opportunities with the excuse that I needed to focus on what was important and block out ‘distractions’,as I called them. But what’s actually important in some cases is not a stringent focus on my work but on examining opportunities.
 
When I look at the things that have truly transformed my life, although hard work and education feature prominently,I’m surprised at the number of simple chance meetings that have had some of the biggest influences. In particular, it’s the people I’ve made contact with. I haven’t sought them out; they’ve just crossed my path by chance.
 
Balance and practice
As investors I believe we need to keep a healthy balance of both scepticism and optimism. We need to bluntly  question what we believe about investment opportunities without shutting the door on them too routinely. We need to guard against emotional bias, being careful not to be either too positive or too negative.
 
The more opportunities we’re presented with, the more times we need to make a decision about them –whether to pursue further or ignore. When we’re busy and focused, we don’t examine an opportunity; instead we cut it out immediately. By shutting out each opportunity blindly, rather than putting some examination effort in, we lose the opportunity to rehearse the kind of research and thinking that results in identifying a good opportunity.
 
Perhaps this is the reason why some people seem to have things so easy. They don’t work as hard as others, and this leaves more room in their life to explore opportunities. Practice in exploring opportunities develops a highly profitable skill that somehow delivers better results than hard work.
 
The key is to make as many evaluations as possible to get better and better at identifying a good opportunity. With feedback we can improve our evaluation techniques and get better at thinking about opportunities more objectively, without bias or misplaced attitude.
 
Note that a good attitude can be just as damaging as a bad one. Investing in a poor market, wanting to believe the marketing hype of the developer, can leave you with a dirty attitude towards developers years later. It is crucial that,as investors, we don’t make decisions with any bias.
 
Beware bias
Bias can affect so many appraisals we make. If you find a potential property hotspot all on your own, you’re more inclined to have a positive spin on it than if someone had suggested it to you. If someone challenges your reasons, you tend to defend them staunchly. This is because we have an emotional attachment to our own opinion and our own hard work. We trust ourselves more than we trust others. It’s only natural that we should respond this way, but it is still a bias.
 
We all have our favourite property experts or mentors,and we probably dislike some,too. So if someone you don’t like suggests a hotspot worth investigating, you’re more inclined to discredit it. And it’s amazing how many things you can find wrong with something if you’re biased against it. You never come home empty-handed from a witch-hunt.
 
If an opportunity arises to implement a certain strategy that you’ve never considered before, you tend to be more resistant than if it is something you’re familiar with. Quite often we brand ‘different’as ‘wrong’. And the older we get,the harder it is to try something new.
 
On the other hand, if you’re desperate to try anything new because of past failures, you could allow bias to hurt you from another angle. Wanting to believe can make you vulnerable to a bad choice. We may never realise the opportunity costs we’re accruing every year from irrational bias. There needs to be some healthy balance of perspective. How can we protect ourselves against being biased?
 
One answer is to examine how we feel at any time we make a decision. If there are emotions at the time of making the decision, then perhaps we need to review the reasons more closely. There’s nothing wrong with having a good feeling after making a decision, especially if you feel confident that decision was made without bias.
 
Statistics to the rescue
One of the truly great benefits of statistics is their objectivity. The computer that performs a calculation doesn’t care about the property market. 
 
Another way to assist with objectivity is to use spreadsheets.I always use a spreadsheet to assess a property investment. I try to define the opportunity with a single figure, the return on investment (ROI). When comparing twoinvestment opportunities,all I need to do is compare their ROIs and their risk. This goes some way towards freeing me from bias. Of course,I still need to estimate some of the variables, so independence is not entirely guaranteed. 
 
Even if I look at the Demand-to-Supply Ratio (DSR) and my spreadsheets,I’ll still need to consider other purely subjective elements before making a decision to buy (or sell). Will an extension of the train line out to suburb ‘Abc’result in more drivers of growth than the building of a bridge across the river at suburb ‘Xyz’?
 
It helps to list all the positives and all the negatives for the markets you’re investigating. By the way, if you can’t find any negatives about a potential hotspot, you’re biased. Keep researching until you’ve found something negative,just to prove to yourself you’ve been objective. If you’re only looking for positives, that’s all you’re likely to find.
 
Investment opportunity time-savers
Examining potential property investments is really time-consuming,even if you’re well versed in how to go about it. You want to get all the data in front of you in the least amount of time,and then get to that truly valuable point of making an impartial decision.
 
This is another beautiful thing about the DSR score –it can provide insight into the nature of supply and demand in a property market in seconds. With so many markets, it becomes invaluable in filtering the nation down to about a few dozen manageable research targets. 
 
Although you’re not going to make a decision based purely on the DSR score, at least you know whether you’re in the ballpark. If the fundamentals confirm the stats, then you’ll have more confidence going forward.
 
Practice makes perfect
I believe it is important to keep track of decisions you’ve made in the past and reference them in the future. You may not be in a position to capitalise immediately on what you’ve learnt, but over time you’ll start making better and better appraisals.
 
I can ask a buyer’s agent to do research for me to save some time. Or I can employ someone to take my manual on how to find property hotspots, do the research for me, and find my next investment property. But I’ll employ the services of others sparingly because I don’t ever want to lose the ability to make good investment decisions. That ability can only be preserved and improved by rehearsing the process. And the process comes from examining loads and loads of opportunities with an unbiased, unemotional attitude.
 
By the way, at the end of the experiment with that town in England, the pessimistic man realised thathis attitude was a problem,and he vowed to change. In fact,to cut a long story short, he put his entire life savings at risk just to learn that one lesson –to explore more opportunities. And fortunately it all worked out very profitably for him in the end,the lucky dog.
 
Jeremy Sheppard is director of research at Redwerks, and a keen property investor. He created the Demand-to-Supply Ratio (DSR) and is the author of How to Find Property Hot Spots.  Visit DSRscore.com.au.

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