Humans are conditioned to blindly follow
They know more than us, so they must be right. Right? There no property expert myth?
In his book Wrong: Why Experts Keep Failing Us, David Freedman calls this the ‘Wizard of Oz effect'. We’re taught from cradle to grave to respect the opinions of others (which I’m not suggesting is wrong) and that someone else always knows best.
I can’t argue with that last point, either. There is always someone that knows better. But the point is to learn how to discern between good expertise and bad expertise. The first thing to look at property experts track record and percentages.
Bad advice tends to be certain of itself, while good advice seems to be questioning.
For example, “I think that property prices will rise again this year, possibly at the same rate as last year, though a headwind could be the possibility of a rate rise caused by better than expected economic growth numbers.”
Immediately you have a basis for consideration, and a number of other elements to consider. The definitive, eye-catching, mouth‐watering advice (Dow will go to 36,000!) might be exciting and compelling, but it’s not empowering.
The experts also tend to provide a ream of evidence, all supporting their view. There is no contradictory meanderings, no counter argument.
The world is a complex place, and predictions are a complicated part of the information world we live in. To hold on to evidence that would shoot their predictions to shreds would make them less of an expert. Data is cut down, edited, and sometimes discarded if it doesn’t fit the prediction. Contrary to what Warren Buffet said after the event, there was plenty of evidence out there that trouble was around the corner for financial markets – did he and Berkshire Hathaway choose to ignore it? Maybe we'll never find out.
It’s easy to fall into the trap of blindly following the experts.
We’re told something by someone who knows better, and we switch off to our own ability to question, examine, and judge. Experts can be confident, charismatic, even hypnotic; so much so that we simply accept what they tell us as the reality of all things.
The predictions of property experts simply cannot be relied upon, and you have a few strategies to help you avoid the Wizard of Oz effect. So what about the people around you? What can you learn from what the majority are doing?
There’s Safety in Numbers: The Psychology of the Crowd
In trying to discover the reasons why the property experts simply can’t get their predictions right, we’ve largely looked at the issues with ever changing market fundamentals that don’t hold true from one street to another, never mind across the whole country. But there is another factor at play in the property markets that is even more difficult to monitor than interest rates, the economy, wages and affordability, etc. This factor is market sentiment, or as some would call it, investor madness.
People tend to believe bullish predictions when the market is good and bearish predictions when the market is bad. In other words, we allow the emotions of today to rule our expectations of tomorrow.
If you open a newspaper and see headlines from property experts such as such as “Property to fall 30% this year”, or turn on the television and watch news of another property investor gone bust because interest rates have gone up, you’d probably get a little scared. You might not rush to sell your family home, but you’re more likely to sit on your thumbs and ignore what, just a couple of months ago, you thought was good value.
And if you hear or read or watch stories of boom times and property shortages, you’re more likely to rush out, jump on the bandwagon, and pay over the odds for a property you wouldn’t have given a second thought at the price a few weeks back. Sentiment is a funny thing.
Emotion gets in the way of real information
You get so confident, or so distraught, that you ignore anything that offers a contrarian view to popular thinking.
Emotion is a powerful beast. It is able to drive property booms and busts, get in the way of an otherwise sound investment strategy, and put your wealth and health in jeopardy. But when that emotion gathers a following, it’s like a snowball rolling down a mountain. It grows and grows until the sound of the avalanche is deafening.
This phenomenon is exacerbated today by the easy flow of information (and misinformation). Social media, property forums, and message boards all spread news and views fast. Often people don’t read or hear things right, or type on their keyboards with fat fingers (how many times have you sent a text or Facebook post and then realised that words are spelled wrong or missed altogether?).
It’s also easier to be a part of the crowd. It abdicates responsibility should something go wrong: your parents/uncle/brother/sister just did this or that so it’s got to be a good thing, right?
Finally, lack of education informs the crowd. This could simply be because of time. I remember back in the mid-2000s that investors, experts, the media, and the man on the street never gave a thought to the possibility that property prices can go down. Well, here’s news for you: they can, and do. On a regular basis. That’s part of the property cycle. Just like economies go through growth and recession. Falling prices are every bit part of a property investor’s life as rising prices and vacant periods.
If you can’t rely on the experts, or take solace in the crowd, then who can you rely on?
If you’re at the stage where you’re trying to answer this question, then you’re already on your way to a free mind, unencumbered by reliance on experts and the comfort of the crowd. That’s a good thing, because a thoughtful, questioning attitude is the best way to protect yourself from making poor investment decisions. This isn’t the same as procrastination, by the way. If you are actively questioning, then you are being active towards making a great investment choice.
The trick is to listen to the experts, then go and find all the data and evidence yourself and come to your own conclusions. Look in the press; watch the news, listen to the radio. Search the internet, and then check every fact two or three times. Don’t forget that most of these channels publish only the exciting stuff, the eye‐popping headlines that grab our attention. You need to look deeper.
Look at what the crowd is doing, and ask if it is logical action or a knee jerk reaction that presents opportunity.
Oh, and don’t forget that I’m an expert, too. So perhaps you shouldn’t trust me, either! But what you can trust is the constant turning of the property cycle and a proven property investment strategym then based upon this, your own solid judgement.