Real Estate Investing and the Danger of the Herd Mentality

Remember the days a few years ago when real estate was all the rage? When news articles and magazine covers and just about everything and everyone were talking about how hot real estate was? About how you should buy buy buy? And also about how California home values would continue to go up because, well, after all it is California. Time Magazine June 2006 – “Home Sweet Home, Why we’re going gaga over real estate.” What just happened? Do you wish you had bought real estate in 2006? No? Why not? Everyone said it was a good buy didn’t they? Isn’t the media always right? Not that time! Real Estate values nationwide plummeted from that point on.

Fast forward to today. Time Magazine September 2010 – “ Rethinking Homeownership, Why owning a home may no longer make economic sense.” Now all of the headlines say real estate is bad. They are saying, don’t buy, Real estate values won’t ever be the same. We’re in the looking glass now, aren’t we? What do you think about that? Are you gonna listen to the media this time around?

I would suggest that you consider a contrarian investing attitude. Contrarian Investing requires the ability to ignore the prevailing mood of the market and buy when the herd is selling and sell when the herd is buying. When the housing market is still in the recession phase, the stage is set to reap the biggest profits later on, at or near the top of the next phase. The problem with contrarian investing, even though logic may dictate otherwise, is that it goes against our survival instinct and plays into our herd instinct, both paths being governed by emotions. Illogically, most investors decide to enter or leave the market at the wrong time by following their emotions. Contrarians tell us to do the opposite of the herd but the fact is, when logic and emotion are in conflict, emotion will usually rule the day. This is the point where confidence and nerves of steel are useful. One thing is certain, cycles will repeat – that’s why they’re called cycles. Those with the discipline to understand cycles and invest contrarian will reap the big rewards.

Many people, I hear, are trying to time the “bottom” of the market. That isn’t realistic or even possible. Real estate peaked in 2005 in California. The world was shouting, buy,buy, buy! Would you have had the inner strength to sell, sell, sell?  In retrospect, would you have wished you had? But why? Everyone said to buy. Well today is the opposite scenario. Everyone says buying is dangerous. Since when is everyone right? The rest of the world thinks we are on sale right now. Today is a golden opportunity to set yourself up for a future of wealth that most people won’t have the courage to go after.

Which side of the fence do you want to end up on?

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