Beware The Perils Of Groupthink
Before making an investment decision, do some research, gather your facts, do your own independent thinking and beware falling victim to groupthink.
Way back in 2007, when I was still a member of the JOB (just over broke) world, I listened - uncomfortably - to a group of co-workers complaining about the Alice Springs property market.
""The catchphrases and soundbites echoed off the walls, ""Prices are crazy! People are paying too much! Can't keep going like this!""
To get a decent home you were looking at spending $400,000. Then you have to deal with stamp duty and the other buying costs. By the way, this $400,000 home wouldn’t be anything special. If you wanted something a little more upmarket you’d be looking at the half million mark and even that home would probably require a bit of work. This was way back in 2007.
One co-worker summed up the whole discussion with this rhetorical question, ""Who in their right mind would pay four hundred thousand dollars for a house in Alice Springs?""
My co-workers arrived at a group consensus, “House prices in Alice Springs are too high.”
I kept a low profile. I didn’t say much at all. Mostly uttering things like, “Ah Hah! Is that so? They do seem high don’t they?”
I didn't want to get involved. I didn't want to participate in the conversation.
Here's why ... I was in the process of buying my third house in Alice Springs that year! And I paid well over $400,000 for two of them. Luckily I got one house in the low three hundreds. They were four-bedroom homes on nice sized lots in desirable neighbourhoods. I bought these houses because they appeared to be bargains. That’s what my independent analysis told me. I didn’t take a survey. I didn’t ask my co-workers what they thought. I decided on my own.
But, how could I get it so wrong? My expert property investor co-workers were giving me free advice, ""C'mon mate, house prices are too high in Alice Springs. It’s obvious. Only an idiot would be stupid enough to buy a house in this town.""
They didn't tell me directly. They told me through their conversation. I listened and the doubts crept in.
But, I kept thinking back to the deals. After all, you don't make a profit by talking smack. You make a profit by making deals, good deals. And that's what I believed I'd done. I’d analyzed the deals. They stacked up. I went for it. My co-workers didn't. They wouldn't touch those deals. They talked themselves out of it, even before doing any analysis. No sir. Instead, they all agreed, ""Alice Springs property prices are too high, therefore don't buy any. That's it, done, dusted, onto the next issue.""
There's only one problem with this sort of quick ""I'm an expert at everything"" approach ... it can cost you a lot of money. You can go broke being this kind of an expert.
Hey, here's a novel idea, why not study the situation first before making an assessment? Why not do some research? Why not do your own independent thinking and stop all this ""groupthink""?
Groupthink may be fun and a great way to make friends, but it can be expensive and it can lead you to the poorhouse. I like to stay away from ""groupthink"" unless I'm at a BBQ, drinking beer and the topic is butterfly migration.
Am I suggesting you head off to Alice Springs this weekend and buy an investment property?
But, I am suggesting you steer clear of groupthink and instead, do your own thinking. Am I suggesting you do your own analysis, your own research; then come to a conclusion, and then make a decision?
Save the groupthink for when you’re laughing with friends, drinking a beer (or two), got shrimp on the Barbie and you’re tackling a socially serious topic like butterfly migration. Other than that, stay away from the groupthink.
Let’s fast forward in time. Let’s talk about now, today, early days 2018.
And, let’s go back to the original question, “Who in their right mind would pay $400,000 for a house in Alice Springs?”
If we ask that question today, what’s the correct answer?
ANYBODY and EVERYBODY!
The three houses I purchased in 2007 are worth substantially more. I’d probably have to come up with an extra $200,000 for each house if I tried to buy them today. So, in essence, by purchasing in 2007, I saved a lot of dough. (Not to mention the additional stamp duty!) I’m glad I bought back then. I’m glad I didn’t listen to the committee of “they.” I’m glad I didn’t listen to all the “armchair experts” - the “group-thinkers.” I’m glad I took decisive action and blocked out all the noise coming from the naysayers.
Did I know prices would rise?
I had no idea prices would climb to their current levels. But, it’s a nice bonus. I don’t make buying decisions based on future predictions. I buy based on the deal at hand, what does the deal look like right now?
So now we have to change the question – adjust for inflation – as follows:
“Who in their right mind would pay $600,000 for a home in Alice Springs?”
Careful how you answer that!
Dave Ives is a property investor and author who lives in Alice Springs, Australia. Get his FREE ebook, ""How I got started in property investment.""