Front of the Curve

When markets are bullish, it’s easy to be a successful investor; you buy something and it increases in value. Unfortunately, stock, real estate and other investment markets are …

When markets are bullish, it’s easy to be a successful investor; you buy something and it increases in value. Unfortunately, stock, real estate and other investment markets are constantly changing.

Successful investors seem to stay a step ahead of the crowd, sensing opportunity when others see risk. These investors make money in both up-trending and down-trending markets. What is the secret that allows them to stay at the front of the curve? It’s what and who they know, of course.

Know People

Successful investors know a network of reliable, credible sources is key to staying ahead of the pack. Investors who are social have an advantage in identifying contacts, building relationships and cultivating trust and respect.

“You have to be really, really well networked,” David Dweck, a south Florida realtor, hard money lender and investor, said. “I always have my investor cap on, no matter what I do.”

Dweck, who holds leadership roles in two investment clubs, uses every possible social opportunity to build and expand his network. Civic organizations, business meetings, charity events and school activities can “help you get connected with the people who could potentially bring you deals,” he said.

SEC regulations limit many people and companies in how and to whom they can advertise their investment offerings. For this reason, many of the best investment opportunities can only be found through word-of-mouth. The bigger the network an investor has, the more choices and opportunities for investing are available.

Established relationships give investors an edge in highly competitive markets. In the real estate market in Edmonton, Alberta, for example, relationships and contacts are crucial, Les Michaelson, a real estate investor and president of the Edmonton Revenue Property Investors Association, said.

A commercial or multi-family property in Edmonton does not sell through the MLS, Michaelson said. “It sells by word-of-mouth. It sells by a realtor getting a listing and giving a guy like me a phone call that is kind of in their back pocket already. Or…a list of buyers that have contacted them.”

Most foreign countries don’t even have an official listing system for properties, so word-of-mouth is the main way real estate deals are done.

A network of solid sources can also help minimize mistakes by providing insider knowledge. Many lessons can be learned the easy way—through the experience of others—rather than the hard way, through personal experience.

The most successful investors are careful to take advice from the right people. Many novices listen to “experts” who don’t really have practical experience in the field, Robert Locke, an Atlanta area real estate investor and property manager, said. Experienced contacts can save an investor from some painful mistakes and headaches.

Investment clubs and associations are a good way to begin building a base of credible contacts; investors who gather at those meetings trade insider information and work together to make deals, Locke said.

An investor should “affiliate with a real estate investors association or real estate investment club in their area and get good, solid advice from someone who’s been there, done that,” Dweck said.

Investors in the U.S. can find a local Real Estate Investment Association (REIA) chapter through www.nationalreia.com, Katherine Swanberg, a Seattle area real estate investor, said.

“I think if you’re just starting out, you need to network. You need to show up at these meetings and find people in your community, in your industry, doing the kind of investing you want to do, so you can find a mentor program, a coaching program,” she said.

Know Your Market

There are many ways for investors to develop knowledge of a market. In an era where vast amounts of information are available through the Internet, investors must develop trusted go-to sources to provide a balanced overall perspective. Sources may include informed people, experts, books, investment publications, websites and seminars.

“It really matters to take time to understand the city, the area, the neighborhood…and to not jump in too quickly,” Michael Fry, a Kansas City property manager, said. “I’ve seen owners that get excited about real estate, they put a lot of money out there too fast without really understanding what they’re doing…I’ve seen a couple owners go into foreclosure over it.”

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“Pay attention to what is going on,” Dweck said. “It’s not a matter of being trendy. It’s just a matter of following the market and then being able to perform in that market.”

Some market observation can occur in ordinary social interactions, Joel Kotkin, an internationally recognized authority on global, economic, political and social trends, said. “If you go to a party and everybody’s complaining about what’s going on, and they’re talking about moving someplace else, well, that tells you something.”

The media also can provide valuable market information. “You have to be…a voracious reader. I start my day every day with a local real estate and law newspaper,” Dweck said. “If you’re not in the loop, if you’re not consistently feeding your brain and getting out there…you’ll never get a deal done.”

Investors can also use the media to identify negative public perceptions that could deter others. Negative media hype can cause investors and homebuyers to pause, Todd Millar, owner of an Edmonton area investment company, said. “That is where the opportunity lies…in these plateaus….If you’re investing on a fundamental market where you can go in and see that as just a temporary lull.”

Educational seminars can be helpful, even for experienced investors. “You can never stop learning…I spend a lot of money on my education,” Dweck said. He attends a seminar outside his area every year and constantly reads real estate books.

Investors should be choosy about which seminars they spend money on, Swanberg, who is vice president of her local investment club, said. “It’s hard…for a new investor to find really good content, and to not pay for a lot of fluff.”

Swanberg said she would rather see people “pick a strategy and focus and do a couple deals and systemize what they’re doing. I think their results would be better than if they went out and spent money and bought 10 different boot camps on 10 different ways to invest.”

Along with diligent research and education, practical experience is a natural way to continue enhancing market knowledge. Dweck suggested investors keep journals so “they can really keep track of what they’re doing or not doing.” This helps people be accountable to themselves, he said, and reveals how their actions align with their plans.

Know Thyself

Finally, successful investors know their own strengths and weaknesses, as well as which strategy fits them best. They then use discipline to stick with that strategy, even in the face of temptation.

Investors need to determine their competitive strength and expertise. This means “finding where your comfort level is, where your expertise is, and investing in it. If your real expertise is understanding the dynamics of core cities, then you ought to try to figure out how to take advantage of those trends,” Kotkin said.

A careful analysis of risk tolerance will help determine the investment style and strategy that best fits a particular investor. Age, existing wealth and a variety of other individual factors combine to determine risk tolerance.

Some investors consider lifestyle issues and other non-financial factors. Chris Lengquist, for example, invests in real estate within 20 minutes of where he lives in a Kansas City suburb. As a realtor, Lengquist already spends a significant amount of time driving, so he wants to minimize the commute to his rental properties.

The small percentage of investors who are actively participating in their field of expertise full-time may be able to safely concentrate on a certain type of investment. The vast majority of investors, however, will benefit from diversification across a variety of investments so that if one sector experiences a downturn, others will buoy the portfolio.

Diversification also enables investors to make higher risk investments. By diversifying risks over several types of investments, an investor can maximize returns while keeping overall portfolio risks manageable.

Certain strategies work better for certain types of investors. For example, investors who can afford to wait for long-term returns may benefit from a buy-and-hold strategy where they ride out short-term market dips. These investors will be less likely to get forced into selling too low during a downturn.

Investors who keep a close pulse on trends may be suited to a contrarian approach in which they buy investments that are out of favor or undiscovered but have future growth potential. Contrarian investors know that early adopters experience the greatest success; it is the inexperienced latecomers who suffer when a market peaks and falls.

A market that has already experienced large increases attracts many new investors, Dweck said. “And that’s where people get caught. They get caught up in the hype…and there are plenty of people left holding the bag.”

“Be cautious because when everybody is jumping in on something, it’s usually when the smart money is getting out,” Brandon Rolheiser, a real estate agent and investor from Edmonton, said.

“I like to get in when nobody’s looking at a particular commodity,” Mike Norman, an internationally-known contrarian investor who is regularly highlighted in various media, including Fox News and BizRadio, said. He buys commodities that he feels are undervalued and then waits “until eventually the market prices it at what its true price should be.”

For example, recent housing market problems have created a negative sentiment about timber and lumber, Norman said, “and that gives an opportunity to buy in on the cheap.”

When the investment becomes popular and prices rise, contrarian investors sell for a profit. Finding the discipline to sell a successful investment is challenging for many, and then taking that money and investing it in a less popular market is emotionally difficult.

“Whenever I see a lot of interest develop, whenever I see all kinds of new ways to speculate or invest in a particular theme, I pull back,” Norman said. It requires discipline to get involved when an investment is out of favor, he said.

Once an investor has committed to a strategy and has gained knowledge of the market and the right people, the last step is overcoming fears. Many investors hesitate at this stage even after a solid education and expert advice that will likely minimize failures.

“I think the best piece of advice is just to get out of your own way. I think the biggest obstacle that I have is my own fear of messing things up,” Swanberg said.

“I have never learned more in a boot camp or a seminar or a class than I have from just actually doing it and doing it wrong,” Swanberg said. She advises that people “just get out of their own way and move forward and screw it up if you have to.”

Although education and research are crucial, “you’re not going to be able to know the answer to everything before you move forward,” she said.

Once the research is done and an informed decision can be made, that information must be put into action. “If people want to jump into the game, it’s not too late. Don’t be a procrastinator,” Dweck said. “Get educated, and then do it. You’ve got to get off the old rusty dusty and do it.”

How to know people:

* Join an investment club

* Join investing blogs or forums

* Network at social events

How to know your market:

* Talk to people (pulse others)

* Monitor investment media

* Read financial books

* Take educational seminars

* Learn from practical experience

How to know yourself:

* Analyze your situation

* Commit to a strategy

* Overcome fears and take action

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