Welcome to the 122nd episode of the Alternative Investing Podcast!
In this episode, I will discuss three important key points as to why you should not look for killer investment deals to build your wealth.
If you're an investor who wants to avoid jeopardising your returns by constantly seeking to hit a home run or find a killer investment, then make sure to listen to this episode!
In this episode, I will argue why you should not look for killer investment deals.
I know this might sound counterintuitive, and some people will disagree with me. I’m not trying to be polarising, saying you should step over killer deals.
I’m suggesting that it’s not necessary for the context of your overall game plan to build your wealth with some momentum.
I want to explain exactly why you don’t have to have every investment you put your money into as a killer deal.
Let me tell you about this experience I had recently.
Then I'll go into some of the insights I gleaned from that conversation and other opportunities I've looked at over the last few years.
The Entrepreneur Couple That I've Met
Last week, I met a lovely couple who have done reasonably well as entrepreneurs or business owners.
They were looking to take some of their hard-earned capital and park it into opportunities that would provide them with an above-average return and potentially some form of annuity in the form of income streams.
They’re not new to investing, but alternative investing is a new world for them.
For them, the opportunity at this particular event represented what, for many investors, sounds like the Holy Grail.
It’s an investment where you don't need to worry about things like tenants and toilets.
You also get a monthly income and a healthy capital return each year.
They were such a lovely couple that I enjoyed hearing about their journey, what they’re doing, and their stage of life.
For them, this investment opportunity was like the Holy Grail, but they were seeking confirmation that they were making the right decision.
They were at a stage where it did sound like they couldn't afford to put a foot wrong, and the investment they had made today had been narrow and deep in terms of its focus.
They'd invested heavily in their business and a little bit of commercial real estate, but this was a step left field for them.
The takeaway that I’ve got from that is that it’s tough to find a good deal if you are new to the alternative investment space and think that you’ve got to put all your money into that one deal.
I hope the couple finds many opportunities that align with what they want and can diversify from the asset class, dealmaker, geography, and liquidity.
However, even if they put all of their eggs into one basket, there’s nothing wrong with it if it completely aligns with their risk profile.
But for most investors with a conservative mindset, as I do, I take small bites of lots of different cherries so that if any of those deals go wrong, I'm not going to die in a ditch over it.
There are a few key points that I want to share with regards to why you shouldn't be looking for just killer investment deals.
Key Takeaway #1: Perfectionism Kills Compounding Momentum
The first thing I want to drive home is that seeking perfection over reasonableness can kill the momentum around compounding.
I know this sounds obvious, but I’ve worked with many investors who couldn’t do the arithmetic around how to stack their odds in their favour, whether it's in the share market, managed funds, or even property.
A great example of this is some of my clients who have been reluctant to gamble on real estate investing over the years.
Years later, they regret not starting to invest sooner and think about all of the opportunities they missed.
This is a more common experience than you might think.
What they hadn't been able to quite work out this idea that, many times over, they would have told themselves that the market couldn't go any higher.
There was a perceived risk in the market that they didn't want to put any money towards or expose themselves to.
They felt that adding that risk to their portfolio was not worth it, so they decided not to do anything and instead focused on other things like reducing their debt.
There is some risk involved when you enter into an opportunity with speculation.
But you can increase your chances of success by understanding how to stack the odds in your favour.
You need to have a series of investing rules that allow you to make the best possible decisions with your capital.
The opportunity cost of doing nothing or only focusing on debt reduction is huge.
Aside from that, if you don’t do anything to move the needle and invest, the momentum from building wealth through compounding starts to diminish.
I've seen this happen many times before. For example, people with good incomes sometimes invest their money all at once in things like stocks or property.
But then, over time, they may not have as much money as they could have if they had just created a regular cadence around deploying capital into the market.
You've got to avoid seeking perfection on every deal and focus more on a reasonable return that you can live with.
Therefore, continue to move the needle to allow compounding to do the heavy lifting for you.
That's the first thing that I want to focus on.
Key Takeaway #2: Give Yourself a Competitive Edge
The second thing I want to mention is that looking for killer deals alone is hard work, particularly when focused on efficient markets.
One of the things that blew my mind about why I was able to get much better returns in the alternative investing space was that they are very inefficient markets.
Most of you know that my preference is to only focus on real estate-backed deals in the alternative space, and the reason why I love it is because it's a very inefficient part of the market.
When we look at our local market here in Australia and many property markets around the world, a lot of the local residential real estate has, over the last two or three decades, become increasingly efficient.
When I say efficient, it doesn't mean there are no opportunities to make money. I’m saying it's hard to find those killer deals where you can hit a home run every time.
If you’re only looking for killer deals, you may end up in a situation where you can’t take action on a consistent basis, leading you to erode your returns.
Even if you're working within efficient markets, you've got to find a way to give yourself a competitive edge.
Whether it's alternative investments or traditional real estate deals, I keep coming back to this whole idea of building relationship capital.
For example, let's say I am looking for a development opportunity. In addition to researching the area I want to develop in, I will also look at things like population growth and whether the market is likely to perform well in the future.
Then I will start to focus on who are the movers and shakers in that market - people I can talk to, who will be informed, and who will have access to the opportunities I'm looking for.
I’ll get on the phone, and I'll just make those calls.
It could be that you don't necessarily strike gold straight away.
The worst part about all of that is, if you're someone who wants to cut to the chase and talk to the person who's going to supply you with your deal, I think that's the wrong approach,
If you can connect at a deeper level, be authentic, and be genuinely interested in what they do, you can find yourself building a second-tier level of relationship with people who can bring you deals when they come up.
When I meet someone, I genuinely like them.
In a competitive environment where people are vying for deals, making an effort to build a little relationship with someone made them want me to win the deal.
They almost go out of their way to help or support me, and I love to think that the universe conspires to bring people into your life as and when you need them.
You can get these points of inflection by having authentic curiosity and a desire to meet and connect with people at a deeper level.
Let me share with you the best example of this.
In the last 18 months or so, I have been looking for a development side, and I started chatting with people in the market I wanted to be in.
Sure enough, I built this relationship with a real estate agent who I just clicked with straight away.
Long after the transaction has been completed, I still have a keen desire to stay in touch with this person, and if I'm in town, I would look this person up and meet them for a coffee.
I didn't craft it from a strategic point of view, but that's the competitive advantage I have found.
If you’re looking for killer deals by going through a forum or relying on the network you already have, you’re stunting your ability to cast a wider net to bring in what I call "off-market opportunities," meaning deals that don't even make it onto the mainstream internet.
That's my second key.
My original thesis for this podcast was why you should stop looking for killer deals, but I want to add that doing it yourself is tough, so relationship capital is super important.
Key Takeaway #3: Idea of Contrast and Returns
The third and final key I want to focus on is the idea of contrasting returns.
If you’re only looking for investments that you perceive to be killer home run deals every time, you might choose something based on better returns rather than sustainability.
The point is, if you have two opportunities that you are presented with, the overarching mindset that you should cultivate is that you are in it for the long game.
You need to remind yourself that you are seeking momentum over the long term, not just a small return in the immediate term.
If there’s some incentive in the government place to open up a certain market sector, I have seen people play the short game.
An example of that would be the government's housing support for people with disabilities.
I knew a lot of investors over the last five to ten years who bought into it because of great short-term incentives.
The incentives varied depending on which state or territory you were in, but they usually only lasted for a certain period.
Plus, the banking environment changed and moved away from interest-only loans.
These investors were thrilled with the return in the first few years, but shifting sands in the banking environment and a move forcing them into principal repayments left them carrying substandard real estate deals that weren't growing successfully.
If I'm contrasting deals, I want a threshold return that I will not go below.
I will always choose the returns that I perceive to be in line with my risk appetite and will be sustainable if there is a shift in the market.
In the alternative space, your time horizon on some of these deals is maybe two to three years, so you could argue that I'm taking the short view.
I'm looking for the sustainability of the returns, regardless of the market environment.
I’ll give you a quick story about one of my beloved clients. When he first started working with me, he had a business that was very labour intensive and demanded a lot of his time and energy.
He kept saying to me, “Salena, just tell me what deal to do. Just tell me where to put my money."
I kept circling back and told him, “ You're building a pipeline of returns. You're building relationships that will potentially last you for the rest of your life. This is not something that you want to focus on in terms of returns."
Through a series of conversations, I think he now realises that focusing only on the returns is a very one-dimensional perspective as an investor.
Sustainability over time is far more important.
During our time together, he shifted his perspective and realised that there are so many other variables that he needs to consider when considering what investments to take.
They're my three keys.
Key Takeaway Recap
To recap, I believe that seeking to hit a home run or find a killer investment deal is, number one, unrealistic.
Number two, it can jeopardise your returns over the long term.
Now, let’s recap the three key points.
Number one, if you constantly seek perfection over reasonable returns, you will kill the momentum around the compounding of your wealth growth.
Second, you have to build relationship capital as soon as possible because that will deliver you the best pipeline of opportunities, even if you're only doing one deal at a time.
The third and final point I've made is that when you are contrasting deals and returns, you need to focus on sustainability over just the pure mathematical numbers and play the long game.
If you're a business owner feeling frustrated that despite doing everything right in the property investing playbook and you're no closer to financial freedom, then head over to www.inkosiwealth.com to learn more about how you can use alternative investments to catapult your investing income and blend strategies to shave decades off your timeline to financial freedom.
If you're interested in understanding how to create wealth through alternative strategies, please check out my programs, where I help you catapult your investment income and blend strategies to shave decades off your timeline to financial freedom.
Or, you’re welcome to get in touch today, book a call with me, and I would be happy to talk you through it - no obligation!