Don’t Make Long-Term Decisions Based on Short-Term Problems

Last Updated: November 23, 2010By

By: Chris Miller

I have seen countless investors, countries, and even major corporations make permanent, long-term decisions based on short term problems.  My investors are well aware that real estate works best when it is held for five to ten years, or perhaps longer.  Such an investment needs to be made based on long-term trends; not “fads.”

Mistake One  – Cutting Necessary Costs to Save Money

An excellent example is a company that, in an effort to cut costs, fires a majority of its’ salespeople.  Less salespeople equals less sales, and severe financial hardship follows.  This may seem like an extreme example, but I’ve seen it happen twice!

In real estate terms, we can make this mistake by; skimping on maintenance – using lower quality replacement appliances that just break sooner, or on management.  (Hiring a cheaper property manager, and seeing vacancies increase by 5%.)  We can avoid these mistakes by looking at the “big picture;”  How can spending a little bit less today affect me in the future?  Keeping costs low is an essential part of successful real estate management; but it needs to be done wisely.

Mistake Two – Let’s completely change the direction of our business in response to this short-term market condition.

It would be impossible to discuss missteps made by the “Big Three” American motor companies in less than 100 pages, so I will just pick one example from General Motors; the liquidation of their Hummer brand earlier this year.  I personally did not like those cars, but GM created a powerful and valuable brand name with those big ugly trucks.  Hummer was profitable, but higher gas prices slowed demand, then the economy brought sales to an abrupt halt.  (Along with the sales of every other auto manufacturer.)  GM had a corporate meeting and decided, “Big cars aren’t selling – so, rather than designing smaller vehicles to sell along with the big Hummers, let’s just throw this company and brand into the trash.” This way, GM can focus on their other brands; or decide which of them will join Oldsmobile, Pontiac, Saturn and Geo in the automotive graveyard.

GM has the idea that “people will never buy big, gas guzzling cars again.”  A look at history tells us they are probably wrong.  After the oil crisis’ of the ‘70’s, (the last time that people were “not going to buy huge, gas-guzzling cars anymore”), it only took 15 years for them to regain popularity.  The huge SUV craze seemed to start just after the famous “OJ Simpson Bronco chase” in 1994.  We don’t know if the Hummers of the future will run on electricity, natural gas or gasoline – but they will come back into fashion again.  After all, some people still need big cars.

Similarly, many of my competitors in the tax-advantaged investments arena have revamped their business plans in order to bring in more revenue.  These have abandoned real estate as a primary focus to sell stocks, bonds, and even auto insurance.  This strategy is problematic for two reasons:

First, businesses that are specialized tend to be more successful and produce better products for consumers.  For all their faults, at least the Big Three automakers haven’t fallen into this trap.  Imagine if GM started selling bicycles, lawn furniture, and cement mix!  Fortune 500 companies such as Hewlett Packard, Caterpillar, and Home Depot show that the focus created by specializing in one industry can lead to success.

Second, bringing differing products into the mix takes ones’ focus away from hard assets such as real estate or oil and gas.  As I have mentioned before, these assets require significant expertise to evaluate.  Somebody who represents real estate or energy assets on a “part-time” basis simply cannot evaluate deals as well as one who does it full-time.  My favorite example is the hypothetical CPA who also serves as my gardener.  It may be more convenient, but he probably isn’t the best tax guy or lawn mower out there.  As a result, quality suffers; in my taxes and my yard.

This is why, for investors, it makes sense to find advisors who specialize in different areas; and to use separate advisors for those areas.  A CPA, a stockbroker, a separate municipal bond broker (if you own either of these assets), and somebody for your real estate and tax-advantaged investments.  I have seen many investors overwhelmed by managing their own stock investments.  In some cases, this can lead to “analysis paralysis.”  Recently, I spoke with “John.”  He wanted to move a sizable part of his stock investments into real estate, but wanted to wait for the “right moment” to sell.  Since he was managing all these stocks himself, he was caught up in the “micro-managing” of individual positions.  As a result, he didn’t sell – and the DOW went from 11,000 down to 10,000 again.  If he had a professional running his stocks, he could have sold what he needed with a phone call and written a check.  His adviser could have made some sell suggestions right away – and may have avoided those losses.

Instead, Make Your Long-Term Decisions Based on Long-Term Trends

In real estate, I prefer to buy in growing metropolitan areas.  An investor who bought property in Southern California during the 1970’s probably saw more appreciation, on average, than one who bought in Detroit.  This wasn’t due to luck; Time magazine published an article lamenting Detroit’s decline in 1961! Detroit is getting some attention from investors today due to “low prices.” I don’t believe that Detroit will grow as fast as Dallas or the Raleigh areas over the next ten years, however.  Focusing on the “big picture” here can help us make better decisions.

Investing, like life, is not a “6 month drag race.”  It is a decades-long marathon.  This doesn’t mean that we need to hold our investments for 30 years; we should choose those purchases based on what we think will happen between now and 2040.  Focusing on these long-term trends can help us reach our long-term goals.

Christopher Miller is a Managing Director with Specialized Wealth Management in Tustin, California and specializes in tax-advantaged investments including 1031 replacement properties.  Chris’ real estate experience includes work in commercial appraisal, in institutional acquisitions for a national real estate syndicator, and as an advisor helping clients through over two hundred 1031 exchanges. Chris has been featured as an expert in several industry publications and on television, and earned an MBA emphasizing Real Estate Finance from the University of Southern California. Call him toll-free at (877) 313 – 1868.

This does not constitute an offer to buy or sell any security. Securities offered through American Beacon Partners, LLC. 3603 N. Hastings Way, Suite 100, Eau Claire, WI 54703, 715-552-2741. Member FINRA/SIPC/MSRB. Specialized Wealth Management and American Beacon Partners are not affiliated.


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