The Psychology of Investing - Four Reasons Why People Fail

Investing, in anything, is not easy. I'm convinced that anyone can learn what they need to learn, apply whatever lessons required, do the necessary research and determine whether something is a good investment or not. I'm also convinced that very few people can correctly carry out an investment.

I think there are four reasons why people, armed with everything they need to know, still fail at investing:

1. People are impatient. If I mention that I'd like to hold on to something for 10 years, they freak out. Well, in this market, you should be going into a real estate investment thinking of holding for at least 10 years, or you may not make money. I know it's tough when we're in an environment where people's minds change each day, but to make money you have to have patience.

2. People want to follow a crowd. It amazes me how many people who are not selling real estate right now complain about what a horrible market it is and how dumb it is to buy. Those are the same people who paid way too much in 2004 because all their friends were buying. Wake up! Nobody wants to buy right now, which is why you can get something cheaper. Now, you're in control, but you're too afraid to buy because no one else is. You would follow the person in front of you right off of a cliff.

3. People are lazy. They don't read the fine print. Listen, if you're talking about $200,000 of your own money, how can you not take the time to read your loan document? Yes, it's long, and maybe complicated, but you're talking about $200,000! Are you too embarrassed to ask a question? You really have to take control of your own life. When you lose your house because you didn't understand how much your payments would increase this year, what good is it going to do complaining that your lender didn't tell you about it? It's your money. Read the documents.

4. People are greedy. If you bought something thinking you're going to get rich quick, eventually your luck is going to end. Most of the flippers from a few years were lucky. They took advantage of the opportunity, yes, but very few of them recognized the risks involved. As Sam Zell has said, he takes risks but he knows in advance what the risk is. Too many people take ridiculous risks because they don't even know it's risky. That's a terrible, lazy, impatient, greedy way of trying to make money. And, it will also cause you to lose money.

Sometimes it's lonely to be an investor. I liken this real estate period to the situation that the Nasdaq was in in late 2001. The tech bubble was over. The market had crashed. No one wanted anything to do with tech stocks. That was the time to get in. Unfortunately, most people didn't want to sell in 2000 even though they had made a lot of money already. Greed. Then, they didn't want to buy in late 2001 because no one else was buying. If you want to make money, you can't follow a crowd.

Look at buying when the headlines talk about how bad the real estate market is. Look at selling when the headlines talk about how great the real estate market is. There is always a lag time until the news gets to the headlines. Know thyself. If you can't handle thinking independently, maybe you shouldn't invest.