What Got You Here Won't Get You There
Ten dollars and ninety-nine cents.
That was the cash value balance of my Inpixon shares when I opened my brokerage account on Friday morning.
I wasn’t surprised. The shares were falling in price since October 2018 when I bought them for $997.93.
At this point, I have nothing but upside, so I’ll keep holding them.
This kick in the wallet is a perfect example of the adage, “what got you here won’t get you there.”
Stock market guru
When I started my first job after college,I opened a brokerage account. I didn’t have any idea what I was doing, so I didn’t gravitate toward passive index fund investing like a smart investor would.
I watched a lot of Jim Cramer, read the Series 7 manual, and bought individual stocks. In hindsight, I can confidently say I got lucky. But either way I returned about 30% over several years.
With those returns, I convinced myself I was good at picking stocks.
I had what Morgan Housel calls Level 4 Confidence. It’s a hallmark of the incorrect “what got me here WILL get me there” mindset.
Real estate guru
After I got lucky in the stock market and made a few thousand dollars, I cashed out my brokerage account to buy real estate. Over the course of a year, my business partner and I bought four multifamily properties.
We planned to buy between 25 and 50 properties over the course of ten years and use the cash flow to retire early.
But as you may suspect, what got me here didn’t get me there.
The environment changed in our target market. Finding decent properties that met our criteria became harder by the day. And the margins we predicted on any new deals wouldn’t allow us the same financial freedom we once anticipated.
The first four properties work well for us.They throw off decent money which allowed us to build a small reserve fund.
But I won’t expand in the same area, and I may not even pursue multifamily real estate in other areas.
What got me here may not get me there.
Stock market schmuck
Once you’ve accepted that past performance does not guarantee future results, you can analyze all the factors that contributed to your initial success. Then you can objectively determine if you can repeat those factors, or if there was too much luck involved.
I didn’t do that.
I used my Level 1 Confidence to convince myself that buying Inpixon was a good idea. Inpixon is a virtually unknown company with no reputation and a downward trajectory.
And in true what got you here won’t get you there fashion, I lost all my money.
Here’s what my analysis should’ve looked like:
In the stock market, I initially made money because I bought mostly blue-chip stocks – solid companies with a good reputation and an upward trajectory. I bought them after a quarterly earnings dip. This allowed me to buy shares of good companies at a discount.
Foolproof strategy? Far from it. But a discernible pattern that gave me a better chance for success.
But let’s look deeper.
I was buying companies when their stock prices dipped after quarterly earnings. But I wasn’t reading any 10-Q reports,so I had no way to know if the stock dipped due to investor sentiment or a significant underlying issue.
I was using a strategy, but it was a strategy based on luck. The only reason I didn’t lose my shirt was that I coincidentally made a couple good guesses.
I eventually came to that realization, but not before I threw away $1,000 on a crappy penny stock.
So now I dollar cost average my money into a low-cost index fund every two weeks. It’s boring and doesn’t feed my ego. But as Morgan Housel once said, “When making money decisions, constantly remind yourself that the purpose of investing is to maximize returns, not minimize boredom."
After rolling back the game tape on Monday morning, I can clearly see the fault in my approach. I know that what got me here won’t get me there.
But it meant losing a solid chunk of money before I figured it out.
Real estate realist
As I discussed with stock market investing, it’s easy to mistakenly assume your initial success predicts future success in the same area. But that’s far from guaranteed.
What made me successful in real estate was timing,market conditions, strict cash flow requirements, in depth knowledge of the area, and a strong cash position.
If I’m not honest with myself, I may think I’m just a talented real estate investor. I could totally ignore the things that allowed me to succeed, several of which were out of my control.
I could bust into another market, invest a ton of money, and go belly up – if I don’t acknowledge that what got me here won’t get me there.
If I mirror my stock market blunder in real estate, it could be devastating. Real estate investing requires a lot more money than a $1,000 bet on a dog shit company.
I’m determined to avoid the same mistake, so I performed an objective analysis:
My partner and I made money because we invested super conservatively. We wouldn’t do a deal unless the numbers were great…and then some. We knew we were beginners and we were bound to screw things up. The only way to make money was if we left room for error.
We were also successful because we spent years saving money before we started investing. We had money to deploy, and we had a cushion to cover unforeseen emergencies.
We were successful because I spent more than a year delivering pizzas on the streets where we bought houses. And my partner spent 20 plus years growing up in the area. We knew it well. We minimized our risk of accidentally buying in the wrong area.
That was the conscious part. The unconscious part was the market conditions that allowed us to find deals with extra cushion, along with the luck of the timing.
It would be easy to assume we’re expert real estate investors and go charging into another market.
But we don’t intimately know the streets of other markets. And now that we understand the housing market, we’re much more wary of getting in at the wrong time.
There was a bit of skill involved. I'm not a complete moron. But some of that skill was specific to our market. And we also had some luck that we can't count on for the next deal.
What got us here won’t get us there.
This isn’t a recommendation for inaction
Your first success will inflate your confidence. But inflated confidence doesn’t equal inflated competence.
Success can often be attributed to luck,like it was in my initial stock picking success.
It can also be attributed to skills or knowledge that is very specific in one area but doesn’t necessarily translate to another area, like in my real estate investing.
I think if you pair analytical skills with a fair dose of humility, you can have both.
Use careful analysis to make your money.Then use careful analysis and honest reflection to determine if the strategy you used the first time is prudent to repeat.
Remember to ignore your Level 1 Confidence,because more often than not, the strategy won’t be repeatable.
Write it on your phone, write it on your wall, tattoo it on your brain:
What got you here won’t get you there.
