We have no doubt that upon reading the headline to this article you nod your head and recognise that this is a straightforward investment strategy. What is the point in running your losers and cutting your winners in the world of real estate investment? However, if we dig a little deeper does human nature support the above strategy and do you actually abide by this strategy in your own dealings?
Cold hard facts
As you build your experience in the worldwide real estate market you will get a feel for markets, you will recognise uncertain periods are emerging and you will no doubt react in a cautious manner. However, until you build up this experience and create the “gut feeling” skills which many people use so frequently, you should deal in cold hard facts. Do not let your heart rule your head!
While it is obviously common sense to run your winners and cut your losers, is this as easy in the real world?
Cut your winners
Whether you are dealing in real estate for the first time, or you are fairly experienced, the feeling of making a profit, albeit a paper profit, cannot be beaten. The idea that your strategy is working and making you money will give you a warm feeling. This is where sometimes human nature can kick in, if you are making a profit and your assets are still moving higher in value some of us will begin to panic. We may be happy to bank a relatively small amount of profit when in reality we should always re-evaluate the situation going forward.
If you ask yourself the question, would I buy this asset today even though it has risen in price, you will answer your own conundrum. If using cold hard facts you would buy this asset at the high price then continue holding? If you believe the asset is overvalued then you should consider selling and if you’re unsure then keep a very close eye on the situation. The fact that you may have bought the property at a price much lower than its value today is to all intents and purposes irrelevant. It is the value of the asset today, the potential for the future and not the amount of profit you are making on paper which should be considered. Next time you’re in profit with an investment, whether real estate or any other asset, and you begin to panic then simply sit back and ask yourself would you buy the asset today?
Run your losers
How many times have you spotted an “excellent opportunity” to buy real estate assets at rock bottom prices before anybody else has realised? It can be fairly easy to get wrapped up in the situation, think that you have stumbled onto something special and maybe let your ego and your heart rule your head. If you do believe the asset is undervalued then there is nothing wrong in taking a calculated risk but perhaps give yourself a stop loss limit at which point without thinking you basically sell the asset.
Human nature dictates that many of us hate being wrong, can easily convince ourselves that the markets are wrong and everything will come right in the end. This can sometimes lead to a situation where you are holding loss making assets you would not buy today but you bought at a much higher price in the past. Even a small loss can sometimes very quickly snowball into a relatively large loss at which point you say to yourself “it’s not worth selling” but the fact is if the asset is friendless and unlikely to recover in the short to medium term then get rid!
Think of other ways in which you could use these funds, topping up on your successful investments or indeed keeping your powder dry for special opportunities in the future. Do not run your losers purely and simply to “prove something to yourself” and if you are in such a situation take a timeout and reconsider the position today. If you would not buy the asset today and believe it is overvalued why would you continue to retain it?
There is no doubt that part of a successful investment strategy revolves around knowing your market and using “gut feeling” but sometimes you do have to use cold hard facts. Whether you have an asset which is in profit for an asset which is losing money ask yourself this, would you buy, sell or hold the asset today if you were new to the market? If you’re honest with yourself then you will likely very quickly realise what you need to do and if you are taking a loss, which can be difficult to stomach, just remember, run your winners and cut your losers not the other way round.