Wednesday, August 8, 2007

The Herd Mentality


I spent much of 1999 watching Internet stocks exploding in value, seeing how everyone else seemed to be making vast quantities of money.

“But this just doesn’t make sense,” I spent 1999 telling myself. “There’s just no way that these unprofitable companies are ever going to make enough money to justify the kind of money that they are currently valued at.”

And so I sat back and waited to see what would happen.

By the start of 2000 though, I started to doubt what seemed to be common sense to me. I was no investment expert and everyone else who (theoretically – highly theoretically) knew what they were doing were leaping in and getting rich, rich, rich.

So on 1 March, 2000, I leapt into the market investing a big chunk of my savings. For the first week I saw some nice gains and was feeling very smug.

Then, on 10 March 2000, the bubble burst and I ended up losing 75% of the money I had invested in just a couple of weeks before I decided to cut my losses and run.

It was a good – but very expensive – lesson in the mentality of following the herd. I vowed that I would never again let other people sway me from going with my gut feel – a gut feel that is based upon common sense and the most basic economic education, which is how prices are influenced by supply and demand.

I can understand how easy it is to happen because of my own experience with the Internet stocks, but it is still quite horrifying to me how people can forget about the laws of supply and demand and fall prey to sales hype coming from someone whose job it is to sell some development – whether or not that development really does have good potential or not.

I have seen two examples of this at close hand recently.

Just a few weeks before I met her in late April, my new girlfriend had signed a contract to buy an off-plan property under development in the ski resort of Bansko, Bulgaria.

My reaction was, “Noooooooooooo!!!!!!!!! How could you have done such a thing? All of the reports coming out are saying that Bansko is saturated and it’s going to be impossible to either sell or rent out the properties once they’re completed.”

Unfortunately this was not what she wanted to hear, and she ended up getting into a horrible temper. So now I have learned just not to talk about it at all.

Then, just yesterday, my ex-girlfriend called me up all excited. “Hey!” she said, “I’ve just been given a tip-off about a great new development in Bulgaria that’s got enormous potential.”

“Where in Bulgaria?” I asked.

“On the Black Sea Coast.”

“Where exactly on the Black Sea Coast?”

“Some place called Sunny Beach.”

“Aaaaaaaarrrgghhhhhhhhh!!!!!!!!!!!”

“But all of my friends are investing in developments there so it MUST be a good investment.”

I won’t repeat the rest of the conversation, but it had a lot of references to ‘a bargepole’ and ‘not touching it’.

I told her to go to Propertastic! and educate herself a little bit about what’s going on with the property market in Bulgaria right now. OK, so my opinion that the market is already saturated is just that – my opinion – which anyone is free to agree with or not, but it’s hard to argue with solid facts and news items telling the actual state of the market as it is already.

After a long conversation, I told her that she should check out Egypt as this is the market that seems to be happening right now. It’s not so easy to get out to Hurghada or Sharm el-Sheikh at this time of year as the temperatures are uncomfortably high – it’s currently the off-season – but when the charter flights start going out there at the start of the winter season in October, I think she’ll be going out there to check out the opportunities.

It is exactly the type of people like my ex and present girlfriends that we created Propertastic! for, so they can make an informed decision about which markets to consider and which to avoid. Neither of them are millionaires with vast amounts of wealth to invest. They are ordinary people who understand that investing in property is the best way of acquiring wealth in the long-term – providing that you get it right. Once you have developed a decent property portfolio, it’s possible to make a mistake from time to time and recover from it. In the early stages though, making the wrong decision concerning which property to buy can kill off someone’s chances of making it big totally.

My one hope is that we don’t end up ‘preaching to the converted’. During the countless hours that I spent online researching the market for international property, I have noticed that investors tend to fall into two distinct groups:

The first are very savvy. They have considered a large number of different options, researched each of them carefully and, after considering all of the facts, have gone with the best options. These are the people who are buying property and real estate in hot markets like Montenegro and Egypt right now. They realize that, if you get it right, there’s a huge amount of money to be made from international property and so it’s worth taking a while to make the right choice.

The second group are not so well-informed. They read the Sunday papers and read articles like “Bulgaria is the next boom market!” and then start contacting agents selling property in Bulgaria. Of course the sales people are quick to tell them everything that they want to hear and so members of the second group end up buying from them. It’s only a couple of years later when they end up with a property that’s impossible to sell or rent out that they realize that they have made a mistake. But it’s too late by then – their life savings are spent already.

Our hopes with Propertastic! are to make it as easy as possible for ordinary people to make an informed decision as to where to invest. The vast majority of information on the site can be found elsewhere, but it would require hours and hours of research to find it all and would require the reader to use their judgement to separate the hard facts from the sales hype and PR-puffery. Another problem is that most of the useful information is written in such a dry and turgid style that people can very easily get bored of the whole exercise and just give up.

Propertastic! has been established in an attempt to resolve all of these problems. We just hope that the second group of buyers are able to find us somehow in order that they avoid making some very expensive mistakes.

3 comments:

Unknown said...

Great post! I am gonna share it with my own blog readers at jason.landbrokr.com ! Thanks.

Unknown said...

While I agree with much of what you say about places like Sunny Beach and Bansko, not all Bulgaria is overhyped and a poor investment. I have 11 houses in central Bulgaria in villages and all have increased drastically in value and could be easily sold on.

Rachel
http://www.thetravelbug.org

Nick @ Propertastic! said...

Hi Rachel,

I agree with you 100% on this. It is only the ski and coastal resorts that have been overhyped in Bulgaria - there are still plenty of bargains to be had in other parts of the country that have not been over-developed.

I still think that Sofia is a good bet as are some of the other larger towns and cities in Bulgaria.