Beginners win while others get burned

Surprisingly often, beginners do good first deals in real estate, the financial markets and business.

Why? Answer by clicking comments, but I’ll lead off with a fairly analytical approach.

My theory is successful newbies are cautious and actually begin. What do I mean by this?

Character traits of the cautious:

  • Have an inbuilt drive to do some sort of research (also known as due diligence);
  • Discover (or formulate) some simple guidelines;
  • Understand the investment enough to describe it simply;
  • Consult with experience;
  • Take responsibility for their decision.
  • Beginners who begin:

  • Overcome analysis paralysis;
  • Deal with the fear of making mistakes;
  • Take action until they get results.
  • Then what happens? Intermediate investors overestimate their abilities once they gain knowledge. Did you know that most people rate their driving ability as “above average”?

    Investors tweak their system. Instead of following the simple guidelines that led to success in the first place, they make adjustments. The strategy becomes a patchwork of plans. Few intermediate strategies can be articulated in one sentence.

    Experience leads to on-the-fly decisions, because overconfidence creeps in. This allows emotion to take over the rational decision-maker. Greater risks are taken to avoid a loss and exit strategies become poorly defined

    Three steps for Intermediate Investors to avoid the trap.

  • Express your strategy in one sentence. e.g. “buy big cap stocks with a P/E under 12 and a Price/Asset ratio over 1” or “3 bedroom houses within 10kms of the CBD with a yield above 6.5%”.
  • Build on the basics. Musicians practice scales and exercises as the building blocks of performance. Your wealth creation strategy is the same.
  • Use a written plan to outline the deal. This forces you to think ahead, remove emotion from the process and develop an exit strategy.
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