Forming a real-world investment thesis …

We all have beliefs that guide our investment decisions … even when we don’t put much thought into them.

Sometimes we don’t even know what we believe, until we’re sitting in a pile of rubble asking ourselves, “What the heck was I thinking?”

So sometimes it’s smart to slow down to go faster … investing time to form a more cogent investment thesis.

That’s why we do our annual goals retreat, and make it a high priority to get away together with other serious investors at conferences and summits.

Plus, you compress time frames by listening to and talking with others … especially those with different perspectives and experiences.

Honest investors will tell you some of their hypotheses proved true, while others didn’t.  We’ve never met anyone who’s ALWAYS right.

But if you can be right more than you’re wrong … you may lose a few battles along the way, but you’ll win the war.

That is as long as you NEVER risk it all on any ONE thesis or deal.

For example, before 2008, it could be said U.S. housing prices had never declined.

Sure, individual properties … even certain areas … had pulled back or dipped.

But across the United States, the average and median prices of homes had been on a 40-year upward trajectory.

So everyone from Wall Street to Main Street had investment strategies based on the premise that U.S. housing prices were highly stable.

Of course, in typical fashion, the wizards of Wall Street leveraged their investment thesis to the extreme … using multiple derivatives of mortgage-backed-securities …

… and by so doing changed one of the important dynamics of stability (sound loan underwriting) … with catastrophic results.

Some saw it coming.  Most didn’t.

So again, never bet the farm on one deal, one market, or one thesis.  We know … because we’ve done it.

Way back in pre-2008, Dallas Texas was one of the most boring major real estate markets in the nation. B-O-R-I-N-G.

But on the 2009 Investor Summit at Sea™, Robert Kiyosaki’s real estate advisor Ken McElroy … the master of simple brilliance … told us his investment thesis.

Ken said he thought that coming out of the recession, energy producing economies would create the most jobs, attract the most people, and lead to steady demand for working class housing.

He reasoned those jobs are linked to where the energy is … because you can’t move an oil field or huge refineries to China or Mexico to take advantage of cheap labor.

So any region heavily involved in energy would probably do well.

In the fullness of time, Ken’s thesis proved correct.  Texas led the nation in job creation and the energy sector was a big part of it.

Dallas … along with other energy markets … boomed.

We understood the concept and wondered what other industries are geographically linked?

We came up with distribution and healthcare.  After all, people need supplies … and those supplies need to be shipped.

People also need healthcare, especially as boomers age, and they’re not going to China for it.

And neither supplies or healthcare are highly discretionary either.  People need them in good times and bad.

So things that are necessary at all times, and linked to geography and/or extremely hard to build or move infrastructure …  are more likely to remain stable.

Based on that thesis, we took an interest in distribution markets like Memphis and Dallas (energy AND distribution) …

… which both turned out to be great residential real estate investment markets to this day.

This is just another real-world example of starting with a conversation with a smart investor … forming a simple investment thesis (focus on markets with geographically linked jobs) …

… doing some research, using common sense, and then stepping out and testing the thesis in the real world.

Over time the thesis is either proven or refuted.  In this case, so far so good!

Of course, the “geographically linked jobs” thesis is only about regional industry.

There’s also demographics and economics to consider …

Robert Kiyosaki has been warning for years about a shrinking middle class.

Robert’s a smart guy.  So we listened, we researched, and we reasoned.

And because it made sense to us, we rolled the premise of a shrinking middle class into an investment thesis described in this 2011 article.

Later, building further on our studies of the shrinking middle class, we found opportunity in something we call the dumbbell effect.

We won’t rehash those musing here, but they’re worth reviewing today … now that you have the benefit of hindsight.

Lastly, this very recent news article provides perspective supporting another long-held thesis we’ve had about affordable housing markets.

According to ATTOM Solutions, one of the industry’s biggest and most reputable data crunchers …

 “At the moment, demand for rental homes is strongest in less expensive housing markets, which serve households with lower incomes.”

“The weakest demand is in the high-end and the strongest demand is in the low-end …”

A “booming” economy might low unemployment and rising wages.

But it can also mean higher interest and energy expenses, which are cost components of EVERYTHING people need to buy.

So the national economy might be booming … but is it showing up for the working class folks on Main Street?  Maybe.

But when it comes to residential real estate, we still feel safer in affordable markets and property types … things like B-class apartments and mobile homes.

Right now, the data seems to support the thesis.

But what about going FORWARD?

Today, investors are facing a rising interest environment for the first time in decades.

At the same time, and perhaps related, the dollar is under attack with a global resistance led by China, Russia, Iran and other nations.

Mainstream financial news pays some attention to these things … but only from Wall Street’s perspective.

Yet these events all directly or indirectly roll down to Main Street investing … creating both challenges and opportunities.

While we’re still formulating our theses for today’s changing world, it seems likely that product classes and markets with higher-yields will become capital magnets …

… eventually driving the yields down, but also creating gobs of equity for people already in the space.

That means now could well be a land-grab opportunity in those key markets and product types.

There’s also the changing of the demographic guard as baby boomers sail off into their rest-home years and Millennials become the new pig in the python.

So paying attention to Millennial trends will become increasingly important.

That’s why we have an Investor Summit at Sea™ Young Adult Program to get more young people into our conversations.

Another developing trend is the current drive to rebuild America’s manufacturing capabilities.

As this leads to a revitalization of the rust belt, it could create a convergence of affordability, demographics, and capital attraction … with lots of opportunity.

The point of all this is the world is changing … as it always does.

Our experience is the most successful investors pay close attention, get lots of qualified input, and then make important adjustments to their core theses so they can stay ahead of the curve.

Until next time … good investing!


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