I've been looking at the goals I've set for myself for this year, and trying to dig deeper to see if there are any other ways that I can grow my skill sets over the next year. For example, I can see a pretty clear distinction between the investor knowledge in our middle management and founders. I was just curious from your perspective on WSO, what makes a person a great investor, what distinguishes them from just a good investor?
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Luck.
I'm only half-joking...but on a more serious comment, this question gets asks fairly often, something along the lines of "what makes a great investor?" Or "how to think like an investor?" And I understand why it's ask, but I think it's the wrong way to think about investing. When people ask this question, it sounds like they think there is some magic class you can take. Like a "Follow these 5 steps in order to become a great investor." Investing isn't rocket science. There's really only 2 things going on with good/great investments: 1.) You believe you've found an undervalued/overvalued asset and invest/short the asset and make money when markets realize it 2.) You've found an asset underperforming asset that you believe you can add value to. As I've said many times before, investing is just finding a needle in a haystack, but you need to know what is hay and what is a needle. This requires knowing your market and product really well so that you can identify discrepancies in pricing; this is especially true for real estate because of how illiquid real estate is and asymmetric information. If you watched the Big Short (which i'm not sure how historically accurate it is, but since it is based off of Michael Lewis' book, I'm going to assume decently accurate), Michael Burry predicted the '08 crash, by reading through MBS prospectuses and noticed that borrowers had terrible credit scores and were overleveraged. This was an incredibly monotonous task, but not rocket science, but he is considered a great investor. You know what I think was impressive? The fact that he had investors that provided him with hundreds of millions of capital to invest, connections strong enough with the big banks that they created a new instrument for him to short the real estate market, and most important...his conviction. Burry shorted the housing market despite everyone else in the world (his investors included) telling him he's wrong and he continued paying premiums to the big banks for months...that takes massive balls and conviction in your investment thesis. Which leads me to what I think makes a "great" investor: 1.) the ability to execute and 2.) conviction. What use is a great investment thesis if you can't execute? Also, predicting and shorting the '08 crisis is a once in a lifetime investment...it's not the norm that other investors miss such a huge opportunity. When you work in an industry with other competent competitors, it's rare that a great investment opportunity is missed because if it is that great, other investors will bid the price up. What's more important is once an incredible opportunity does appear, you are able to act and ideally act swiftly enough that other competitors can't compete against you (ie off-market deals in real estate) or you have the ability to add value in a way that your competitors can't (maybe you have in-house construction capabilities and therefore can keep construction costs lower and bid higher to beat out competitors). And then of course conviction, which is pretty self explanatory. Every investment I make I have 110% conviction that it is a good/great investment.
to piggyback off of this, the Michael Burry aspects are correct, but compare him to someone like John Paulsen, who made ~$4B in the subprime crisis. Paulsen, though he did the research and did the trade (credit default swaps), considered less of a financial mind, and a little more someone who got very lucky on a trade.
I think good vs. great boils down to two things (I'm sure there are others):
1. Way to fit your capital into a deal to really juice the risk-adjusted returns. Rather than being equity, can you structure something super downside-protected with a good return (e.g. sit 60-80 in a cap stack across two crossed deals to earn a 13)
2. Relationships - being the first to look at good deals by brokers and operators, and using relationships to create deals (meet with an operator to discuss a deal only for them to bring up an issue on another deal, and then you can talk about buying it at a discount to give them some liquidity)
EDIT: One more, and that's the ability to get deals done within the group. If people will listen to you, that's more time you can look for deals, talk with partners, learn new markets, read research, etc. If you need to spend a ton of time convincing the group to do it, you'll end up having to do various analyses that won't affect the outcome instead of looking for more deals / becoming more knowledgeable
I had a professor that would say, "You make money when you buy a property, not when you sell," because, while execution is important, ultimately if you overpay no amount of construction/development/finance expertise can get you out of that hole. The only way is to get lucky, and that's not a reliable strategy. Plenty of bad investors made a lot of money during the longest bull market we've seen with rock-bottom interest rates.
Read a lot of other people's comments and I actually think I need to qualify my initial comment above. I think my comment as to what makes a great "investor" is intended for "investors" who are operators/developers...not so much for "hands-off" investors such as LPs/REPE. LPs/REPE firms are really just capital allocators and so much of their investment decision is based on the financials and GP/operator that they are investing in. Since I am an operator/developer myself, my expertise does not lie in the capital allocation method of investing, so I cannot speak to what makes a great investor in that field.
Anyways my main point is that in order to be a great operator, you must be able to execute (conviction is obviously needed to be a great investor in anything) and ideally you can execute better than your competition or be better at adding value. Basically, do something that your competitors can't. A couple years ago a developer wanted to entitle a ~50 unit development but he needed the support of some union (I forget which trade). The union as opposing his development because they were demanding high labor costs and the developer was at a stalemate with them and abandoned his efforts to entitle the property. That developer ended up selling the land to my ex-employer/boss. My ex-boss knew the head of that trade union and was able to negotiate a more reasonable deal with them in order to gain their support and entitle the land. I don't know if this means my ex-boss was a better "investor" or better "operator," but in either case, do something your competitors can't (or at least most of your competitors can't).
@ Fred Fredburger's answer is a good one, and luck has a lot to do with being known for being a great investor, but my answer would be understanding risk.
I don't think most people on this site, let alone in the general population, have a great understanding of what risk is and how to manage it. Or not the kind of risk that makes one a good investor; after all, while some of it could be called luck, a lot of what separates a good investor from a bad one, or a great one from a good one, is understanding when it's time to take a calculated risk and when it isn't. For the Michael Burry example above, that's a decent one where he did his research, came to a defensible conclusion, and then took a massive fucking gamble. And it worked out. And I would argue that the reason it did, and so spectacularly, is because Michael Burry had a good handle on what the risk/reward factor was with that investment.
Most people on this site think that "risk" is not getting a big bonus because you're not on the right team at the right firm, and that's not accurate. That is opportunity cost, and I see people conflate the concepts all the time. I see other people in the NYC real estate industry, especially mid-level guys who have had experience working on big deals for large firms but no personal liability or exposure there, talk about wanting to do $100mm deals and complaining about why they can't find any opportunities there, etc. And the answer should be so glaringly obvious that maybe it's missed because of how apparent it is - why would anyone in their right mind give tens of millions of dollars to a totally unknown quantity? People are really good at seeing the upside and very bad at spotting potential pitfalls, in general, and I think this is double apparent when it comes to investment decision making
As said above, good vs great, has an element of luck, but great investors have a process and an understanding of their market.
I'd break it down into three categories of investors though, bad, good, great. Bad investors dont really have a process, they just through money at investors. An example would be they read someone on wall street bets or got a "tip" and threw money at something. They can make money, but they're more of a gambler. Good investors have a process, they do the work and understand what they invest in. Great investors, also have a process, but understand the market they are investing in better.
As an example, take Peloton. A bad investor would buy stock because maybe they bought the bike, they know people who own a bike, and they saw a commercial on it; they don't do any research or a deep dive. Good investors look at the financials, get an understanding of the product, look at projects, maybe a conference call, and then maybe buy the stock. If you're a good investors, maybe you have a little more understanding when the stock jumped, maybe you sell maybe you don't. Great investors, see the financials, understand the market, most likely ultimately don't invest, because they understand this years peloton was prior years GoPro (stock when up then down severely). Most likely a great investor doesn't invest because they realize its all about getting in and out of the stock, which is more a trade than anything else.
Going to take this in inverse order, because I think you are kind of representing here of all the ways in which people who consider themselves "good investors' are, in my opinion, shit. Take this opinion, which would make you a trader, not an investor. An investor is interested in more than making a quick buck. You invest in something you believe in. Whether that is the long terms prospects of a company/asset, or the fact that it's undervalued, you aren't there to generate income, but to build a business. All too many people seem to confuse the two. Exploiting an inefficiency in the market isn't really investing in something, to my mind. To my mind, an investor doesn't care about the fact that GoPro shot up and then fell down again; if they think Peloton will for structural reasons, that's one thing, but comparing across asset classes doesn't make a ton of sense and seems like someone more interested in making a buck off an IPO pop than actually caring about the product being produced.
I'm not sure I agree with this. What you're describing are bad, good, and great traders. I think a good investor thinks "hey, I bought a Peloton, everyone I know is buying one, and the reasons they are make a lot of sense to me." That is someone who knows about the product, cares about the long term success of the product, and has some rational reasons to think that long term, the company that makes that product is likely to succeed. I agree that a great investor will then say "let me look at the books, at comparable companies, at where interest rates will go and how that will impact this product, etc etc". Not everyone has access to that. Not every great investor will have the resources or the timing to do what Michael Burry did. Let alone do it several times in several different asset classes.
I think a bad "investor" is someone who looks only at potential profits and not at potential risks. Think of every person YOLOing into crypto, or GME stock, and thinking "hey, I can double or triple or 10x my money and be a millionaire in a month!" No thought about what is being bought, or why, let alone more advanced research or diligence.
Being a Warren Buffett or any other famous billionaire investor type is pure luck. There are a hundred Warren Buffets out there who didn't have his luck or his exposure. He was inevitable; not saying he's all luck, but this is the Taleb paradigm here, that someone was bound to become that successful, and while Warren Buffett is smart and patient and knows what he's doing, there are 1,000 other people like him who missed the boat by a week or a month and ended up screwed because of it.
And again, a lot of this boils down to the idea of "risk" versus "opportunity cost". If you have limited dollars to deploy, and you've got a trader and an investor looking at buying Peloton, the investor is going to think "well, I think the long term prospects are good, lets invest" while the trader is going to think "this has all the hallmarks of GoPro, and I don't want to tie money up in a stock which I might not be able to get out of at a profit in 12 months."
Fair points, i agree with your points on investing vs trading.
My original point, which I don't I conveyed properly, is that being a great investor doesn't come down to strictly making money vs not making money. I take a good investor to be one with a process. For example, I think of Bill Ackman when he did his short on Herbalife. He did the work, just didn't work out for him; he couldn't really have predicted that Icahn would take the other side or that the government would allow the company to restructure. Take the reverse side, when Ackman shorted MBIA some say he won out because the country ran into a recession, but he made money.
I agree with your points about Buffet, but I'd also go a different way. Yes, he had luck, as he says, in the sense he was born in America, but also because he lived at a time when knowledge of stocks was easy to obtain, so he was able to out hustle everyone. However, I think he had some skill as well. If you had a 25 year old Buffet in 2022, could he still make $100B+ investing, i don't know, but I also don't think he would lose money in the long term. Time and place have as much to do with luck as does skill.
Well I see a lot of excellent points above and I want to add a point of view that may have been forgotten
As a professional investor, you almost always (if you are not managing your family trust fund) managing other people money / institutionnal money
Thus, the best deal/investor might not be the one generating the best return but the one your money provider (the one paying fees) wants you to reach: i.e, if you have a mandate to reach a 8% return, do not come to them with a 18% IRR opportunistic deal . Your investors also manage other people money (in case of institutionnal investors) and have to report to their hierarchy and risk department.
Making the collaboration as smooth as possible (communicating clearly on your returns and on your projects), managing downturn events, being on time on reportings is at least as important as outperforming the market and will ensure them to come back to fund your next funds/projects
As great an investor you are, if you do not have any money to invest you will only be able to underwrite deals and not execute them
Edit: A great example of this are HFs or Investment Managers that do not provide the best returns (sometimes even not beating market) but are providing the risk adjusted returns adapted to their investors cost of capital
Above are really good points. Investing is not just about who can run the fastest.
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Political connections, family connections or really strong personal connections.
This is true. Government externality plays a huge role in winners and losers
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