The Emotion Of Daily Quotes

The Real Estate Espresso Podcast

The Emotion Of Daily Quotes

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The Emotion Of Daily Quotes

Welcome to The Real Estate Espresso Podcast, your Morning Shot at what’s new in the world of real estate investing. I’m your host, Victor Menasce, and on today’s show, we’re talking about your frame of reference. For some, the frame of reference is the dollar; for others, it’s the euro. Still, for others, it might be ounces of gold. But then there’s another frame of reference that’s also meaningfully important and that’s time.

We often hear daily quotes, especially in the news media, about what’s happened to a particular commodity price. “The price percent, or the stock mark it’s down one and a half percent.” But all of this is in reference to what? Are we talking in the past day, in the past hour, in the past month? While news reporters have to pick some point of reference, none of these measurements are actually meaningful to a single individual. When you speak to everyone, you’re actually speaking to nobody.

The problem with speaking to nobody is that it creates a narrative, which for those who lack critical thinking, they might latch on to it. If I bought gold a long time ago at 300 bucks an ounce and today it’s trading at 2600 an ounce, who cares that it went up 30 bucks in the past day! What decision would I make with that information?

If I bought shares in Apple stock back in 2020 at $63 a share and today it’s trading at $234 a share, why do I care that the price has risen or fallen $10 a share in a given day? If I decided to sell today, I would be selling at an equity multiple of 3.71. If the share price was to fall by $10, then I would be selling at $225, my equity multiple would be 3.57. Yes, there’s a difference between those two numbers and, of course, higher is better. In both cases, I would be experiencing a very healthy capital gain.

I might create a narrative that I’ll sell the stock at maybe $250. I’ll only sell when it reaches 250. Well, there’s nothing magic about 250, no more or less than $234 or 225 for that matter! The only measurement that matters is the frame of reference that pertains to me.

More importantly, I want to introduce the concept of zero-based thinking. Imagine for a moment that there was no transaction cost associated with buying and selling. For real estate, that’s certainly not true. And for some stocks, the cost of executing a trade is only a few dollars, so the approximation of zero transaction costs might not be too far off in that case. Of course, I’m ignoring any tax consequence in that statement as well.

So let’s imagine that you could buy and sell any asset without any transaction cost. Would you sell your Apple stock, ounces of gold, or your real estate and put all that cash in the bank account, and imagine that you could buy back that exact same asset the very next day at the same price or maybe even for 1 percent less than you sold it for. You now have a blank canvas, a blank sheet of paper and of all the thousands or millions of choices out there in the universe, would you buy back that exact next day? Would you put 10 percent into gold, 10 percent into a commodity like steel and then maybe the remaining 80 percent into a piece of real estate?

Every single day, you should be making determinations about which assets you want to be in your portfolio on a risk-adjusted basis. Some investments will have worked out better than you expected and some will have fallen short of your expectations. That’s completely retrospective, but knowing what you know now, do you want to be holding on to that asset or not? If you decide you want to be holding the asset, then what’s the reason? Is it because the outlook for the market has improved? Is it held constant? What’s the reason now?

Of course, not all assets are liquid and you can’t truly buy and sell with zero consequence, but if you were at least clear on the zero-cost transaction decision then it helps put the real decisions that you want to make into context. There’s a myth out there that investing is passive. Well, I suppose it could be if you buy an asset, sit on it for a decade or more, and then maybe do another transaction, but the world changes far too much to take such a hands-off approach.

Investing can be emotional and as investors, we can make better decisions if we make decisions on a fundamental basis. That means doing math and when the news media reports that the prices upper down by some percentage in the past day they’re only feeding into the emotional component of the investor’s psychology. There is nothing of value in saying that gold is up $10 today, so what? Who cares? There’s nothing of value in the price of oil is down five dollars today, but if a policy change means that four million barrels of oil per day is going to be removed from global supply then that’s meaningful information that’s actionable. Any piece of data is useless unless it’s coupled to an event or an explanation that connects the dots and informs cause and effect.

As you think about that, have an awesome rest of your day, go make some great things happen, and we’ll talk to you again tomorrow.

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