Hello, everyone! Big Mike here, and today I want to dive into the fascinating topic of intuitive versus data-driven investing decisions.
Let me start by sharing a bit about myself—I’m a chess master, and my experience in chess has greatly influenced my approach to investing. Chess is a game of precision, a finite problem where computers have increasingly become the best players in the world. These machines rely on a data-driven, computational approach that allows them to make decisions with remarkable accuracy.
However, as a human player, I’ve learned to make intuitive decisions, especially when I could not compute every possible move. In chess, many decisions are made based on an understanding of positional theory and tactics, where intuition plays a crucial role. This is not to suggest that intuition should replace data but to highlight that both have their place—especially in investing.
For most of us, investing is about finding the right balance between intuition and data. Relying solely on data isn’t always the answer. Data can be incredibly insightful, but it can also be misleading if it’s not reliable. On the other hand, intuition isn’t just a gut feeling—it’s an intelligent way of processing information, shaped by experience and logical thinking.
Let me give you a real-world example. Yesterday, I had a conversation with a good friend and fellow investor about a project we were analyzing. We discussed whether to inject additional capital into the project through mezzanine financing or member loans. We performed a comprehensive analysis of the property, evaluating everything from its current value and budget needs to rent projections and market comparables.
This analysis was data-driven and essential for making informed decisions. However, the key question my friend kept asking was, “How do we know this property is really worth $50 million on an as-is basis when it’s still a work in progress?” The answer isn’t straightforward. While we had plenty of data supporting the valuation, there are factors that aren’t always easy to quantify—like the impact of a nearby hospital expansion that will bring thousands of jobs to the area.
Location, future developments, and other unique factors can significantly influence a property’s value, but they aren’t always captured by traditional data points. This is where intuition comes in, helping us make decisions when data alone doesn’t paint the full picture.
After our analysis, we concluded that the property could indeed be worth $50 million as-is, with a potential value of $65 million once fully stabilized. But could it be more or less? Absolutely. There’s always variance and uncertainty in such predictions. And with the current interest rate environment, where rates have recently spiked and may soon begin to decline, we had to factor in the potential tailwinds from falling rates—a consideration that isn’t purely mathematical.
The main takeaway here is that investing isn’t like chess, where every move can be precisely calculated. The rules aren’t always clear, and many factors are beyond our control. Decisions should be based on a mix of data and intuition, considering who you’re investing with, the business plan’s execution, and the ability to address unforeseen challenges.
As you face new investment opportunities or consider adding capital to existing ones, remember that uncertainty is always part of the equation. A book I recommend on this topic is *The Uncertainty Solution*. It reminds us that the world is inherently uncertain, and investing is no exception.
Real estate, while generally stable over the long term, can experience periods of volatility, much like the stock market. The key is to diversify and have strategies in place to protect against unexpected events—like the black swan events we’ve seen with COVID-19, inflation, and large fluctuations in interest rates.
Just like in chess, successful investing requires a combination of good intuition and an understanding of where things are headed. As of late August 2024, we anticipate that the interest rate easing cycle will begin gradually starting from September 1st rate cut, which should benefit many projects. However, the extent and speed of the future rate cuts remain to be seen.
Thank you for your time and attention. Until next time, keep balancing intuition with data in your investment decisions.
