There’s a popular, and, I daresay outworn expression in many corners of our modern culture: Perception is reality.
Most people accept this as true because they can see many examples of it in their daily lives, and rather than question why that is, they shrug and accept it and go about their merry way.
Me? I’ve learned to question. Perception is not always reality.
Often, the perception is spot on, but other times the gap between the two is like a chasm. If you can spot these gaps and find a way to profit from understanding why, you can become an effective contrarian investor, zigging when the rest of the investing world is still zagging. The bigger the gap, the bigger the potential for profit.
Seeing What Others Don’t
How, exactly, do you find those gaps in the first place?
The answer lies in understanding how they come to be. Here are a few common causes I’ve found:
Real or imagined barriers to entry: This can often be a very real problem. For instance, certain investments are only legal to offer to “accredited” investors, meaning you must already have a substantial net worth and income. “It takes money to make money” can apply in this instance, but I’ve found the more frequent barriers are the ones most investors put up for themselves - “There are no good deals out there”, “It’s too technical”, “It’s too much work”, “I’m afraid of making a mistake”, “I’ve never done it before”, “Only rich people can do that”…the list can go on and on.
From my own experience, I can promise: (1) mistakes will be made, (2) you may have to learn some new things to master an opportunity, (3) it may indeed be a lot of work, especially at first, but achieving financial independence is not the exclusive domain of the rich. Each of these “barriers” can be overcome if you just have the will and understand making mistakes is often the best teacher. I’ll post in the not-too-distant future on managing the risk of your investing activities so the mistakes you do make don’t set you back in a meaningful way. In investing, we can be our own worst enemy and barrier to entry. Work to overcome the invisible barriers you’ve erected for yourself.
The “common” knowledge that everyone knows to be true isn’t: Just a couple of days ago at a conference I attended, a business executive with a bad leg asked if he could sit down next to me to give it a rest. We struck up a conversation and I told him I was writing an article on perception versus reality in investing. He nodded in agreement with the value of such an article and asked me what I knew about lithium. Now, I support an industry that uses it extensively, and while I’d never looked to invest in it, I thought I knew lithium pretty well.
He then shared that when the US evacuated Afghanistan in August of 2021, he invested in lithium and had since earned a 5x return on his money. I was stunned. I knew lithium had spiked but had no idea our leaving Afghanistan would have any bearing on that spike. Turns out, in his younger years, he did a military tour in Afghanistan and came to know about their substantial lithium deposits. He explained that one of the unspoken and perhaps primary reasons we were in Afghanistan was to access/control the vast lithium deposits there. I always thought opium was the main export, but it turns out they may have the world’s largest lithium deposits. I had no idea, but this guy, due to his unique background, knew the facts and profited handsomely from them.
A lack of financial education: In To Buy or Rent? I show how buying as an investor makes very little sense in Pasadena, California unless you’re betting on it as a speculator. When the financial productivity of a property is ignored in assessing its value, the prices can swing wildly. Our home, purchased for around $200,000 in the late ’90s, rose to nearly $800,000 in early 2007, dropped to $450,000 in early 2010, and now sits at $950,000 in 2022. Buying our home to live in at the wrong time could have had dire financial consequences for the buyer, setting them back a decade or more in achieving not only financial independence but also in successfully increasing their net worth.
Being able to look at buying any asset - including the one you live in - like an investor, grounds your perceptions in financial realities and increases your chances of knowing when to buy and when not to, regardless of the market-driven perceptions.
Appeals to one’s emotions: An example of this is the timeshare industry. Here’s how it usually goes: You’re on vacation at a swanky resort and the concierge asks if you’d like to take a look at their timeshares in exchange for a $100 gift. You say “Sure, why not?” After dropping the kids off at a really nice on-site daycare facility you are shuttled into a beautiful showroom with a big window overlooking the resort where a sales rep introduces themselves, makes you a double cappuccino with a mini biscotti, tells you about the fabulous vacations they’ve taken recently using their timeshare and then asks you how you like to vacation.
You answer yes, I mean who doesn’t like to vacation? And so they walk you through one of the units and you love how spacious and new it all is and they sit you down and show you how much better your vacations can be from now on and the cost isn’t really all that much. I mean you deserve it. Your family deserves it. Think of the memories you’ll make. So you eagerly decide to finance the nominal $40,000 loan and agree to pay an annual maintenance fee of $1,500 for the pleasure of owning one week in paradise for the rest of your life.
Then you find out you could’ve bought the same thing at half-price through a resale market, and a change in interests means you don’t want to go there every year for life. To exchange it to go elsewhere means spending even more money.
So, someone like me comes along and agrees to relieve the unhappy owner of that obligation, but at a price that can annually generate a 10%+ return on the cash we invest in them. True story. We own several weeks, use one each year, and profit handsomely from other people staying in the others. We buy them based on financial potential - aka reality - where the prior owners paid much much more to satisfy an emotional pitch (or was that itch?) for forever vacations.
Failing to see the forest through the trees: My best personal example of this is my experience investing in Bitcoin. I took a casual interest in Bitcoin in 2011. At that time there was a very small circle of very excited computer geek types hyping up this thing called Bitcoin as the future of money. I made no great effort to learn more about it at that time but registered in my mind that something might be brewing that I should monitor. So, monitor, I did. In late 2015, I decided I understood Bitcoin well enough to know it would be at a minimum the next tulip bulb craze, or, better, a genuinely transformative form of money. So, I decided to invest a guardedly decent sum in Bitcoin, about 2% of our net worth at that time and started to share with friends and associates my strong opinion that this might be the best investment opportunity of our lifetimes.
I was aware of a tsunami of negative press about Bitcoin. They called it a vehicle for criminals, a Ponzi scheme, that it would go to zero again, among other negative claims. Except criminals use cash, diamonds, and the global banking system and nobody seemed to have a problem with those. Since fiat currencies are the ultimate Ponzi scheme and Bitcoin was more limited than a fiat currency in how more could be created, that didn’t hold much water either. As for it going to zero, I saw it as a moonshot opportunity, big risk, big reward.
It made my decision easier that I had no debt of any kind at the time, so if this investment I was paying cash for went to zero, it wouldn’t have a material impact on our life.
By now, you can guess how it went. That original investment grew from 2% of our net worth to 50% of our net worth, and that was even after reclaiming multiples of the original investment as it increased in value. I recognized a reality that cut through the ocean of financial and mainstream media-created perceptions. I’ll write a post diving deeper into my Bitcoin investment and divestment decision process sometime soon.
So, that’s just a few real-life examples of how learning to spot reality in the fog of perception can accelerate your journey to financial independence. There are many more that I haven’t identified or have chosen not to pursue, but spotting just a handful of these opportunities and taking action to profit from them can be transformative to your financial condition. Master this ability and you will become a true contrarian investor.
Please note: None of this type of investing should give rise to crises of conscience. You are not creating the condition, only realizing it exists and then taking actions counter to the gap between the perception and reality. If anything, your actions stand to force closure in the gap as more investors like you come to understand the same thing. That’s the free market doing its thing for the betterment of everyone!
Where you should give pause is when you or others you are associated with are attempting to create the gap yourself. Also, steer clear of the rotting, low-hanging fruit of insider information. Never trade on knowledge of a company’s actions before they are publicly known unless you are clearly complying with SEC requirements for such activity (but even then, you may want to let your conscience be your guide - I’m speaking to you, Congressional representatives!).
It’s a Process - Learn it and Profit
While I’ve shown you some ways in which the gaps can come about, let me summarize what you can do to identify these gaps yourself:
Increase your financial literacy: Learn how to analyze the value of an asset in more objective terms. Using the litmus test of it having to be a productive asset can be invaluable in assessing opportunities in real estate and value investing in corporations.
Trade on your unique knowledge: In the world of collectibles this is one of the secrets of success. When you have a personal passion for art, comic books, coins, cars, whatever it may be, and you circulate in a community that is like-minded, you will have understanding outsiders simply cannot have. That specialized knowledge will allow you to recognize value where others don’t, so you can acquire something at less than its perceived value with one person and sell it to another who you know will pay more for that same item.
Don’t take everything at face value: Question what you read. Test it against questions drawn from Logic 101. I readily dismissed most of the so-called objections of the financial media by applying this technique and thereby removed several barriers to my choosing to invest in Bitcoin.
Look at investment opportunities in at least three ways: (1) Get in the weeds - learn the nuts and bolts of how the investment works, then (2) Step back and examine the big picture - Look at what the socioeconomic and political influences are around the investment that could impact its relevance, growth potential, and profitability. (3) Look at timing and contingency - could the underperformance of an asset be a function of poor timing? - It’s a good product, or truly innovative, but nobody seems to care…sometimes a great product or idea doesn’t flourish until another product or idea better facilitates its adoption. If you can spot these gems early and validate that the contingent forces are already in motion, buckle up. It could be a fun ride!
Okay, enough for now. Until next time, may peace and prosperity be with you.
The Natural Economist
Next up: Investing through your 401k…make sure you light the match!
In the original e-mail version of this article to subscribers, there was a typo in the date referenced for the US evacuating Afghanistan. What should have said 2021 showed 2001. The above version has since been corrected.