I recently read a blog post where the author was a bit smug about all the smart financial things he was doing and how these intelligent decisions had protected him and his family through this recession. I am glad to hear it; smart financial choices do protect us through a downturn. Having some savings and avoiding unnecessary risks can make us look smart but sometimes the truth is we just got lucky.
Here in Florida, lots of people did some really risky real estate deals before the crash. Many everyday working families decided that they could be successful real estate speculators. When reading the definition of speculator, they missed the risk part; higher-than-average risk in return for a higher-than-average profit potential. Most of those that you thought made a “bundle” during the boom really didn’t. They may have made out on some deals, but most of them were still “in” when the market fell. The ones who found a chair when the music stopped were for the most part, no smarter or better informed then the rest; they just got lucky.
That’s the thing with risk; sometimes you are going to win, sometimes you are going to lose. You have to be sure that you can afford to take the loss before you play.
There is an implied inference that those that really got hurt had it coming. While this kind of thinking may make you feel less vulnerable, it’s simply untrue. Many who were leading conservative financial lives have been greatly affected, through no fault of their own, by the drastic change in the real estate market. Others, who were normally conservative people, did act outside their normal comfort zone. They were seduced by the tales of their neighbors and friends turning huge profits.
Overgeneralization is an irrational thought process that we must guard against. Whenever we observe a few people winning at something (like flipping houses), we find it easy to conclude that everyone is making a fortune and we better rush to get ours. There are two major flaws in this thinking. The first flaw is our observation is incomplete. We hear the success stories but not the failures because that is what our friends want to talk about: the times they hit it big. Secondly, we without sufficient investigation, conclude that if their deal made money, then our deal will also. Yikes, even in a boom market, profit is not guaranteed.
I was not speculating through the boom or bust but I am not so smug as to say it was because I was so smart. I know it could have very easily been me.