Confidence As People Learn About Real Estate Investing

The Dunning-Kruger Effect

I'm continuing to work on the new monster real estate investing PowerPoint presentation (1,076 slides so far), which will be a series of classes and eventually a book.

Right now, I'm taking some time to redo the code for the charts from the Real Estate Financial Planner™ software, and that's taking A LOT more time than I originally thought. Once that's done, I will redo a ton of the slides with new, improved versions of the charts, and those will—eventually—also be used in the new book.

As I work through this stuff, though, I am reminded of when new real estate investors would come to a single class on deal analysis and—falsely—believe that by attending a single class on the subject, they knew everything they needed to know and did not need to attend any more classes on it.

Confidence

Apparently (and I am not an expert on this), this is a known psychological effect called the Dunning-Kruger Effect... where newbies overestimate their abilities (confidence) in a topic they have very limited knowledge, expertise, and deliberate practice in.

So, based on some other charts I saw, I created an infographic to describe it for real estate investors.

Stage 1: What’s this “Real Estate Investing”?

In stage 1, people don't really know anything about real estate investing. They have very little (or no) knowledge, expertise, or practice with real estate investing and therefore very little confidence.

Stage 2: This is EASY and I know EVERYTHING.

In stage 2, people who have read a book or three...

...especially ones that sell the excitement, the attractiveness, the simplicity, and how incredibly wealthy you will become by investing in real estate part-time, with no experience, no money, no credit, no family, no friends, no running water, no ability to read/write, no clothes... you get the idea...

...they read a few books like this and they have utmost confidence... they truly believe they know everything.

They believe that everything is SO EASY and that the $20 book (from 1973) they read (that they got for $1.99 at Goodwill on sale) is a book of forgotten secrets that only they have discovered. Everyone else is an idiot. They're the only smart people... because they read this book and the author made it seem so easy.

Stage 3: There’s a little more to this than I originally thought.

If they keep at it long enough... seek out additional knowledge, expertise, and deliberate practice to get better/improve... they eventually realize that there might be a little tiny bit more to this real estate investing thing than they originally thought after reading a $2 recycled book on the topic from the '70s.

Their confidence begins to slip.

Stage 4: I’m NEVER going to understand this.

With more time invested... and usually a lot of money spent on get-rich-quick gurus speaking the language of "secrets" and "things they only know," they start to think... I'm NEVER going to understand this... everyone has these secrets, and they're only willing to share them with me if I give them $100, then $1,000, then $10,000, then $50,000 for coaching.

Confidence drops to near all-time lows.

Unfortunately, many people quit between stage 3 and 4.

Stage 5: I’m starting to “GET IT”.

But, if they persist and continue to acquire knowledge, gain expertise through action, and deliberately practice at improving their weaknesses and gaps... they eventually bounce off the bottom confidence level, and things start to click.

They start to gain some confidence as they truly understand the nuances of the details of the real estate investing business.

Stage 6: Trust me; it is COMPLICATED.

Over time, the more they learn, the more they begin to truly understand that it is not as easy as the books make it out to be.

There are no "secrets" you can easily buy for $100 or even $50,000.

But there is knowledge to gain.

There is expertise to be acquired through implementation and action.

There are weaknesses to strengthen through deliberate practice and seeking out experts.

They come to understand that while the basic ideas are simple and easy to grasp, the devil is in the details and nuance.

They come to learn that it is complicated and not something you can learn with a cute meme or alliterative phrase.

Small, Incremental Improvements

In the beginning, you read a book and maybe 80% of the information in it is new to you... you gained so much from the 10 hours invested.

On the second book, maybe 40% is new. Same 10 hours invested, but you learned less. You still learned important things, but not as much.

On the third book, maybe 20% is new to you. Same 10 hours invested, but now you're becoming more knowledgeable.

By the 100th book, you're spending 10 hours to pick a single gold nugget or two. Or, maybe you're exposed to how someone else does something slightly different than you do. A lot of the joy of “learning something new” is gone; it can feel like a grind.

The monstrous class, course and eventual book…

In the new 1,076-slide monstrosity I am working on, I am covering insights you won't find in other books because—for whatever reason—no one has opted to analyze an entire investing strategy... looking at how net worth, cash flow, debt-to-income, debt to net worth, reserves, and about 100 other measurements change as you implement an investing strategy.

I liken it to a blueprint.

You wouldn't dare build a house without a detailed blueprint. You wouldn't haphazardly just nail up a board here and there and hope that... at the end... you have a functional house to live in.

But people do that with their investing plan.

They’ll buy a house, sell a house, refinance a house... all without understanding where these all fit together. How things like debt-to-income and risk look over time with each purchase. And, a lot more…

I plan to share a lot more about this as I start teaching the classes and the book, but that's the idea for now.

Love,

James Orr
Real Estate Financial Planner™