When Investing Experts Make A Wrong Call
You’ve probably heard before that emotions can overwhelmingly affect investing. Rick Kahler, president of the Kahler Financial Group in Rapid City, SD, knows this better than anyone. But even he was recently surprised at how powerfully feelings can interfere with the best of plans:
Larry Light: Tell us what happened.
Rick Kahler: Investment success requires a person to have a high tolerance for boredom, which means that they have a deaf ear to the investment panic of the financial press. It is good for your financial health if you don’t follow advice on forecasting financial fortune tellers. Even if one of them is me.
In May 2020, the financial devastation of the pandemic occurred and the effects were largely unknown. Given the economic and physical uncertainty at the time, almost no one wanted to buy, sell, or even look at a home unless a move was already in the works. The sale of living space had almost come to a standstill.
Light: What did you say to your customers?
Bald: Even the most casual observer knew intuitively what the future of house prices would look like. I gave my clients a firm recommendation that they could put off a decision to buy real estate and wait a while. In a few months, the price of the retirement home you are looking to buy could have dropped significantly. “I predicted that like in 2009, prices could fall 5%, 10%, or even up to 25%.
I didn’t have second thoughts on this recommendation. After all, much of my formal education is in real estate. I have the highest commercial real estate certification, the CCIM. I have the highest level of valuation and brokerage licenses. I understand real estate. I have 40 years of real estate experience. I’ve been through many real estate recessions and booms. I am an expert.
And I totally and completely screwed it up.
Bald: Those who followed my advice and waited to buy residential property cost themselves a bundle. In spring 2020, home sales fell 18% from March to April and 10% from April to May. Then in June they shot up 21%. Instead of my forecast that house prices could fall like they did in 2009, in some cases they have risen by 10% to 20%. This is an epic failure by anyone’s standards.
Light: Nobody can predict the future if they are out of luck.
Bald: In a March 12, 2021 CNBC article, Diana Olick writes: “The real estate market is at a turning point after an amazingly successful year during the pandemic.” She had the following to say about the puzzling rise in property prices: “Nobody could have predicted it. Not the economists, not the real estate agents, and especially not the home builders in the country. But a pandemic caused an emotional run unlike any other apartment.”
Okay, it feels a little better knowing that I apparently had a lot of company.
Light: That’s for sure.
Bald: The operative word in their statement is “emotional”. I am reminded once again that markets, all markets, are driven by human emotions. The logical part of me dislikes this as illogical, but the fact that emotions drive all markets is inherently logical. And it is the logic of human emotion that drives markets that makes it impossible to accurately predict future market prices.
Light: Life in the pandemic has indeed become full of emotion.
Bald: Pointing out the emotions that drove the housing market, Olick writes, “The frenzy was extremely emotional as most aspects of everyday life were suddenly confined to their homes. Space became a major asset. It was also fueled by very attractive mortgage rates who have made more than a dozen record lows. “
Just as money affects every aspect of our lives, so do emotions affect our financial decisions. My predictions were historically and logically based, even obvious. However, they were wrong. Because of this, it is risky to entrust your investment decisions to experts who claim to be certain about the price movement of a market.