By Mike Myatt, Chief Strategy Officer, N2growth [caption id="attachment_36" align="alignleft" width="99" caption="Rational Pessimism "][/caption] It's been a few years now, but not so long that you shouldn't be able to recall the phenomenon of "irrational exuberance" as the commercial real estate market...
By Mike Myatt, Chief StrategyOfficer, N2growthIt's been a few years now, but not so longthat you shouldn't be able to recall the phenomenon of "irrationalexuberance" as the commercial real estate market raced towards itspeak. We saw even the most savvy of investors start to believetheir own smoke, and we watched the amateurs enter the market fartoo late in the game thinking not only that everybody was invitedto the party, but also that the party would never end. Whattranspired as a result of the frenzy and chaos associated withirrational exuberance was an evisceration of equity that had notbeen seen in generations.With this week's column I'm coining a newphrase which I call "rational pessimism" to describe a mindsetimpacting today's current market environment in a different way,but with perhaps a similar impact. The phrase rational pessimism isintended to define the phenomenon that is exactly opposite ofirrational exuberance. Unlike the impassioned investors of old whoflocked to the market with a herd mentality in times of irrationalexuberance, the current herd of unimpassioned investors, infectedby rational pessimism, are simply choosing to stand on thesidelines waiting for markets to stabilize and return to normal.You see, one phenomenon impacts investors during robust marketswhile the other impacts them in down markets. Both of thesephenomenons are plagued with flawed logic based on extremepositions, and both equally work against healthy markets.Irrational exuberance accelerates market decline, and rationalpessimism slows market recovery.So, is it rational to bepessimistic in today's market? With virtually every piece ofeconomic data that hits the market being negative, sure it is (thusthe name)...But however well reasoned rational thinking may be, itisn't always right thinking. A market simply cannot recover withoutparticipation. A dormant market can only be jump started byinvesting, lending, building, buying, etc., so as rational as yourpessimism may be, it isn't managing your risk. Your rationalthinking is sadly only exacerbating your problem. Let mebe clear...I'm not asking you to throw caution to the wind, butrather to break from the herd by using contrarian instincts tocapitalize on significant opportunities that do exist for thosewilling to pursue them. Real players don't manage risk nearly asmuch as they exploit opportunity. Look back at any down economicperiod and it is not those who take a flight to safety and sit ontheir cash that increase their net worth, it is those that taketheir cash and make astute investments while their competition isparked in a safe harbor that win big. By getting off the sidelinesand back into the game you'll not only be helping yourself, butyou'll be doing the one thing that truly will make a difference inthe market...you'll be making a market.
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