Why Diversification is Investor Ignorance

Why Diversification is Investor Ignorance

I'm going to humbly group myself with Warren Buffett and Mark Cuban because we focused on one thing and made our fortunes in our area of expertise. Warren's expertise was in his company Berkshire Hathaway, Mark’s was in software, and mine is investing in commercial real estate.  That approach differs from the everyday investor who's trying to diversify by creating multiple streams of income and building on them. This is what they call diversification, and they never become an expert in anything. They're always dabbling in things and trying to grow their income that way. Here's why diversification is investor ignorance...

Focused Investing Produces Extraordinary Results

When we focus, we become experts in a certain area producing extraordinary results. Remember, Mark and Warren are famous because of they can produce extraordinary results with their investments. You may be reading this blog because of the results I was able to produce with commercial real estate.

This is the opposite of the everyday investor because they want to have the multiple streams of income. There's no discipline and it leads to frustration. I can relate to this. In my first five years of leaving my corporate job to do commercial real estate full time, I had too many things on my plate. I could get nothing done or become an expert in anything and became very frustrated because it wasn’t producing the results I wanted. Now that I am focused and disciplined like Warren Buffet and Mark Cuban, I can produce extraordinary results. I'm a big believer in this acronym for FOCUS:

Follow One Course Until Successful

Focused Investing Produces the Capital to Diversify

Because we have an area of expertise and are highly focused, unique opportunities present themselves to us and we invest in them. That's what we call diversification. We were able to invest in these opportunities because our expertise and results produce excess cashflow and equity. For example, I was able to invest in syndications, other people, companies and other specialized funds because we had the extra cash flow and equity built up waiting for these opportunities.

The everyday investor who isn’t focused and tries to diversify their investments in the early stages can't take advantage of any unique opportunities because they have no money. The result of this approach is they don’t have the capital to take advantage opportunities because they're spread too thin. Having an area of expertise and being focused in the beginning provides the opportunity for diversification later.

Focused Investing Enables You to Build a Team

Now that we have been successful in our area of expertise and been able to diversify by investing in these unique investment opportunities, we must build a team to manage everything. By building a team, it builds upon itself and you will not believe the massive leverage that can be attained in commercial real estate by having the right team. That's what we teach our students, assemble the right team and have things build upon each other. The everyday investor doesn’t have a team and they're struggling because they must do everything themselves.

Do you now see the difference between Warren Buffett, Mark Cuban, and myself versus the everyday investor? We are increasing in wealth and the everyday investor is still struggling to get results. Which one do you identify with?

3 Tips on How to Correctly Diversify Within Commercial Real Estate:

 

1. Choose Commercial Real Estate

  • You need to study it like crazy.
  • Start small, there’s no reason to start with a $10 million property because it’s too risky. You can make money by starting small and then go bigger and as you go bigger, make more money.
  • Always focus on making money, this is not a speculation business. The properties will start to produce excess cashflow and equity buildup that will allow you to diversify to other things.

We do the opposite from the traditional investor. We focus on becoming good at something first, creating the cash flow and equity, and then we diversify. That's what Warren Buffett does, that's what Mark Cuban does, and that's what I do.

 

2. Focus on These Commercial Property Types

  • Cash flowing properties. We don't do any speculations, everything is conservative, and we focus on cashflow and we focused on the statistics.
  • Favorable demographics, for example the job outlook in the city. Wherever we invest, you must have jobs. If there are no jobs, then you have no tenants.
  • Deal upside. What do I mean by that? Deal upside is where we can increase the NOI in their property, through rent increases by charging back utilities, redoing the leases, or reducing expenses. When NOI goes up, so does the property value.
  • Only invest in B and C class properties, no A class, and no D class. A class is too expensive and D class is too risky.
  • Find motivated sellers. This is the key to the rest of this. It’s called lead generation and that is what we are good at.

 

3. You have limited time on earth.
This is from me on a personal level. You have limited time on earth, especially if you're in your late 30's or your 40's and upward. You don't have time or energy to become an expert in four different things at that age. So, what I want you to do is to focus on one thing and become an expert at it so you can participate in what Warren Buffet, Mark Cuban and I do. Having an area of expertise and being focused in the beginning builds equity and cash flow and provides the opportunity for diversification later.

 

I hope now you have some tools in your tool belt that will enable you to beat the socks off of the everyday investor!

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