Editor’s Note: Michael Cobb is the CEO of ECI Development, a leading real estate development company focused on the emerging markets of Central America. Mike has spoken at hundreds of investment conferences about real estate financing and development, and consulted with top projects and investment publishers on the subject.
With this issue of Golden Opportunities, Mike offers the second in a three-part series on questions that every serious investor needs to ask about the markets and their wealth.
— Brien Lundin
The Perception Gap Part Two in a three-part series on questions we need to ask ourselves when investing.
A Guest Editorial
By Michael Cobb The Dow Jones Industrial Average is at an all-time high — over 23,000 mid-November 2017. Have we bet the farm on stocks? Are the shoe shine boys giving stock tips again?
Maybe we should remember the lessons from 2007-2008.
Elite investors understand that true asset class-, country- and sector-diversification is the key to their financial success. They never, ever let other people do their thinking for them. And most importantly, they understand that perceived risk is not real risk. Of the three simple ideas, perhaps the third is the most profound.
There is a “gap” between what feels like risk and actual risk. They know that in that “gap,” there is profit potential. Huge potential. These elite investors see the gap. More importantly, they possess the courage to charge through it.
A great example of this was a friend of mine, Ron Zent. He was a developer in Belize who, 45 years-ago, purchased 14,000 acres in Belize for not much more than a song. He tells me that his friends in Houston laughed at him. They said, “You’re crazy.”
Part of Ron’s massive holdings in Belize Maybe, but Ron saw the gap between perceived risk and actual risk. Ron passed away in 2015 worth over $20M. Ron’s gone, but I bet his heirs are happy that he decided to go to an unknown, unpopular and underdeveloped country despite what his friends in Houston thought. He diversified into something that others thought crazy, and did very well for himself.
Ron did his own thinking, saw the gap, then charged through it. You can too. It’s easy if you follow these three simple principles. 1. You must observe some long-established and empirically proven investment rules about diversification.
2. You are required to do your own thinking, even if it means some extra effort and slight to moderate emotional discomfort.
3. You must allow your objectivity and rationality to prevail over fear, or fear will condemn you to a life of mediocrity. Principle #1:
You must follow some rules. There are established rules for what percentages of your net worth should be in various asset classes. They vary with age, total assets, goals and objectives...but they are there, and should be followed.
Modern portfolio theory says diversification is the single most important factor for maximizing long-term return. Diversification is what keeps you out of trouble but, more importantly, it exposes you to the multitude of winners in the various sectors that run counter-cyclical to the NYSE and other traditional markets. Take a look at the $30 Billion Harvard diversification model. It’s chock full of hard asset classes like Private Equity Absolute Return, Commodities, Real Estate and Emerging Markets. Harvard has over $3 billion in timber assets alone. Timber at 10% of the endowment — imagine that. Together the “alternatives” make up 74% of the endowment. That’s 1% shy of three quarters of their investable assets. When the big money folks think about diversification, they think “hard assets” and outside the box. And they want real control and direct ownership, not foreign ETFs and Nestle stock for international diversification on the NYSE. They want to own physical real estate. They like investments in emerging markets. They see commodity ownership as a hedge to the monetary bubbles and inflation.
What’s your investment allocation right now? Think about your portfolio. What do you have invested in these sectors above? Do you have the sector diversification you think you need? These are important questions for you to consider right now. Principle #2:
Never let other people do your thinking for you. But you would never let other people do your thinking for you. Really? Let’s see. “Nicaragua.” What’s the first thing that comes to your mind? Is it a positive word association? Be honest. Is danger what you thought of when you saw the word Nicaragua? If so, it’s not surprising. Most folks have a negative feeling when they think about Nicaragua. But unlike “most folks,” you are very likely to read on, see the facts yourself, and draw your own conclusions, aren’t you? Gosh I hope so.
According to the World Bank and the Economist Intelligence Unit, Nicaragua is the second safest country in Central America. It is also the country that best protects investors, measuring transparency of transactions, shareholders’ ability to sue officers and directors for misconduct and strength of investor protection index. If the word Nicaragua didn’t conjure up ideas of excellent health care, a booming economy, technology companies, call centers, manufacturing, Bell South, Unilever, Quiznos, TGI Fridays, Payless Shoes, Radio Shack and a host of other international companies all doing a booming business here, chances are someone else has been doing your thinking for you. If you didn’t think about the region’s second fastest growing economy and one of the safest countries in the hemisphere, someone else has been doing your thinking for you. CNN and the other news organizations love to cover blood, guts, tragedy and misfortune. Sure, there was a civil war in Nicaragua...27 years ago!
The media left before the blood was dry to cover some other tragedy and misery to keep ratings high and advertisers happy. The only real news from Nicaragua in the last 27 years has been largely good news, and when was the last time you read or saw that on TV?
Baby Boomer Surfers Enjoying 80-degree Pacific Waters
and Empty Waves at Gran Pacifica
Zip Line Through the Cloud Forest
& Oceanside Golf at Gran Pacifica
500-year-old Colonial Granada, Nicaragua Tourism growth is up more than 10% per year, every year the last decade. More visitors mean more people seeing the reality for themselves, some of whom get the joke and make investments. The perception gap is closing with each and every investment made. And remember, the gap is where the money is, right?
Is Nicaragua the next Costa Rica? Many experts say that it is. Do you wish you would have purchased property in Costa Rica 20 years ago? The smart answer is “yes.” You would have made a ton of money.
Do your own thinking. A small investment of time and money to visit Nicaragua might uncover the best long-term investment you’ll make this decade. Nothing beats boots on the ground and serious investors come and visit Nicaragua to see with their own eyes, walk with their own feet, think for themselves and draw their own conclusions.
It’s this “little extra effort” that could pay off with huge dividends in your bank account. Principle #3:
Risk and the perception of risk are two very different things. Again, the “gap” is where the greatest profits are. It’s called arbitrage on Wall Street. Seeing the gap, and then having the guts to charge through, is what produces greatness.
In sports, it’s what separates the average college running back from the one who makes the pros. In business, the elite see the “gap of information” and that’s where they make their mark. They see the hole and run hard to make it through before it closes. The same is true in the investment world. Only the hole is not a physical one, it’s mental...and when the hole closes, so does the opportunity for big profits.
The gap between risk and perceived risk is where the great profits are made. But are real risk and the perception of risk the same thing? Sometimes yes; sometimes no. It takes a hard analysis of the facts to find out.
For example, many people drive cars, yet are deathly afraid of flying. This is insane, because statistically flying is 60 times safer than driving. But people will zoom down the freeway texting on the way to the plane, and be deathly afraid of the flight ahead. So how does this tie back into investing? At first glance, what appears or feels risky may actually be a lot safer than we think. Flying is far safer than driving. Yet for many it feels exactly the opposite. Another example is ownership of property in Latin America.
What if a small amount of due diligence on your part would uncover the facts and reality of such an investment? What if you examined this data under the light of objective scrutiny and it showed that owning a hard asset overseas was indeed less risky over the long term than owning a stock market index or mutual fund from Wall Street?
John Kenneth Galbraith, the famous 20th Century economist, sums up the issue very well: “Faced with the choice between changing one's mind and proving that there is no need to do so, almost everyone gets busy on the proof.”
Are you everyone? Or are you someone who can look at the facts and make an informed decision with logic and rationality. The time to act is now. But how? Diversify The diversification model of the Harvard Endowment shows the critical importance of wide sector diversification. It requires setting aside pre-conceived notions and stereotypes pounded into our heads by the likes of the mainstream media. It requires us taking some risk, yes, but measured risk, and some thick skin to deal with the silly nonsense from friends who probably let others do their thinking for them.
If you are reading this, you are likely in a good spot to keep an open mind and consider alternatives the average investor won't.
One example of convergence in the three powerful diversification sectors is ownership of a parcel of teak timber in Nicaragua. This is the trifecta of owning real estate in an emerging market, planted with a highly valuable, internationally demanded commodity. (Please note for transparency that I am a part owner in a company, Gran Pacifica, which plants, maintains, harvests and then replants the trees for the next cycle.)
The fact that you can own a half-hectare of baby trees for less than a reasonably equipped Toyota Camry or a Ford F-150 is amazing. Imagine owning a long-term, cash-flow asset, one that appreciates over time, and something that helps the environment. Now add that it creates a multi-generations legacy for your family, and you’ll see that owning Nicaraguan teak timber could be a pretty sweet opportunity for you. $30,000 Depreciating Assets like the Camry and F-150
Teak Timber – A Legacy Investment for You, the Kids, Grandkids,
Great-Grandkids, and Beyond. I started my first teak plantation 19 years ago with trees pictured above in Panama, to the heckles of some friends and business associates in the small town where I lived then. This timber will be ready for harvest in seven more years for an exceptional ROI. Then it will be replanted for the next harvest for my girls. Meanwhile, the land alone has seen its own 800% increase in value. The teak timber even more. Follow The Rules Remember the rules: 1. Diversify your assets.
2. Do your own thinking.
3. Define the gap and charge through it. By diversifying our assets, we capture the widest set of non-correlated opportunities and absolute, long-term return. By doing our own thinking, we are more likely to get in at the ground floor of opportunities. The little extra effort required to do our own thinking pays off handsomely. And finally, by defining the gap, we can clearly see that there is a difference between perceived risk and actual risk and this allows us to succeed where others fear to tread.
Follow the rules the big boys use. Do your own research, dig a little bit and see what opportunities are out there perceived to be “in the fringe.” And finally, make a commitment to yourself that you will do what you fear most and conquer fear. Do those things and see what a difference it makes in your life.
Note: Gran Pacifica has an ongoing planting schedule annually, whether or not it sells any of the planted parcels to third parties or retains them for the ROI downline. Our company understands the powerful benefits to our investors when we find ways to combine an emerging market with real estate and a commodity that has been popular and in demand worldwide for more than 300 years. We will continue to capitalize on this investment internally because we know the value of being “outside the competition.” Can you see it too?
To read more about teak timber in Nicaragua, the winning trifecta of asset sector diversification click here. |
