Recently, EG was invited to submit a second round bid on an office asset in Melbourne. We were told by the selling agents that the winning bid was likely to be on or just above $70 million. After several weeks of due diligence and debate, the maximum price that EG could justify was $66.7 million and that's what we submitted.
So when an EG colleague texted me the inevitable news that we had missed out, I replied: "Amen" - my standard tongue-in-cheek response when a deal dies.
Understandably my colleague expressed exasperation at "so much effort wasted yet again". I sympathised but texted:
"We get paid NOT to scratch the itch 😜".
More about the itch and the emoji later, but first a little about what's at stake.
Discipline Separates the Good from the Great
Perhaps the greatest of the American Presidents, Abraham Lincoln, once gave this insight into the philosophy behind his success: "I walk slowly but I never walk backward."
For investment managers, the equivalent of "walking backward" is losing capital. And to demonstrate the importance of never walking backward, below is a graph comparing the long term investment performance of two portfolios: (1) four "great deals" and one "bad deal" (blue line); versus (2) five "good deals" (orange line).
After 10-years, the portfolios are approximately equivalent in value. But over a 30 year time frame, the portfolio that "walks slowly but never backward" out-performs the "great but occasionally bad" portfolio by some $3.6 million.
Worth pausing here to absorb the magnitude of the difference: an additional $3.6 million to fund your retirement. It's nothing short of life changing.
Public attention typically follows the blue "hare" investor (the great deals and occasional bad deal make for good press), while the orange "tortoise" investor walks noiselessly past the madding crowd.
Moral of the story? Avoid bad deals like the plague, which - especially for non core assets - means studying the skies to discern the seasons.
(To understand the difference in approach for core and non-core assets, see my blog, Location vs Timing).
To Everything There Is A Season
There is a season for everything under the sun. A time for buying and a time for selling. A time for boldness and a time for caution. A time for urgency and a time for patience.
Oh, and there's that less poetic season - I call it the "itchy season" - when it's time for looking and not buying; for itching and not scratching.
Let's face it, we all enjoy doing deals. It makes us feel productive and what's more it gives us a good old fashioned hit of serotonin, the "happiness hormone".
So the itch to make an acquisition is very understandable - particularly for optimists, who are serotonin junkies.
What makes it even harder is that itchy seasons are typically characterised by high transaction volumes - deals abound during this season and there is much back-slapping happiness to be had. But the deals all too often don't stack up.
During these times, I relate to the anguish of Coleridge's Ancient Mariner: "Water, water, every where, nor any drop to drink."
Why An Itch Is Difficult To Resist
It feels so darn good when you scratch a testy itch ... until of course it starts itching more and drives you crazy. Have you ever wondered why that might be?
Well it turns out that scratching (much like deal doing) causes the brain to release serotonin. Serotonin acts to reduce pain but (oddly) it exacerbates itching. For this reason, pain is often easier to endure than an itch.
So that's the science behind itching - but what can we do to control our urge to scratch ?
The One Armed Man
When I was still a student at law school, I became so interested in a particular form of yoga that my brother (Jeff) and I decided on the radical plan to fly one of the yogi masters (Ashok) from India to personally induct and train us. We figured it would be cheaper than the two of us flying to India and, happily, Ashok accepted.
During meditation training, I once complained about a persistent itch. Ashok looked at me intently and said: "Nobody ever died from an itch, Adam", and then added "Except of course for the one armed man hanging over the cliff with an itchy bum." I burst into laughter and the itch instantly disappeared.
Ashok understood that it was important for a leader not to "look too good nor talk too wise" - which, in emoji, roughly translates to 😜.
How to Avoid Scratching an Itch ... Literally
Ashok taught me that there are two ways to deal with a persistent itch. The apprentice, he said, uses distraction; the master uses attention.
The apprentice will start chanting a mantra; they will not look at the body. Changing your focus is a great strategy when it comes to not scratching an itch.
The apprentice, he said, uses distraction; the master uses attention.
The master does the reverse. Ashok recommended that I just sit with the itch and observe it rise and fall. "Become its friend" he would say with a serene smile, "stop fighting it and it will disappear all by itself". When, on one occasion, I complained in frustration that I felt as though an army of ants was creeping all over my body, he giggled and said: "The creeping is on the inside Adam, not outside."
With practice, I learned to overcome my urge to itch. I just paid attention without opening my eyes and watched it ebb and flow. Within a few seconds, the itch would disappear. And when all the pains and itches and ants disappeared and the body settled in its right place, I experienced however fleetingly something of the "peace that surpasses all understanding".
When I opened my eyes and looked triumphantly at Ashok, he just nodded and said: "Attention is the great sword – it cuts through everything."
How to Avoid Scratching an Itch ... Metaphorically
So now let's get back to the thorny business of investment decisions, and the very real pressure we all feel to indulge our itch.
There are three anti-scratching strategies worth considering:
1. Distraction. Make sure that you and your team have other projects and/or business opportunities that you can direct your energies into whenever you encounter the itchy season. I know of many successful property investors that have a cash flow business that they deliberately pour themselves into to distract themselves from scratching, others take a prolonged break.
But, if that's not a viable option ...
2. Attention. Focus on process and not outcome. Double your efforts to search for the right deal, without beating yourself up if you aren't successful in the short term. The itchy season will soon come to pass, so there's no need to scratch. Just watch it come and go.
Either way ...
3. Don't hang around deal junkies. Scratching is contagious. If you keep company with people who are routinely scratching their itch (and often bragging about it), you will very likely start scratching your own itch. And the more you scratch the more you'll itch.
To those who follow these disciplines, theirs is the serenity that Thomas Gray speaks of in his 'Elegy Written in a Country Churchyard' (1751):
Far from the madding crowd's ignoble strife, their sober decisions will never learn to stray; and along the cool sequestered vale of life, they will keep the noiseless tenor of their way.
Sober and noiseless seem a little pedestrian perhaps - but like Lincoln, you will never walk backward.