JF2228: Are You A Passive or Active Investor | Actively Passive Investing Show With Theo Hicks & Travis Watts
Today Theo and Travis will be sharing the difference between active vs passive investors, the common personality traits found in both, and why you should get started right away.
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We also have a Syndication School series about the “How To’s” of apartment syndications and be sure to download your FREE document by visiting SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow.
Theo Hicks: Hello, best ever listeners and welcome to the best real estate investing advice ever show. I’m Theo Hicks and today we are back for another edition of The Actively Passive Investing Show with Travis Watts.
Travis, how are you doing today?
Travis Watts: I’m doing great, thrilled to be here as always.
Theo Hicks: Thanks for joining me. Looking forward to our conversation today. We are going to talk about what type of investor you are. This is going to be based off a blog post that Travis wrote. The three things we’re going to talk about is first, figuring out what the two types of passive investors are, what the characteristics are of each. And then based off of that, we’re going to talk about the second part, which is becoming self-aware of your personality, to see if you’re more conducive for one or the other. And then lastly, we’re gonna also talk about understanding your risk tolerance. All about self-awareness, all about understanding based off of who you are, if passive investing or active investing is ideal for you.
I’m going to let Travis take over for each of these sections. First, Travis, tell us about the differences between the passive and the active investor.
Travis Watts: Sure. Well, first of all, I’m very excited about this particular topic because the name of our show, The Actively Passive Show, so we are talking about the active side, the passive side… Trying to reel it in and bring it home. I know sometimes we get on these rants and tangents of celery juice and other topics, but this one’s spot on.
I think I titled this “What type of investor are you: A quick guide to self-awareness”, which I’m a big advocate for. I think the more self-aware you are, the better decisions you’ll make and the more in line with your goals you’re going to be. That was really the intent, is to help people uncover what may be right for them.
To your point with that, yeah, the first section that I point out is painting the picture. Of course, I go into much more detail on the blog, but I’m just kind of bullet pointing and recapping here… Active investor mindset versus passive investor mindset, and a few things you might pick up on that resonate with you.
As I go through this really quickly, just think to yourself which one resonates most with me and why that might be. I’ll start with the passive investor. I’ve just got a few bullet points, and of course, these are generalizations; everybody’s unique, different, you may be a combination of both… In fact, to be quite honest, most people are a combination of both active and passive. I’m the extremist, being I was full active, now full passive, but you don’t have to be that.
The passive investor often lacks the time to frequently monitor their investments. I say this all the time through podcasts; the doctor, the dentist, the lawyer, the attorney, and in my situation years ago, the oilfield worker – career-focused. Yes, I was doing the active stuff. But man, it became very difficult to find the time to do that when I was so career-focused.
Number two would be enjoys reading financial news. You do have a vested interest in investing. Being passive doesn’t mean you tune out and you look the other direction, and you just put money in a 401k, and you’re done. That would not fall under these categories the way I’ve laid them out.
The next thing would be likes to own a little bit of a lot. Hence the private placements, the syndications being a 1% or 2% owner perhaps in an apartment complex. Also, you can relate this to stocks, this may be more of the index fund investor that likes to own just a little bit of all the companies and not necessarily cherry-pick and handpick their favorites
At the end of the day, and to that point relating to stocks, seeks to match but not necessarily beat the market. You want to be in the game, you want to be participating, but your real goal isn’t to say, “I’m just going to annihilate the competition out there. I’m the best of the best.” It’s just to be in the game at the end of the day.
Now, let’s switch over to the active mindset relating to real estate and stocks, and any other asset class. The first thing would be “Likes to create their own unique strategy.”
My first property when I was active full-time was a unique strategy. I had found this undervalued two bed, one bath, I thought I’m going to move in as an owner/occupant. I’m going to rent out the spare bedroom. I’m going to make it fully furnished. I’m going to custom hand pick out all these things I can find frugally on Craigslist. I was kind of custom designing my own strategy that I felt was competitive among what I was seeing out there online, and among the competition.
Number two, doesn’t necessarily value diversification. What I mean by that is often the philosophy or the mentality of the active investor is put all your eggs in one basket and watch the basket closely. I don’t know who coined that term or that quote, but that kind of resonates here. You’re probably, in terms of real estate, doing active deals in your own local market, so to speak, not necessarily doing them across the US.
Number three, seeks control over his or her investments. You like to be in control, you like to call the shots, you like to make the decisions. That’s a huge component to being active. I enjoyed it for a while. You may have, as I pointed out, a unique skill or an upper hand in the marketplace, whatever that may be; you may be self-reflecting and thinking, “I can do this better than what I see other people doing it as.”
Last but not least, you essentially seek to beat the market, not just participate in it. You think, “If I do this myself, I’ll have higher returns, I’ll have more reward coming from it, because I have that unique ability to get out there and do it myself.”
I’ll pause there to not get too long-winded, but that’s kind of the active and the passive mindsets and the difference between the two.
Theo Hicks: Yeah, I couldn’t agree more. And I’m thinking back that the book I’m working on right now; I’m not sure exactly what the title will be, but it’ll be focused for passive investors. And that’s essentially exactly how we, in the book, define the differences between the two.
The categories for me were you mentioned control – so the control is going to be different… We’re gonna talk about it a little bit later, but the risk is going to be different. The time commitment and feasibility is going to be different. And then the returns, like how much money you’re going to make is going to be different between the two. I think those are the four main categories that will show you what the differences are between these two.
Okay, so now we know what each of these are. The next step is to look at the different personality types or to become aware of our own personalities, to see which one we are naturally a better fit for.
Travis Watts: Exactly. As I was writing this, it felt a little two bullet-pointed and analytical for me. This is kind of the portion of my article or blog that I go into a little bit of story mode. And this is the self-reflection piece more than anything. The whole blog is about self-reflection, but this is thinking back to, for example, your childhood. Where did you develop your beliefs around money and around finance? How do you respond to financial situations?
Let’s say that you own a bunch of stocks, and then you tune in to your phone tomorrow, and they’re down 30%? What does that mean for you? There’s folks on every side of the spectrum, people who could say, “Eh, markets go up and down whatever,” and people that freak out and say, “I’ve got to sell everything. I’ve got to get out of this market. I’m panicking.”
It’s great to be able to be self-aware of that, because you may be in the wrong asset class all together, you may be using the wrong strategy all together. It’s thinking through, and I point out a few examples, things to think through there, on the personality. For me, on a side note, I was raised by two very frugal parents. I’ve always found a lot of confidence and peace in the ability to save and to buy things below value. That sits really well with me.
As I was in the stock market at one time with a lot of my portfolio, I learned pretty quickly I can’t stomach the ups and downs. It was so unsettling. I couldn’t sleep at night. I wasn’t in panic mode, where I was about to sell everything, but I was uncomfortable. It was like this rain cloud over your head all the time. I got addicted to staring at my computer or phone, whatever it was, and I just couldn’t not do it. If it were down 30%, I had to know the next day, was it up or did it fall more? If it fell more, I’m really sweating bullets. If it went up, of course, it wasn’t enough, right? It needs to go up more. So I’ve got to tune in the next day now and see if it went up even more. It was a waste of my time number one, and it was taking a toll on me.
I found that private real estate, whether that means active in my own single-family homes that I used to own, or private placements, that you don’t know the value for a number of years unless you’re constantly getting appraisals done. That sat well with me. I loved the set and forget for a period of time; not set and forget for life, but for maybe three to five years. I will check in on it at that point, we’ll make a decision as needed. That’s kind of what that section is, is just self-reflecting on yourself and how you handle finances and investing.
Theo Hicks: Yeah, this is a very important section, I think; we could definitely talk about this for a full episode. But from my personal experiences, I can definitely relate with you when it comes to that cloud over your head. Because as a lot of best ever listeners know, when I bought all those fourplexes a few years ago, and I was self-managing them, and ever since I bought my first duplex, whenever I owned a rental property, it’s really—I wouldn’t say I was constantly thinking about it, but whenever I thought about it, it was never a positive feeling. I always had my phone, and when my phone rang, it was like, “Is this the tenant telling me the house burned down?”
At first, I thought that it was going to go away, I’d get used to it. I kind of did in a sense, but it never fully went away. So kind of, as you said, with the stocks versus some sort of passive investment, when you’re the active person who’s managing it, you have the ability to, as you mentioned, figure out where it’s at every single day. Whereas for passive investments, it’s you invest, and then you’re getting monthly updates, or you don’t even have access to getting the value and you don’t control the entire asset. The way you think about it, it’s definitely different.
And the getting used to it part because it is kind of two different ways to look at it. It’s either “Okay, so I’m self-aware that I react negatively to ups and downs in the market”, or for my case, I reacted negatively to my phone ringing, whenever I think it’s a tenant. So on the one hand, should I figure out why I feel that way and try to get over it or do I just try to take advantage of how I naturally am, in order to find the best investments. I think you can kind of go either way.
I’ve talked to people on the show who were a bundle of nerves when they first started investing. And then now they at least say that they’re not a bundle of nerves. Whereas other people say that “I started this one type of investments, and I didn’t like it, it made me too anxious, so I did something else that I was more comfortable with.” So kind of just being self-aware also of your ability to potentially change the way you react to these things.
I think Travis said it best, which is just see how you actually react to things in real life as they happen, as well as reflect on how you reacted to things a year ago, two years ago compared to how you react to them now to kind of see if there’s any evidence that you’re able to change your reaction to things.
Travis Watts: 100%. And I was exactly like you when self-managed real estate. I started very confidently, because when you first start, you don’t have problems hopefully. I didn’t for a while. It wasn’t until that rent was skipped, or a tenant bailed and fled town or these things started happening; a property was damaged… Then I started freaking out a little bit. Then to your point, every time I would get a tenant phone call, what problem is it now? Are they going to tell me they’re bankrupt, they’re moving out, the house burned down, whatever.
Here’s a key point to specifically being a general partner or doing your own active syndications. This is a critical self-reflection and conversation to have with yourself. Imagine, if you’re a bit paranoid about it, or always thinking the worst or it keeps you up at night, imagine that not just on an individual level, but imagine handling 100 or 200 people’s money, and now having to report to them and having investor emails come in all the time and having to do reports, and sometimes maybe that’s not always roses and rainbows. Because I get asked all the time on podcasts, are you, meaning me, am I going to be a general partner? Am I going to start doing my own syndications?
The answer is absolutely not. No, I won’t. It is for a lot of reasons, but liability and time commitment and whatnot. Now, I’m not bashing it, because obviously, there’s great GPs, we need them. That’s the Ying and the Yang, the LP the GP.
All I’m getting at with this – I’m not saying that active is right or wrong, or passive is right or wrong. It’s being able to identify your strengths, weaknesses, how you respond to things and just choosing the right strategy, the right asset classes… This is a great first step. That’s why I made this blog.
To that point, our last section or the last section I wrote about was risk tolerance. It’s a huge conversation that I don’t think it is happening often enough. I tried to categorize it in a different way than most people do, or what I’ve seen, and I took four different types of investors and how they respond to kind of piggyback on the last section. You have the cautious investor, you have the systematic investor, you have the spontaneous investor, and then you have the individualist. I’ll kind of go into again, much more detail in the blog, but I’m going to bullet point it out.
A cautious investor is very sensitive to losses. They may be better suited in things of CDs or bonds or annuities, things that aren’t going to fluctuate, go up and down; they’re looking for more of that certainty around their income or their retirement. Cautious, right? It makes sense.
Systematic is somebody who basically has built a system or adopted a system to go through the investing process. It’s most often based off facts, research, and a particular philosophy that you might subscribe to. It’s just simply a system. It’s just rinse and repeat every time, you filter it through your criteria, and there you go. That’s how you invest; very robotic, rightfully so.
And then you’ve got the spontaneous investor. There’s a lot of folks like this, that let’s say, to use the stock example. They log in to https://www.cnbc.com/. They see that Tesla is up or down, and then it’s buy, buy, buy and sell, sell, sell, and “Oh, I just heard that Bitcoin’s going up tomorrow, I might as well dump 10,000 there,” and they’re just always kind of on a whim, they’re trying to catch the wave. There isn’t really a philosophy or systemized approach, it’s just more on a whim. You’re walking through a neighborhood, you see a foreclosure, maybe I’ll buy that. Why? I don’t know, maybe it’s a good deal. There’s not a whole lot to back that stuff up, but it can be fun. They like to keep things fresh and new. Again, rightfully so.
And then you have the individualist, which you could relate that to an independent in political terms. As Robert Kiyosaki always talks about, there’s three sides to a coin; left, right and the edge. These are the folks that tend to step on the edge of the coin, and look over both sides, see the case for, “Yes, the stock market’s going to go up. And then this side no, the stock mark is going to go down.” And then they’re trying to be as unbiased as possible and make a decision based on what they believe. That’s kind of the approach there.
So yeah, those are four common types. Again, you may not be 100% in any category, but in general, that’s more or less how it goes. In the investors I speak with, that’s what I see coming up over and over again. Any thoughts?
Theo Hicks: Yeah. On the spectrum it’s like on the one hand you’ve got the spontaneous who’s the one who — I’m going to say suffers in a sense from shiny object syndrome. That’s kind of what the term people use. Then on the other hand, you’ve got maybe the cautious or systematic, who potentially falls into analysis by paralysis. Those are kind of two terms that I’ll always hear people talk about on the interviews that I do.
Again, I think the purpose of understanding and talking about these different categories of risks is to understand which one you are, and not necessarily no longer be spontaneous or no longer be systematic, because nothing, as mentioned, apparently wrong with being that way. It’s just if you take it overboard and you fall into analysis paralysis, or you are so spontaneous that you never get deep enough into a certain investment type that you don’t learn enough about it, and you kind of bounce to the next one, and always are at the surface level. So just kind of understanding which one you are.
I was trying to think of which one I am. It’s really hard when you do these interviews, because everyone has a different investment strategy, like, “Oh, that is amazing. I’m doing that,” and then you talk to someone else and they’re like,” Oh, that’s also cool, I’m doing that one.” And you realize that you can be successful doing any type of active investment, any type of passive investment and people have been successful doing this forever. It just depends on personality type, because certain ones are better for other people. I think that’s kind of the entire point on this entire post, is to say, “Hey, here are the different types of personalities, here are the types of risk.” And then based off of that, you can figure out which of these you fit into best, or maybe a spectrum of one you fit into.
And then something else I want to quickly mention too, when it comes to things like risk. There’s going to be risk when you’re comparing across active and passive, but there’s also gonna be risk within the passive. So taking apartment syndications, for example; if you’re going to passively invest in apartments syndications, it’s not like the risk level is the exact same for every single type of apartment syndication. You’ve got developments, you’ve got ones that are completely distressed, you’ve got ones that are turnkey, you’ve got ones that are value add. Those also come with different levels of risk. That’s why it’s important to understand each of those, as well as your risk tolerance level, so you know which one of those apartment syndications or which type of stock is going to be more conducive with your personality.
Travis Watts: Yep, 100%, couldn’t agree more. In that example, LP-GP; LPs have an upper hand on one hand with risk, because they’re limited to what they’ve put into the deal. That would be their max loss, so to speak. But from the GP side, you have more liability, but you’re hopefully making more than an LP would, so you’re kind of limiting your risk there, too.
It takes some research and time. This blog wasn’t to get into the weeds, but I think it’s so important because I had to learn this lesson firsthand. I’ve shared this story before, maybe not here on this podcast, but I was in the middle of doing a fix and flip years ago, when I was fully active. It was this epiphany, this self-awareness moment, this light bulb moment as I’m standing in the middle of this vacant place, I had to pull in my mom to help me with something I was doing. And she yells downstairs, she says, “Hey, hand me the electric drill.’ And I thought, “I don’t own an electric drill.” And then it was just that moment, like, “Should I be doing this? Am I in over my head right now?” It was embarrassing. It was humiliating. That’s where kind of my self-reflection started. It wasn’t too long after that, maybe a couple of years, that I made the full transition out of doing that active stuff. And again, nothing wrong with it, it was just me personally, not very handy. I didn’t really have the competitive edge. I didn’t know what I didn’t know. I didn’t have mentors, coaches. I lacked so much that I wasn’t a key player in that space. And that’s something to recognize.
I wrap this whole blog article up, and I guess we can wrap up this show on the same topic, which is, at the end of the day, what’s the takeaway here that’s practical to get started? That doesn’t necessarily mean get started investing, although you could perceive it that way. But get started on your self-awareness. Write down your strengths and weaknesses. Write down some examples of how you would respond to extreme situations. I made a lot of money, I lost a lot of money, I invested in a deal that did nothing for five years. Just think through this stuff and it’ll help you identify a better alignment to how you should invest, basically. And only you at the end of the day knows you best and only you can make that decision.
Theo Hicks: Yes, 100%. All the people I talked to on the show about how to tactically understand and ultimately change your mindset is to just write and journal it. Some people tell me to literally just carry around a tiny little journal with you. And in this example, whenever you come across anything related to investments, write down your thought process, write down how you’re approaching it, write down how you’re reacting to it, write down how you feel about it. Do that for a week and you’ll have a much better understanding of the personality type, your risk tolerance level and maybe just for a month and you’ll have a lot more self-knowledge.
Travis, is there anything else to mention about what we talked about today before we wrap up?
Travis Watts: I think that’s a good wrap up. The blog is called What Type of Investor Are You; A quick guide to self-awareness or quick self-awareness guides, something like that. It’s on The Best Ever Community. It’s on my Bigger Pockets, so check it out.
Theo Hicks: Yes. What Type of Investor are You; A quick self Awareness guide. There you go.
Travis Watts: I don’t know these things, so check it out.
Theo Hicks: All right, Travis. A very enjoyable conversation. Thank you for joining us again. Best Ever listeners as always, thank you for listening. Again, make sure you check out the blog post and we will be back next week. Until then, have a best ever day and we’ll talk to you soon.
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