Posted on 25/05/2020 16:42:20   by   Richard Knight

Interested in Property Crowdfunding? Are you an optimist or a pessimist? Which is the right approach?

In a nutshell

As adults, most of us will have a pretty good idea of what we are, deep down. Many of us would like to say we're ever the optimist as it throws the light of positivity on our character during uncertain times. Others will be more modest and say with a smile that they're worriers, cautious or prudent. Does that make you a pessimist though?

The Oxford English Dictionary describes an optimist as being a person who tends to be hopeful and confident about the future or the success of something. A pessimist however, is described as a person who tends to see the worst aspect of things or who believes that the worst will happen. Go on then – nail your colours to the mast!

But how does this relate to Property Crowdfunding? Read on and find your answer.

A quick guide to help you find your stance regarding Property Crowdfunding

Equity or Mezzanine – which do you choose?

This certainly feels like a time when discussions about the future polarises people. There are those that believe we're about to experience the worst economic period ever, including the great depression. Then, there are others who believe everything will return to normal as soon as we're released from our homes and can safely get back to work again. In short, this recent global pandemic divides us into either great optimists or terrible pessimists.

When it comes to Property Crowdfunding, we also see a degree of pessimism and optimism play out in the way that people invest, and it's never more obvious than when investors have the choice between Debt and Equity in the same property devlopment project.

The "glass half empty" person is perhaps likely to choose Mezzanine or not invest at all, whereas someone whose glass is half full might be more likely to choose Equity. But why is this?

Is a bird in the hand really worth two in the bush?

There's an old saying that says that a pessimist is just an optimist with experience. Probably voiced more by pessimists than optimists I suspect.

But why would a more pessimistic investor choose Mezzanine? This could be down to them having an inherent desire for certainty or control, as in the old adage that:

"A bird in the hand is worth two in the bush."

Investing in Mezzanine Debt over Equity means that there's an increased element of "safety" involved. Although a higher-risk form of debt than Senior, there's still usually the promise that the principal and the interest on the debt will be repaid before the borrower or other shareholders can take any profit or be repaid their capital. As with all investments, your capital is still at risk and returns are not guaranteed with Mezzanine investments.

But is Mezzanine always a "safer" option than Equity? With the current Cradley Heath investment, the Market Sensitivity Analysis shows a range of scenarios for varying sales revenue figures mapped against how long the project has taken.

We do it in 1 month increments up to 3 months ahead of schedule, to 3 months over schedule, mapped against GDV plus or minus 5% and 10%.

It results in a matrix of 35 potential scenarios and in 28 of those 35 scenarios (or 80% of the shown outcomes), you would be better off investing in Equity than Mezzanine. However, we still find that debt attracts more investors.

Is it unfair to brand Equity investing as the most "risky"?

As we've established, some investors are more open to risk and unknown outcomes, meaning Equity investments might suit them better.

However, is it fair to always brand Equity investments as riskier than Debt? What about listed Equities?

Equity returns may be volatile, but the risk can be mitigated over the long term. When markets turn volatile, as they sometimes do, the optimists avoid panicking. They keep calm, and keep stocking up equity assets.

In finance, risk is usually seen as volatility in an asset class in relation to other asset classes, for example, equities to fixed deposits. So, the greater the volatility, the riskier the security.

However, by that yardstick, equities would be the riskiest of all asset classes. Yet, study after study shows that equity is one of the best long-term means of wealth creation.

So why is there such a discrepancy in our perception of risk in equity as an asset class when it can offer some of the best comparative returns?

That brings us then to the key question of volatility and why investors are so nervous about it.

It's true that when prices rise, the tendency among many investors is to book profits, deepening the fall. However, to be a successful investor, sometimes it's not so much about managing your portfolio as it is about managing your emotions. In other words, don't look at the red numbers.

Volatility is an inherent characteristic of equities. But that does not necessarily imply a negative financial outcome as most people mistakenly think.

However, investing in listed Equities is very different to the types of shares CrowdLords offers. On the one hand, as there is no secondary market for our shares, they do not suffer from volatility so much because the property market tends to be less volatile than the Stocks and Shares market. On the other hand, the crowdfunding investment opportunities available on the CrowdLords platform are generally higher risk in nature than listed investments.

So is it better to be a pessimist or an optimist when investing?

If you are a pessimist you'll always be on the lookout for risk. That's good generally speaking because you're able to factor in the consequences of a negative turn. But if your focus on danger blinds you to opportunity or freezes you out of decisive action, it can be costly.

On the other hand, optimists always see the glass as half full and are able to see an investment opportunity in such a light that they may sometimes ignore the pitfalls. That can also lead to serious financial consequences.

At the end of the day, it boils down to your financial objectives, risk tolerance and personality. Plus, as with so much in all aspects of life, there has to always be a balance.

Can you recognise yourself in the descriptions below?

Qualities and characteristics of Optimistic Investors

  1. You realise that not all outcomes will be as projected but you are sure that not all are likely to fail, either.

  2. You are ready to learn from mistakes and improve over time with hands-on experience rather than trying to learn the rules while out of the game, as in the case of a strong pessimist.

  3. You are less prone to giving up after a small setback as you take each scenario as a learning opportunity rather than an all-or-nothing battle.

Qualities and characteristics of Pessimistic Investors

  1. You may abandon a successful investment at the expense of mitigating negative emotions even when the odds are in your favour.

  2. You are risk-averse and need to know every step the investment will take before committing any money. Bearing in mind that the opportunity will only be around for a short time, pessimistic investors tend to lose more opportunities than optimistic investors.

  3. You may over-rely on historical data meaning that even when the market is positive, you may still be hesitant to invest if the future is unclear.

  4. You only like to act on thorough knowledge. You're not usually willing to get into a venture without a clear understanding of what is involved.