Delusional Optimism
Last week I wrote an article titled “How to Turn $100K into $3.2M. It was an example of the power of compounding and there wasn’t a single catch-THERE WERE TWO! First, you had to patiently live, wait, & invest over the 25 year time period. Second, each of the 5 year deals had to successfully double your money each time. Â To be honest, this is probably Delusional Optimism…let me explain.
Delusional Optimism is different than Realistic Optimism. And also different from evaluating Risk (pessimism, if things go wrong). Â All are critical to successful investing. Delusional Optimism is counting the “Luck factor” in a deal. You can count on it, you shouldn’t expect it, but you should be aware of it going into a deal. If there is none, is the risk still worth it?? Maybe-but this is deal dependent.
Before I make an investment, I ask myself, “If things go well, and we get lucky, how much upside might be in this deal?” Delusional-because I cannot get lucky every time. But if I’m risking my money, I need to see some “luck” if I’m going to take the risk. I do every deal “hoping” for a superior outcome. Here’s an example:
My First Passive Syndication Deal – Las Vegas
My “Delusional Optimism” as a Passive Investor
The first time I invested passively in a syndication, my Las Vegas Shopping center, (currently listed at $17.9M) there were 3 major moments of commitment. These were heavy moments, as I decided to move forward at each step.
- I had to say out loud, “I’ll do it, I’ll invest my money.”
- I had to then sign the subscription docs. I remember having second thoughts at this moment. Should I sign? Should I do this deal? Is this the right thing to do? I decided, yes, it was, and I signed the docs.
- Wiring the money was the biggest & final step. I had some hesitation here too, but after just a moment, I sent the money.
That was it. That was all the work I did on my 1st syndication deal. No more emails, no phone calls, no decisions, & no further checks out of my pocket. It was quiet for about 14 months, receiving only my quarterly updates. Now that the distributions have started, I’m glad I made the deal. But this is still reasonably good, not yet hitting the level of my Delusional Optimism.
My Delusional Optimism – Getting Lucky in Las Vegas
My realistic optimism on the Las Vegas Shopping center deal is that I receive my money back and maybe 8%-12% IRR. My Delusional Optimism is that we get lucky, sell the deal around that $17M+ listing price, and my passive investment will generate about 1.8X the initial amount-in less than 3 years, or a 26% IRR.
Delusional Optimism – Flipping a Single Family House
You build a fix & flip deal on a $40K profit spread. You hit the Spring market perfectly at about March 17 and you get 3 offers in the first 3 days. (Right now would the perfect time to buy that flip for the Spring Exit) You call highest & best and the resulting contract & closing nets a $65K profit. That $25K is the result of luck. If this were evaluated on the way into the deal, the $25K represents my Delusional Optimism in the deal. I’m hoping for this every time. I’m counting on the $40K-Reasonable Optimism.
Underwriting Deals with Delusional Optimism
I NEVER write down the Delusional Optimism expectations-it’s only in my head. It is important to never build a deal solely on Delusional Optimism. Far better to be conservative and create deal structures and forecasts on realistic optimism with a careful eye on the risks of a deal.
My final takeaway here is to do deals with 2 levels of Optimism & one level of Pessimism. Reasonable optimism that you’ll hit an acceptable profit target and Delusional Optimism that counts on luck to deliver an outsize return.