Investors who “chase performance” and buy into last year’s top-rated fund are most often disappointed. As championship sports teams know, it’s hard to score a repeat. A winning streak can end at any time. But disciplined investors, like disciplined teams, excel year after year and achieve a consistent level of success.
At Origin, we take pride in our solid five-year track record for alternative investments in private equity real estate. Our annualized net fund returns, validated by the leading alternative asset analytics firm Preqin, have exceeded 25% since February 2011. That number beats most stock and bond results.
Like sports dynasties, at Origin we ascribe to the kind of discipline that can help leaders succeed in any business. And this same strategy also can give investors a winning edge. Teams that dominate their sport exhibit the same strategies that build a superior investment portfolio, as I recently discussed in a column in the Huffington Post.
These are the five profitable lessons we’ve taken from the playing field:
1. Understand your investing style. Winning teams have their preferred styles of play – the passing game or the running game, power or agility, ball possession or fast breaks – and they gear their personnel, training and playbooks to master their chosen style. The Denver Broncos won the 2016 Super Bowl with an athletic offense that allowed Peyton Manning to react to changing conditions.
Investing styles work the same way, setting strategies that favor growth vs. value or dividends vs. capital appreciation. Origin takes a value-added approach to many real estate assets, improving them to unlock trapped value that will raise their selling price, rental income or both.
2. Find good assets at below top dollar. Players on a championship team are constantly being lured away by their competitors, which means winners are constantly rebuilding. The Chicago Blackhawks hockey team, which faces the additional hurdle of a tight salary cap, relies on free-agent recruits and lower-level draft picks to compete after winning three Stanley Cup championships since 2010.
Commercial real estate fund managers also need to find good assets below top dollar. It starts with paying the right price to assure a successful project. Like sports recruiters, they cultivate confidence-building relationships. Origin’s track record demonstrates that we can deliver on financing and management promises, and this sets the stage for future off-market deals. Individual investors need to buy right, too, and not overpay for assets. Exorbitant fees or unjustified valuations put them behind from the start.
3. Don’t dwell on setbacks. No matter what happens early in the game, high-scoring teams fight back. Their goal is optimized for the short term—to score when they can. This happens across professional sports, notes an academic study on scoring dynamics across professional sports. Teams don’t “get hot,” they earn that descriptor by making plays more often. Volatility ensues only when stronger players are pulled from the game.
At Origin, we focus on moving forward. Take for example our past purchase of a student housing asset at Florida State University. When we learned that new supply to the market was going to decrease rent growth, we sold the asset after 12 months. Our opinion had changed, so we executed the exit strategy quickly, netting a 9% IRR for our investors.
4. Don’t fall for being a fan. Putting the best team on the field means assembling a team without emotion. Fans were beyond upset in 1989 when the Dallas Cowboys traded Heisman Trophy-winner star Herschel Walker. But the Minnesota Vikings gave up five players, upsetting the team’s balance and giving the Cowboys building blocks for its 1990s football dynasty.
The lesson is the same in sports and investing: Without a realistic look at future value, it’s a mistake to pay for reputation or past results, or to hold onto early discoveries or sentimental favorites. The contrarian rule holds true as well: Patience is required with struggling prospects or former star performers.
5. Stick to the strategy. A successful and repeatable strategy is a key to extending a winning record. “It’s easy to have faith in yourself and have discipline when you’re a winner, when you’re number one,” said legendary Green Bay Packers coach Vince Lombardi. “What you got to have is faith and discipline when you’re not a winner.”