It’s good to be back! I hope you all had a great 4th of July.
I’m a big fan of the Lindy Effect. According to Wikipedia, the Lindy Effect is a theory that says the life expectancy of an idea is proportional to its current age, and that every additional period of survival increases the odds of the idea surviving the test of time. Some good examples of this are our cultural and oral traditions, fables, important historical events, rules of thumb, and influential books that have been reprinted numerous times. Hence, here at Investors Therapy, we love to dig into old texts and pull out the pearls of wisdom that can help us better understand human psychology so that we can improve our investment decisions.
Today, I would like to share with you a story called “The King, The Sufi, and The Surgeon” from Caravan of Dreams
, written by Idres Shaw.
In ancient times, a king of Tartary was out walking with some of his noblemen. At the roadside was an abdal (a wandering Sufi), who cried out: “Whoever will give me a hundred dinars, I will give him some good advice.”
The king stopped, and said: “Abdal, what is this good advice for a hundred dinars?”
“Sir,” answered the abdal, “order the sum to be given to me, and I will tell it [to] you immediately.” The king did so, expecting to hear something extraordinary.
The dervish said to him: “My advice is this: Never begin anything until you have reflected what will be the end of it.”
At this, the nobles and everyone else present laughed, saying that the abdal had been wise to ask for his money in advance. But the king said: “You have no reason to laugh at the good advice this abdal has given me. No one is unaware of the fact that we should think well before doing anything. But we are daily guilty of not remembering, and the consequences are evil. I very much value this dervish’s advice.”
The king decided to bear the advice always in his mind, and commanded it to be written in gold on the walls and even engraved on his silver plate.
Not long afterward a plotter desired to kill the king. He bribed the royal surgeon with a promise of the prime ministership if he thrust a poisoned lancet into the king’s arm. When the time came to let some of the king’s blood, a silver basing was placed to catch the blood. Suddenly the surgeon became aware of the words engraved upon it: “Never begin anything until you have reflected what will be the end of it.” It was only then that he realized that if the plotter became king he could have the surgeon killed instantly, and would not need to fulfill his bargain.
The king, seeing that the surgeon was now trembling, asked him what was wrong with him. And so he confessed the truth, at that very moment.
The plotter was seized; and the king sent for all the people who had been present when the abdal gave his advice, and said to them: “Do you still laugh at the dervish?”
After reading this story, I’m sure that many of us are already beginning to draw connections between the Sufi’s advice and our personal experiences. But we’re interested in investment here at Investment Therapy, so let’s look at how we can apply the Sufi’s words of wisdom to our investment decisions.
Currently all the rage in real estate are Opportunity Zones (OZ). What is an Opportunity Zone? An OZ is an economically depressed area that you can invest your unrealized capital gains into without having to immediately pay taxes on them. Being that so many investors are sitting on capital gains, they are eager to diversify their risk from one asset class by reinvesting those gains into real estate. Thus, numerous Opportunity Zone funds are forming to gobble up investors’ cash.
The problem with this is that people are investing based on tax incentives without focusing on the underlining assets that they are plowing their money into. We must take off those rose-colored glasses, now fogged by tax incentives, so that we can reasonably assess the merits of possible investments with a vision that is as unclouded as possible.
In issue number 4 of Investors Therapy
, we talked about how you need to have a clear reason for why you are making an investment. Well, as a further exploration of that theme, if the reason you’re investing in an OZ is simply for the tax savings, then you’re in for a world of hurt.
You should ask yourself the following questions before investing in an OZ fund:
- Why do you think this area will improve over the next X years?
- What makes this area economically resilient to the next recession?
- Why would renters or potential home owners choose to live in this area instead of a better one?
- What are the risks of the investment? And does this potential risk justify the potential return?
- Finally, when the time comes to sell this investment, who would be willing to buy it at the projected exit price?
If you can’t answer those questions definitely, then you should probably move on. Always remember what the Sufi said: “Never begin anything until you have reflected what will be the end of it.”
P.S. - As always, this is an open therapy session, so if you know of a friend who needs help, then please share this newsletter with them