Most real estate managers today are feeling a lot more comfortable with the disciplines they’ve put in place. Most feel they’ve learned a great deal from the mistakes they made during the market crashes of the late 2008/2009 post-Lehman global financial crisis, and have put stringent measures in place to ensure those same mistakes will never be repeated.
If you’re one of them, or you have managers who are feeling this way, don’t feel so smug. Investment managers, like investors, are human. And human beings all have a habit of learning the right lessons in the wrong order.
The fact is, when you’re still bouncing off the bottom of a market cycle, it is the easiest thing in the world to have discipline. The hardest time to employ discipline is when you’re approaching the top.
Lots of people think discipline comes from putting policies, processes, procedures and checklists in place. It doesn’t. Discipline comes from putting processes, procedures and checklists in place … and actually making the use of those policies, processes, procedures and checklists habitual.
What far too many investment managers do is invent these kinds of so-called “disciplines,” get everyone on board and talking about them, and then do almost nothing to insist that these actually be put into practice. Even for those who do make an effort to put them into practice, after the first year or so of using discipline, the focus of attention gradually gets diverted to doing business again, particularly as the momentum of the market begins to pick up. Slowly but surely, the routine use of these tools of discipline begins to slip. Before long, the only place these disciplines actually exist is on paper.
Then the markets really start to heat up, and the only impact those disciplines have is to remind us, in the back of our minds, that things just don’t “feel” right any more. Our guts are screaming that what we’re seeing in the markets no longer makes sense. Even if we pull back for a while, the allure of the market eventually pulls us back. When month after month goes by with you looking back at the deals you could have done six months ago but didn’t, and thinking about the money you supposedly left on the table, eventually, you can’t help but feel that it’s you that is out of step with the market, and that maybe the market really is smarter than you thought. It’s just about this time that pundits start to come out of the woodwork (like cockroaches), presenting the 10 different reasons why “This time, it’s different.”
It’s during times like these that the market needs discipline. Conversely, however, if the market had discipline, there wouldn’t be times like these. And therein lies the rub.
How do you stop all this madness from happening again? First of all, you need to make the practice of all your well-thought-out policies, processes, procedures and checklists habitual. (How to do that is well laid out in Charles Duhigg’s book The Power of Habit: Why We Do What We Do in Life and Business.)
One individual who actually made discipline habitual was Craig Severance, who used to head up acquisitions for AMB Property Corp., before it went public and eventually merged with Prologis. What Craig did was build his policies, processes, procedures and checklist into a computerized system that tracked every single step, every single document and every single issue that needed to be tracked when managing the doing of a deal. Embedded in this system were all the elements of his disciplines. The proof in the pudding of all this is that, when AMB eventually did go public in the 1990s, it earned one of the highest ratings among the real estate companies trading at that time. Craig asked the folks at the rating agencies why. They responded, “Everyone has systems and checklists for controlling risk. You guys actually use them, and how you do is evident and apparent.”
Craig later launched a company — RealConnected — to take that system to the market and enable others to install the same systematic, habitual approach to risk management. But it was a very tough slog. The mentality of most professionals in this business is to resist these kinds of disciplines. “I’m hired for my expertise,” they will say, “and you want me to rely on a bunch of silly checklists?”
According to Atul Gawande, author of The Checklist Manifesto, nowhere is this more apparent than in the operating room, where you would think using things like checklists would be second nature. It isn’t. Gawande should know. He’s a trained medical practitioner who has spent a lifetime getting medical institutions — hospitals, clinics and the like — to adopt a checklist approach to running routine operating and care procedures. The statistics supporting doing so are irrefutable. And, while Gawande has been successful in getting many institutions to adopt such practices, at far too many places, the practices either are resisted or only temporarily adapted.
The point of all of this is that we don’t have to repeat the sins of the past, but we probably will. As a four-year-old once noted, “If you keep on doing what you’ve been doing, you’ll keep on getting what you’ve been getting.”
Geoffrey Dohrmann is president and CEO of Institutional Real Estate, Inc.
