The Illusion of Control

The Illusion of ControlI was in the bookstore the other day flipping through Why We Want You to be Rich: Two Men – One Message, a book by Donald Trump and Robert Kiyosaki. In the book, Kiyosak’s major theme (he and The Donald write separate sections) is control. Basically, real estate moguls and business owners have control, while mutual fund investors, employees and other losers (I fit into this category) do not. That got me to thinking if this notion of control is really just smoke and mirrors. Allow me to explain.

As a small-time real estate investor, I have some control over my investments. I pick which property to buy, the level of repairs to make on the property, who to hire to make those repairs, how much rent to ask for and so on.

Compared to my mutual fund investments, real estate does appear to give me more control. After all, I have absolutely no control (other than a single vote at a shareholder’s meeting) over how the businesses are run whose stock I own. Upon closer examination, however, there is a lot I don’t control in real estate:

  1. I have no more control over the housing market than the stock market. Sure, I can spend money to improve a home, but that doesn’t change the market, and I may or may not get my added investment out of the property.
  2. I have no control over prevailing interest rates or inflation, which effect both the real estate market and the stock market.
  3. While I can pick what real estate to buy and sell, I can also pick which mutual funds to buy and sell. In fact, due to the stock market’s much greater liquidity and significantly lower transaction costs, I have more control over the timing of buying and selling mutual funds than I do over real estate.

But here’s the real point, the more control you have, the more work the investment requires. In fact, with enough real estate, the investment becomes a job, unless you hire others to manage the property.

A friend of mine owns his own business. As with real estate investing, one could say he has more control over his business than I have over my job. He hates that control. It means rarely taking a vacation. It means dealing with a lot of headaches. It means making money only when business comes in the door. The point here is not that owning your own business is bad, but rather, that gaining control comes with a cost. Whether that cost is worth the added control, only you can answer.

Topics: Investing

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