Promissory Note Investing: Science, Psychology, and Emotions

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Promissory Note Investing: Science, Psychology, and Emotions

Other People Create or Destroy the Value of Your Assets

Psychology vs. Science
Promissory note investing is not an exact science. Crunching the numbers can be an exact science. Making business decisions, judgments, assumptions and predicting the future is personal, emotional and opinionated, the opposite of an exact science. Separate the “hard numbers” from the “soft emotions”.

The investor's psychology and point of view is equal to, or of greater importance, than the numbers in influencing the investment decision. Almost all decisions are emotional decision, whether admitted or not.

Predicting the Future
Analyzing the documents and the information they provide leads to forecast future cash-flows and future events. The data may be large and required making numerous calculations. Regardless of how refined your conclusion, your confidence in the answer is influenced by your emotions and by your personal points of view. Your prediction of the future performance of the note investment is not a fact, it's your prediction; it's your best opinion.

No one can accurately predict the future. There are no exact answers, only educated, reviewed opinions. Develop the confidence to make decisions based on your best, researched opinion.

People Impact Values
The financial information, facts and documents for promissory notes are only part of the total picture. Promissory notes do not exist in a vacuum. The parties to the transaction impact and influence each other; parties outside of the transaction-potential buyers, sellers and brokers-affect the attributions of other investors and the value of the investment asset.

Local and national economic activity, or lack of them, affects the value of the asset and the emotions of the participants. Those same activities impact the attitude of bankers, appraisers and other investors not directly involved with your specific transaction.

These internal and external people, and their activities and behaviors, all affect each other and the value of the note investment. It is impossible to quantify and understand all of these people-related variables. It is people who make transactions, not just numbers. Each person seeks to gain benefits for themselves. That seeking affects the value and importance of numerous other assets.

Examples of Other People's Actions Affecting Values
A note investor in New York willingly overpays for a defaulted promissory note in California secured by a small single family house. His reason for so doing is to foreclose and obtain title to the house so his son can live in it while attending college in California. He has inadvertently distorted the market value of the defaulted note, and possible other similar California notes.

A note investor in Connecticut willingly overpays for a performing note in Beaver Creek, Colorado. He accepts a 5.5% yield when he could easily get 8.5% elsewhere. His reason for so doing is to be able to combine skiing in Vail, CO with a business trip to check out his note investment in Beaver Creek, CO.
He has inadvertently distorted the market value of note yields in the Vail / Beaver Creek area.

These investing behaviors have little to do with maximizing investment yields, but they are not unusual situations. Each investor has personal, specific motives and reasons for making an investment; the reasons may or may not be driven by seeking to “get the best deal or the highest yield”. Regardless of the personal motive or reason, other promissory note transaction valuations are affected.

Summary
• Understand that all investing has risks.
• Understanding risks are caused by people, by the economy, and by inherent features of the asset.
• Understand no one can predict the future.
• Understand your own investing goals.
• Understand your own capabilities and shortcomings.
• Understand that if you have done your due diligence thoroughly, promissory notes can be excellent investments.

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