The Emperor's New Clothes
I grew up on fairy tales, listening to bedtime stories and watching “Shirley Temple’s Storybook” TV series on Sunday nights as a little girl. Through the years, many of the morals of those stories stuck with me, and some continue to be relevant today.
For example, “The Boy Who Cried Wolf” is really a study in honesty and truth. When we keep hearing news reports that turn out to be misleading if not downright false narratives, we begin to doubt the credibility of all news. The danger is that we don’t recognize the real truth when we see it because of all the preceding wolf cries.
And there’s the Pea that was the test of a young woman’s true Princess status. Wouldn’t it be nice today if we had a pea to ascertain the genuine villains and heroes, instead of having to rely on how they’re characterized by one media extreme or the other?
The tale that I’ve found relevant at different times in my career is that in which a preening Emperor orders new clothes to be made to wear in a parade. The tailors don’t make any clothes at all for him but spread the rumor that only the wise will be able to see the emperor’s new garments, and anyone who can’t see them is stupid. Group-think sets in and everyone ooh’s and ah’s about the new clothes despite the fact that the Emperor is indeed naked, until a little boy calls out “But the Emperor has no clothes.”
How often have we been duped by claims that had a lot of hype but no substance, simply because we believed that investors or others must know something we didn’t know or were just inherently smarter? Think of the dot-com bubble of the ‘90’s and the “fog a mirror” mortgage euphoria/get-rich-quick flipping of the 2000’s. And now, billions in venture capital are flowing into the real estate business by slapping a technology label on companies that still (at least so far) have to rely on brokerage income streams for a payback at some point.
Not to use tired clichés, but if it sounds too good to be true, it probably is. And ultimately, the piper has to be paid. Unsustainable bonuses and commission splits that put the brokerage in the red, “free” programs that have to be paid for by someone, stock options that may never materialize all are offered to attract agents and brokers who want to believe this will fund their retirement or the kids’ college expenses. In other businesses, volume can produce economies of scale that will lead to profitability, but so far, real estate is still a labor-intensive service business in which the biggest expense is people. Efficiencies are happening – albeit slower than many would like – and processes are becoming more condensed and transparent, but the fact remains that most transactions still are different enough that problems arise, and someone has to spend time and resources to solve those problems. Higher volumes of transactions mean more problems, so how does this enormous profitability hole of give-aways searching for an IPO pot of gold at the end of the rainbow ever get filled?
Ten years from now, will the hindsight be “That emperor had no clothes?” Or as we used to say in the South, “That dog won’t hunt?”
In this environment where decisions have lasting effects on your livelihood and the careers of those around you, a healthy dose of skepticism is not a bad thing. As General George Patton said, “If everyone is thinking alike, then somebody isn’t thinking.”