What does MALCOLM GLADWELL, the brilliant writer and thinker have to say about the financial markets? Nothing… but this ASTOUNDING observation from him has everything – and I mean EVERYTHING – to do with success in what could be a turbulent market. I’m Bryan Ellis. This is Episode 177.

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Hello, SDI Nation. Welcome to the podcast of record for savvy self-directed investors like you!

It’s said if we don’t learn the lessons of history, we’re doomed to repeat them. Here’s a quick lesson NOT about investing… and completely about it all at the same time:

“In the fall of 1973, the Syrian army began to gather a large number of tanks, artillery batteries, and infantry along its border with Israel. Simultaneously, to the south, the Egyptian army canceled all leaves, called up thousands of reservists, and launched a massive military exercise, building roads and preparing anti-aircraft and artillery positions along the Suez Canal. On October 4, an Israeli aerial reconnaissance mission showed that the Egyptians had moved artillery into offensive positions. That evening, Aman, the Israeli military intelligence agency, learned that portions of the Soviet fleet near Port Said and Alexandria had set sail, and that the Soviet government had begun airlifting the families of Soviet advisers out of Cairo and Damascus. Then, at four o’clock in the morning on October 6, Israel’s director of military intelligence received an urgent telephone call from one of the country’s most trusted intelligence sources. Egypt and Syria, the source said, would attack later that day. Top Israeli officials immediately called a meeting. Was war imminent? The head of Aman, Major General Eli Zeira, looked over the evidence and said he didn’t think so. He was wrong. That afternoon, Syria attacked from the east, overwhelming the thin Israeli defenses in the Golan Heights, and Egypt attacked from the south, bombing Israeli positions and sending either thousand infantry streaming across the Suez. Despite all the warnings of the previous weeks, Israeli officials were caught by surprise. Why couldn’t they connect the dots?”

Those words come from the venerable Malcolm Gladwell – one of the most brilliant minds of our age – in his book called “What the Dog Saw”.

So Major General Eli Zeira had absolutely every reason in the world to think that Israel WOULD be attacked by Syria and Egypt. Literally every single piece of evidence suggested that the attack was imminent and that Syria and Egypt were very serious. And let’s face it: Israeli intelligence has the reputation of being, shall we say, rather effective. But in this case – despite overwhelming evidence to the contrary – Israel chose NOT to set up defensive positions in response to enemy movements, and the tiny Middle Eastern country suffered mightily for it.

Why? Why did Major General Zeira make such a clearly WRONG decision in the face of overwhelming evidence to go the other way?

Consider this: Do you know anyone who was hurt by the mortgage meltdown of ’07 and ’08? Maybe even you, yourself, took some serious shrapnel from that one.

But have you noticed that… even though the financial carnage from that event was very, very widespread, affecting investors and the general public alike… almost nobody seemed to see it coming at the time… yet now, if you ask nearly anybody, they’ll tell you, almost derisively, that anyone with a brain could have predicted it?

Yet… almost nobody did predict what happened. The few who did became billionaires.

What we all recognized at the time was that something was wrong… something fundamental was not right… something that could be damaging to us all was happening. And yet… almost nobody had the good sense to get out of the real estate market or even better yet, figure out a way to bet AGAINST it.

Does that make you and me foolish? I don’t think so.

In fact, you may be tempted to think that Israel’s Major General Zeira was just careless or even foolish. But there’s far more to the story. At the time, it was a rather common occurrence for Egyptians to mobilize for war… it was common for tanks and war supplies to be sent to the canal and for fortifications to be built. The president of Egypt made multiple public statements in years preceding this attack that war was imminent… and yet, it never happened.

Egypt mobilized a whopping NINETEEN TIMES between January and October of ’73… and in not a single one of those cases did war commence.

Furthermore, the trusted intelligence source who warned Israel the day of the attack… well, that person had recently given two completely wrong promptings.

Given the extreme cost and difficulty of mobilizing for war, Israel – which is a tiny country with a citizen army – couldn’t afford to mobilize at every threat. The threat in early October of ’73 seemed to Major General Zeira a serious threat, to be sure… but a threat to be defended against on another day.

How does this relate to investing? It’s a rather apt comparison, my friends. As manager of a private equity firm that buys real estate in some markets that have a volatile history – can anybody say NORTHERN CALIFORNIA – I think about this type of thing every single day. I think about the reports that venture capital is not flowing as freely into silicon valley, and I know that could be a problem since the entirety of northern California is just it’s own little universe that rises and falls largely on the strength of Silicon Valley and the Bay Area. I know that my target markets have a history of extreme volatility… on the upside and the downside. I know that the economy at large is NOT as strong as the press is leading us to believe.

I also know that there are some substantial and profoundly negative factors that are not in play right now like they were in 2007 and 2008, and that’s a very good thing. I also know that most – not all, but most of the time – real estate markets follow a pattern when they’re beginning to reverse in a huge way, and that pattern isn’t in clear evidence presently, and isn’t in evidence at all in some very large markets.

What do you believe? For me… and for my clients… I’ve responded by tightening our buying criteria. We’re going a bit more towards the “no deal is better than a marginal deal” approach. And in truth… this will likely cause me to miss some… but not most… opportunities. On this very day, actually, I’m tasked with making an allocation to my buyers for an auction that happens tomorrow, December 30… and there are a LOT of great opportunities. Still, we’re going to be conservative in our allocations because, at the end of the day, I don’t want to have missed the signs of impending meltdown.

Right now, those signs aren’t in evidence. But there are winds blowing in that direction. Times like these usually presage a shift in markets, but whether that shift is an outright reversal or merely a temporary plateau… the reality is this: There is STILL opportunity… and a lot of it… to be had right now… and I believe for the near future as well.

That’s why we’re hoping to buy several houses this week alone… and really get next year started off right for my private equity clients. We got one late last week where we’re expecting a net ROI in the neighborhood of 23-25% within 120 days… and both history and current market conditions support that projection, so it’s very exciting.

My friends, tomorrow I tell you about what happens to SDIRadio in the New Year… and I think you’re going to love it… because you’ve been ASKING FOR IT. So until then, please be sure you’re subscribed to our PRIVATE and EXCLUSIVE notification list by texting the word SDIRADIO with no spaces or periods to 33444. And, now more than ever:

Invest wisely today, and live well forever!

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