1976: 58 Million Dollar Cities, Empowered Mentoring Program, Hot & Cold Cognitions, Oren Klaff Part 2

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Welcome to the Creating Wealth. Welcome to the wealth show with Jason Hartman. You're about to learn a new slant on investing, some exciting techniques and fresh new approaches to the world's most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine, self made multimillionaire who's actually been there and done it. He's a successful investor, lender, developer and entrepreneur who's owned properties in 11 states, had hundreds of tenants, and, and been involved in thousands of real estate transactions. This program will help you follow in Jason's footsteps on the road to your Financial Independence Day. You really can do it. And now here's your host, Jason Hartman with the complete solution for real estate investors.

Welcome to episode 1976. It reminds me of the bicentennial year. You know, before you know it, we're going to have a tricentennial year. And I wonder when that happens, what the United States will be like, what will the dollar be worth? What will the dollar be worth on the tricentennial? Let me see, the bicentennial was five years after Nixon took us off the gold standard and we've certainly seen the dollar go way down in value since then. We've been witnessing the slow train wreck, the collapse of society because 1990 was the peak of civilization, as you've heard me talk about many times. And yeah, it's just like a slow moving thing, isn't it? But I don't. We'll see. We'll see what happens. So today we've got part two of the Great Oren Claf. And you know, I love how he really identifies things when it comes to his book pitch anything or his other book flip the script. He talks about like the Flash role, for example, and he uses that, that awesome scene from my cousin Venny with the beautiful Marisa Tomei. By the way, there's a funny Seinfeld episode about that with George and Marisa Tomei if you could picture that. Can't imagine it. But anyway, yeah, the whole idea of the flash role for credibility booster just so important. And gosh, Oren Clough just puts this together so well. So we've got him back with us today to discuss that. But first, I want to go into a couple of things, as always do on this monologue portion of the show. And I thought this was a really good way to look at the market, the real estate market, because when we're looking at supply and demand, we've got to look at it. Answering life's most important question. And what is that? Well, life's most important question, of course, is compared to what and the compared to what question. When it comes to housing, inventory is super critical. So we know the inventory is trickling out at a very slow pace. We know that there is a very little inventory on the market, but we also know that there are fewer buyers out there and the market has slowed depending on where you're looking. In some places, pretty dramatically. In some places, you know, it's not down that much in terms of sales activity. Remember, sales volume much different than prices. So you've got to distinguish those things. Okay, so. So let's take a look at this chart. Currently, inventory just came up ever so slightly by a whopping 2,000 homes. In a giant country like this, it's like a speck. It's nothing, right? It's nothing. But it is higher than it was this time last year, for sure. And so let's do some comparisons. Let's look at last year. And if we start last year, we see inventory way down here, kind of in the. The higher part of the 200,000 range. Almost 300,000 homes for sale. And now we've got 414,000 homes for sale. But then let's take. Then Compare this to 2019. Right before COVID 2019, we were looking at well over 800,000 homes for sale at this time in the pre Covid year, Right. Pretty darn amazing and incredible in 2017, even more for sale than that. Approaching 1 million homes for sale in 2017. So it's really just amazing when you look at these comparisons and you really think how absolutely short supplied the inventory is. Remember, if you liken it to the grocery store and during the pandemic, we all saw the grocery store shelves really undersupplied in a lot of things, especially toilet paper, right? And so I remember going to Costco, going to the grocery store, and they had signs, you know, limit one per customer, limit two per customer, because the inventory was so scarce. Of those items, you'd shop online, you'd see the same things, limited availability, limited amounts of things. You can order, right. Very, very short supplied. So that's the way the housing market is now as well. And, and it's especially pronounced in the entry level price range where it's extremely, extremely limited. So this Y over Y or year over year comparison really helps us answer that most important question when it comes to life in general, when it comes to economics, when it comes to the real estate market, when it comes to understanding anything, the way we understand things is by comparison, by answering that question compared to what. So we will continue to monitor this report to you on it. But it's really interesting for those who say the crash is coming. I don't know, it's not quite here yet. And it's got a long way to go before it comes. If it happens, we will see. Now, another important thing we always need to look at when we're looking at the calendar year and we look at the months as we move into the summertime and we'll call this July starting. And then we go to August, September, October, November. And what does that spell? It spells Jason, the only name in the year. Love that. And we see how inventory acted right, in 2022 last year. Right. So as interest rates went up, we saw inventory rise actually pretty dramatically. Now, we saw that happen in 2019. Not quite as dramatic, but following the same arc, the same pattern, 2018, 2017, the same trajectory, the same shape, the same shape of inventory increases in those summer months. But what happened as we came into the latter part of last year and the new year this year, that inventory was absorbed, it came right down to the very low supply that we have now. Okay, I want to tell you something. Tomorrow for our mentoring members, we have every Wednesday, we have our mentoring Zoom meeting once a week. And tomorrow I'm super excited because we've got a buddy of mine coming in to talk about land flipping. Now, I know, I know I don't love land as an investment, but notice the word I used, investment. I do know quite a few people that make some decent money flipping land. So we're going to learn the ins and outs of that on tomorrow's mentoring call. And if you are not a mentoring member, you need to join. Okay? Whatever is talking you out of this is bad, bad, bad.

We're really covering all kinds of great stuff. So go to empoweredinvestor.commentor and check out our mentoring program, empoweredinvestor.commentor, and these Zoom meetings, we archive them all in our special vault. And so people can review those as much as they want. If you're not a member now, but you join and you miss tomorrow's Zoom meeting, you can always go back and look at the archive and the recording and then ask questions in future Zoom meetings. These are nice, intimate, small group Zoom meetings. So I'm always there to answer all of your questions. Our investment counseling team is there and we bring in special guest experts on a whole variety of topics. So looking forward to that. Looking forward to seeing all of you members tomorrow. Now, just as I predicted this would happen, we as we talk about prices and price changing, and I predicted that the biggest softening in prices would be in a certain type of market. Remember, three major types of markets, Linear markets, cyclical markets, and hybrid markets. Linear is that nice, steady eddy, dependable, reliable. Those are the markets we like to invest in. Cyclical, crazy roller coaster ups and downs. We don't like those. Those are very speculative. They're not investments. And then hybrid, of course, in between the two. So just take a look at these charts and you know, I've shown you this, but it's been quite a while since I showed you this, so it's worth a review. So this is Memphis, one of our perennial markets. We've been doing business in Memphis for many, many, many, many, many, many, many years. And here we see this nice steady linear pattern. Of course we see changes up and downs in the market, but they're not very pronounced. So same with another market that I've been helping people buy properties in. And I've owned properties in both of these markets, many properties over many years. Indianapolis, okay, boring, steady. The most exciting thing there is the Indy Grand Prix, of course, the Indy 500. And nice linear market, good cash flow, reliable appreciation, very good. But where I grew up, Los Angeles, California, my hometown, completely the opposite. Look at this chart, this chart. It'd make you sick. You'd get motion sickness from this chart. It's got these glorious highs, these really ugly lows and very bad cash flow, very unreliable market. And of course, it's got California. It's got super tenant, friendly. You go to court, the landlord is always wrong. It's got rent control. It's got so many forces moving against our cause. You know, we want to invest in places, look, that are friendly to our cause as investors, as landlords, landlords that encourage us to provide rental housing, to stock the rental market with more housing. These are the business friendly places. You know, these are the right leaning places politically and they're just much better to invest in this is what I wanted to show you about this. And this is new information that we have never talked about because I saw this chart and I wanted to share it with you as we. I predicted before, of course, that those cyclical markets would suffer greatly as the market was going to turn eventually, right? And then it did. It didn't really turn because it got oversupplied or because of any really bad fundamentals in the real estate market. It turned because of the Federal Reserve, because they let inflation get out of control. They completely screwed this up. They should have raised rates much sooner. They should have raised them much more gradually. But we saw the most extreme interest rate hikes probably in all history, I don't know, but at least in modern history. And really, really extreme. And of course that hit the cyclical markets the hardest. And so this chart says the US lost 58 quote million dollar, unquote cities since the market's peak in July. So we lost $58 million cities. In other words, this was the number of US cities where the typical home value was 1 million or more. Now, what do they mean by typical? You know, I don't know what that means. Does it mean the median price, the average price? Is it a weighted average? You know, who the hell knows what that means? But anyway, that's what the chart says. And you know, forgive me, I almost always have the sources on my charts. I think this came from either Forbes or cnbc, possibly Wall Street Journal. I don't know. One of those three. Most likely. Anyway, it shows you as of January of this year, there were 464 of those cities. Now remember, the US is a huge, very diverse country. There's no such thing as a national housing market. All real estate is local. There are almost 400 metropolitan areas. There are over 3,100 counties. There are over 9,000 cities and countless neighborhoods beyond that. So here you see that the typical million dollar neighborhoods in the United States were numbering well over 500 of them at the peak. And then since July of last year, that number has been reduced because those prices have been reduced. So there's only 464 of these cities now. Kind of interesting. Just thought I'd share that with you. Again, not impacting us because we don't invest in these type of properties anyway. They would be nonsensical for us as investors for our target kind of avatar property. All right, let's get to our guest again, Oren Klaff, the author of Pitch Anything and Flip the Script, this great interview. So let's dive into Our continuing discussion with Oren Claf.

You know, interestingly, I think the customer also perceives that upfront fee that you mentioned in the first example as a real lack of certainty on the part of the vendor that you know you're going to get anything because you probably spend 350, they won't fix it. And if you apply it toward the bill, you don't really know what the ultimate price is going to be. So they might fluff up the bill to offset the 350 they charge you. So I agree that second example is far more certainty.

So that is dead center how somebody needs to perceive you. And I call that a flash roll.

Okay?

Right. It's just a good term of art for the ability to give very, very technical information at a higher rate of speed than if you were just making it up. Okay, that is dead. And it's not for comprehension. It's for credibility and expert status. And there isn't a person on this line that wouldn't benefit from, you know, when some, when a client or an investor or somebody gets on the phone from saying, ah, right, this is the name problem. And giving a flash role that really gets down into the technical details, whether it's software or real estate, that makes it obvious that they have solved or been involved with this issue or problem or situation a thousand times.

Right.

And these things are like 150 words, 200 words, you know, maybe 210 words at max. So it's a minute, a minute and a half of talking that is, is absolutely only an expert who has dealt with this many, many times over could really know. And of course you've prepared it because these things are hard to do, you know, on the fly, but that is something that instantly delivers the status of a domain expert in the space. They want to know who here has dealt with these kinds of issues, whether it's law, whether it's, you know, real estate, whether it's compliance, whether it's software, as you said, whether it's, you know, auto mechanics. Who here has dealt with this at a, at a very fine level of detail, that is a true expert. And then you can get out and talk strategy. You know, when I came up with this, I watched a couple hundred squawk box interviews and really what I found through my own rating, those, the CEOs that I thought did the absolute most compelling job selling their companies, and these are public companies, are the ones that could go way down in a level of detail and then come back up and talk about strategy. Because the ones that I Found not compelling were the ones that were going, you know, the broader market indexes seem to be, you know, increasing rapidly and we're increasing inventories to match the, you know, throughput of capital in our range of businesses. Right? And then, and then go, you know, and then go. I remember one, it wasn't intel, but it was semiconductor guy. He's like, yeah, you know, I walked the semiconductor floor when I was an engineer. And we're currently manufacturing 0.01 micron, which TSMC, you know, achieved 0.01 micron, you know, last year. But we're rapidly developing along the size of chip that would be capable in the early stage quantum computing machines. And actually I was in Silicon Valley visiting XYZ Quantum Computing and they're asking to use our first set of elemental chips. Like, wow. The other thing I said that if you've ever seen this Undercover Boss, the show where like, you know, the CEO of seven eleven goes to a cheese factory, right? And like they pour the cheese out. The thing that makes it funny is they don't know anything about the company.

Right.

That's the gimmick is, hey, you know, I do know the, you know, I sit back in Akron, Ohio or Detroit or whatever and I pull the big finance levers. But you know, at the chip and salsa level of the company in which we do $300 million a year, haha, I don't know anything. And I'm, you know, I mess it up. But really, if you go to Squawk box, the guys are compelling, can really get down into super tactical details in their business, come back out of that wormhole and keep talking about the strategic influence. And to me, if you want to talk about a pitch and covering the certainty gap, not of do you have the product, not of do you have the asset. But are you a true expert in this space? That is the skill set that signals to people you are both capable and competent in, you know, the business you say you can do.

Sure. Okay, so what is, what is hot cognitions? What is that?

Yeah. So a hot cognition is an emotional state, Right. So if you think of cognitive state and a hot cognitive state is somebody who is making decisions on a, a space of being excited, a point, a space of being emotional and a space of being adventurous and, and dreaming about the potential of how the world and their life might be if everything went well, emotional. And so a cold cognition is a calculation. And I have a good example of this. I'm not sure if I even had in the book, but cold cognition is if you were saying, hey, I need to make a spreadsheet. Right. And evaluate a risk weighted decision matrix on whether we should enter this market.

So is emotion the difference or the lack thereof?

It's emotion and excitement. And really, a hot cognition is about filling in the gaps on your own that might be there in the data. So if I'm pitching you something, right, and you're in cold cognition mode, right. And you're trying to get some comps, and you go, hey, you've only given five comps and we really need 10 comps, you know, fulfill our typical analysis of the market. If I could get you into a hot cognition state, your excitement would start to fill in some of those gaps, like, ow. We could basically see what's going on here. We're, we're, this person is super credible. We're excited about this market. We've been wanting to do it anyway. Let's not lose this opportunity. And really, if you wanted an easy way to summarize hot cognition, I would say it's FOMO and hype. Right. And I say hype in a good way, not in a, in a hype, not in a hypey way, but hype in a sense of highlighting really the most exciting things about the deal and engaging in fear of missing out puts someone in a hot cognition in which they make hot decisions. I'm in. Right, Right.

Okay.

And cold cognition is where they go, send me the deck. You know, we're going to run some numbers, send it out to our analyst, get back to you in a couple.

Weeks, and then it just never happens. There's a zillion.

Or it can happen, it can happen. Right. So they, but, but all of us have been through a spreadsheet, answered questions. You're like, you know, at what point are you going to suspend this belief and trust us, you know, that we're in this market and know how to flip this asset.

Yeah.

So cold cognition. And I'll give you what I like to bring these, these down to real. I know we're cresting through. Well, we're moving through. Double your time limit, Jason. So you could just hit the, you know, the dump buzzer like they do in Hollywood, and there you go.

Yeah.

But if you think about it, they did this study of people checking out in the supermarket, and if you ever check down, they say, hey, donate the dollar to a starving kid.

Or.

Right, you know, now be donate. Was that the dump buzzer?

No, they're putting people on the spot when they say that.

Oh, no, I heard a Beep. So I thought that.

Oh, no, I didn't. Nothing beeped over here.

So they're putting people on the spot, right? So, hey, $5 to the hungry kids of, you know, West Palm beach. You know, all the starving kids in Wells Palm beach, where you are, you want to round up, right, for the.

The, the roundup for charity. Yeah, Roundup for charity.

Yeah, exactly. And so what they find is that when, when people are, when they have people think about how much ketchup is and make decisions about this ketchup or that ketchup or how much something is on discount and give them tough calculations to do at checkout. You know, when they try and write, hey, you know, this ketchup is 33% less. It's only a $10 per ounce. And so this one is a $21 per ounce for Heinz. You know, they make them get into that cold cognition state.

Not good.

I'm assuming they don't give in those roundup scenarios. So the brain is split. Right. And that's why those have really, if you're young, you probably haven't seen that in a checkout in a while. And those have faded away because people don't give when they're thinking about, in that cold cognition and trying to evaluate the price of food. And so that's really a big impact. So when you have people thinking about numbers and discounts and ratios and percentages and IRRs and ROIs and really getting down into that, although it's necessary, that's a cold cognitive state.

Yeah.

Hard to get them to make decisions.

Yeah, yeah, I agree. Yeah.

If you want them excited about people ideas. But, but in some ways it can. See, this can seem overly simplistic, but the issue is, in the field we work in is finance. Right. I understand if you're at a, you know, at a dinner party or something like that, you know, they're cold and hot. But we're in finance, like, we have to give people numbers.

Right.

We have to give people, you know, ratios.

And you just don't want to live there though, right? In that cold.

Always have to bring it back. Yeah, Always have to bring it back to the human narrative, to fomo, you know, to, to the exciting piece of it. And so that's the secret of the pitch is. Yes. Giving the information. Yes. Giving the detail. Yes. Giving the numbers people can make decisions on, but not allowing them to live in that cold analysis. So I think you were looking for a 33 word definition of hot cognition, and that was a 7389 word definition, but it still sticks.

Oren, I gotta tell you, I've got a great idea for you. It seems like all of your stuff, the flash roll status, cold and hot cognition points that you made, right. Totally applies to the general social life world, not just the business world because just everything applies to it. So you ought to do another book on non business because the exact same rules I think apply across the board. Isn't that interesting?

That's great, That's a great idea. I would love to. Yeah, that is great. And what examples do I use?

Oh my gosh, I don't know. I'm sure you've got some, but we'll figure it out together.

All right, let's do it.

You know, just a touch on some flip the script, you know, and looking for that through that table of context, you know, you talk about pre wired ideas, plain vanilla. Tell us about those things.

I think plain vanilla is really exciting concept, especially in real estate, but even more so in software entrepreneurs. What software entrepreneurs or software business people try and describe their product as new, breakthrough, exciting, never been done before, new kind of business model. You know, we're super creative, our CEO is, is a Elon Musk, you know, Prodigy, you know, type. And as it turns out, the reason you do that is the novelty. You know, this is a breakthrough software. This is, no other software can do this kind of thing. This is a completely next generation capability. We have some machine learning AI, you know, all this, all this stuff in it. And the reason we do that is it attracts people from the standpoint of novelty and it gets them to pay attention, right? But the reality is people want to buy things that have a lot of certainty on them. So it becomes like this squirrel. You know, as I use an example in the book going back and forth, the bag of potato chips gets close to the bag of potato chips because it smells amazing, right? But the bag then touches the bag and it makes this wrinkly noise and it freaks out and runs away. But it remembers that amazing smell of Dorito, comes back, closer, touches bag, runs away. So the novelty is what attracts people and it's why people use it. But the newness, lack of experience, credibility, context, user base, you know, the newness of it makes people retreat to things that they're familiar with. And so the way around this that I've discovered is to frame something up as plain vanilla. This is exactly the same as the last 300 software packages that were leased in the market, except for this one thing, and that satisfies both the need for novelty, but it doesn't give too much novelty. So especially in real estate there, there should be one sort of patina or one coat of paint, you know, one thing that is new and exciting and compelling. But otherwise this is the exact same deal. Multifamily is a great example, right. Because I'm not any multi family, but I think years ago they added like the kitchen, the cinema, you know, in that central area where people could really enjoy these, these.

You mean a clubhouse?

Clubhouse, yeah. And it was a little bit different here in San Diego, right? So you have all these workers at Qualcomm, you know, they have to live in multifamily, close to it, you know, and, and so, so it's not really a clubhouse, it's a kitchen, cinema. It's like these, these amazing high end things they wouldn't even have in a house if they owned it inside that multifamily. Right. And so then you can pitch it as, hey look, this is a, this is a 200 unit infill Southern California deal that's been done a thousand times, right. The key metrics are the same. You know, the IR is a little bit better, ROI is a little bit better, you know, but the thing that's different here is this amenity package, right? Instead of saying we have a totally new concept to sell to and the newness of it repels people, the sameness of it brings people in. And the one exciting idea adds the novelty to pull people over the line. Much better to present things as plain vanilla and reduce all this risks, all these risks that's perceived in new ideas and have people comfortable with the deal but excited about the one extra thing.

So in other words, the idea is the novelty. Because before when we started you talked about novelty, right?

Yes, novelty is manageable.

It's the one thing. It's just one thing. Right. Because you know, when you talked about that initially, I remember some of my old studying of Brian Tracy and I remember, you know, this was decades ago when he said, you know, if anything's more than 10% new, the market will reject it. Right. Like you probably heard him say that. He used to say that all the time. And so I thought, you know, too much novelty is bad, but so what you're saying is have just a little bit of novelty for sure, but the rest of it's plain vanilla, Right.

I think when you get into the deal world, you know, 10% and a little bit aren't specific enough.

Of course they're not.

Yeah, right. Yeah. And so this is Brian Tracy.

Oh, he just said 10% off. As you know, that doesn't mean anything, but you get the idea. Yeah, it's, it's an example.

I think in Flip the Script, I go through, you know, a couple of deals where you see what layer of novelty we selected in order to get a deal done. Right. And so I think that's that. I think largely that can be true. New things are brought to market all the time. You know, I worked for a billionaire, Steve Kim, at Alcatel Ventures. I learned a lot about this. And he was, you know, he said, listen, companies that we invest in never fail to build the thing. They're going to say that, you know, we don't invest in cold fusion or, you know, rockets to Mars. They either build the software, build the semiconductor, build the radio tower, they build all that stuff. They never fail. Yeah, it might take them a year longer or they do a patent infringement, but they get around that. They build the stuff. The issue is the market doesn't show up. And so there's too many risks stacked up in certain areas. So we have to decide what risk bricks we're willing to load up on and when those risk bricks are too heavy for our investment equation. So it's more precise. It's sort of projecting into the investor the buyer's risk stack and saying, where are the risks that they don't want to have an evolution or a revolution in and frame those out and get frame control. That's the plain vanilla part of the deal. What's the part of the deal that they can get excited about and accept a risky brick on that part of the stick?

Right? Yeah.

More intricate than, you know, 10% I get.

Yeah, yeah, yeah.

So. So I think that chapter in Flip Descript is very good at articulating how if you're in a deal to choose what part of the deal is plain vanilla and what part of the deal has novelty and how that flips people into hot cognition, how you get frame control on them and then use a moral authority frame and the timeframe to create an investment decision. So these things start to plug in together like Lego pieces. They all work together.

Oren, your stuff, I mean, you've really defined this so, so well. I commend you for that. And you know, I read Pitch anything years ago. I'm going to go back and read that again and then flip the script also, I think was like three years ago for me, so I got to review that one too. But just excellent, excellent advice. Thank you for sharing it today. Give out your Website or any resource you want to share with our audience.

Okay, yeah, I think if you go to pitch anything.com, that's easiest thing to spell. And there's lots of resources there. You know, we video, as you can imagine, videos and things like that. I think that the thing, you know, there's a lot of books out there. You know, a lot of those guys are academics, like they've never been so, you know, in a business deal. So these, these psychological topics are really interesting when they come through the lens of people who have done lots of deals in a hardcore finance and have really seen these. You know, it's not bringing in 19 college kids, you know, and having them draw something on a piece of paper and then offering to buy that piece of paper back. Like what does that tell you about, you know, getting into Goldman Sachs and doing a hundred million dollar ABL like off, honestly. Right. So these ideas through the lens of actual real deal making is so valuable. And that's, that's what's been.

Yeah, like your airport deal. I really liked reading about that one years ago too. So you talk about that in the pitched anything book. Thanks again, Oren. Appreciate it.

Thanks, Jason.

Yeah.

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