Physicians are no strangers to specialization. A medical or surgical specialist is an expert on a bundle of diseases. A generalist physician is a specialist in knowing something about everything. Like Tyrion Lannister. The same applies to other professionals or business owners. We must specialize for success in our business.
Whatever our field, we invest our time and energy to acquire the knowledge and skills to succeed. The scions of a given business or specialty also hone that with experience, active reflection, and insights that lead to improved efficiencies or outcomes.
Specialization requires laser-like focus in a defined area to get the volume of experience. That approach translates well to some areas of investing. However, extrapolation to other markets can be not only a waste of time, but actually detrimental. Learn to recognize the difference.
Specialization
For an area of investing or business to be amenable to specialization, it ideally has several characteristics. A defined scope, important controllable inputs, and some friction. Developing your primary business or practice, and real estate investing are two areas where specialization improves the chance for business or career success. For clarity, I would actually consider serious real estate investing as a form of business.
The Right Scope for Business Success
You cannot be an expert at everything. To take advantage of specialization, you need to know more or have more experience than the competition to thrive. That means choosing a narrow enough scope that you can get that edge. However, you must also strike a balance.
If it is your scope is too narrow, then you may not have enough opportunities to use your expertise. Plus, there needs to be enough diversity to keep you interested and engaged. Some diversity also makes you resilient to disruptions.
In Your Career
In medical practice, that could mean finding a niche that you add to your more regular practice. The best opportunities are usually in the areas of greatest need. Not only is it professionally fulfilling, but there is less competition. I found that opportunity in my career as a physician leader, and now teaching about finance.
It is important when specializing in a niche to keep other options open for when new opportunities arise. Conversely, overspecialization also makes you vulnerable to disruption. In medicine, that could be from other providers, technology, demographic changes, or a change in the fee schedule or regulatory environment. A successful business or career must be able to weather disruption long enough to adapt.
In Real Estate Investing
The same principles apply to real estate investing. You need to specialize in some niche that is small enough that you can become an expert. That could be a combination of geographical market, type of real estate (eg. commercial or residential), or even a stage of real estate development. We can see the benefit of real estate specialization play out with institutional-sized investors. There isn’t good data, but I suspect it extrapolates to smaller-scale real estate business success too.
Again, competition and opportunities are vital. If everyone is doing the same thing, that is a crowded market. You may work with a team of experts in different areas, but still need to specialize enough to navigate that with your own best interests attended to. Having aligned interests and shared skin in the game may help.
Still, like in any other business, too narrow of specialization also means an increased vulnerability to disruption. For example, stand-alone short-term rentals in high-density cities are cruisin’ for a bruisin’ from government intervention right now. That has started.
Don’t be fooled by a good market.
Many Canadians have been attracted to real estate investing over the past few decades. It has benefited from favorable interest rates, demographics, and taxation. Real estate is also one of the few ways that the average person, or even a high-income professional, can easily access massive credit for leveraged investing. Most people would have a much harder time getting a good loan rate to invest 500K to over $1M in the stock market. However, mortgages in that range to buy real estate are common.
A favorable market, with returns magnified by leverage, has made real estate investing popular and allowed many people to do well. Even those without adequate specialization. We saw the same thing with all of the “trading geniuses” during the Covid stock market boom. We then hear sad stories when the market changes. Or more often, deafening silence from the recent geniuses.
Don’t let a good or bad market environment fool you. Instead, if you plan on developing a business that is amenable to specialization – get the training and experience. One good thing about real estate is that it probably isn’t as hard as learning medicine. As long as you keep the scope reasonable and put the necessary time and focus into it. Luck will still play a role in business success, but you can tilt the odds in your favor by specializing and making good decisions around important inputs.
Control of Important Inputs
Control of Important Inputs
Having knowledge or skills doesn’t do much good unless you can use them to affect important variables. In a real estate investing business, you may know where to find and how to recognize value that can be unlocked at a good price. You control whether you make an offer on a property and how much. That also requires patience and discipline to execute.
In other businesses, you can control all sorts of inputs. How you manage your client workflow, supply chains, and other services. Specialized knowledge can help to do that better. In a larger medical practice, that may also mean you focusing your specialization on seeing patients and hiring some business support specialists to help with those other efficiencies. However, just like leading the other members of your financial team, you must still understand enough to recognize value and fit it into the context of your practice.
Beware of False Control
One of the biggest pitfalls of specialization is thinking that we control more than we really do. We can develop a lot of confidence from the competence that we gain in an area. That feels great when things are going well. You do play a pivotal role in the success of your business.
However, we must also be careful to consider the risks from important inputs that we do not control. I see this play out in medical practice all the time. You can’t make a silk purse out of a sow’s ear. No matter how good of a surgeon you are. Wow, I am really channeling my mother today.
A good recent example in the real estate business is interest rates. Interest rates have a profound impact on the real estate environment, but are determined by a slew of other inputs beyond our control or ability to predict. Think ahead and consider the disruptive forces that you don’t control and how you could mitigate or plan for them. Be humble. Recognize risks that you cannot control, but that you can consider and plan for. And remember that the rare and unpredictable does happen. Probably more often than we think, but in different ways.
Friction & Inefficiency Create Opportunity
As mentioned earlier, for specialization to be of value for building a successful business, it must give you an edge over the competition. However, the magnitude of that edge must also be large enough to matter. That requires some friction or barriers to separate the specialist from their competition by a wide enough margin.
Friction in Medicine
I am not just talking about not having enough lube on the glove or scope. In medicine, friction for the business aspect of your practice exists, and it matters to your business’ success. Friction, or a barrier to entry and sustainability, could be the training and patient volumes required to get the best outcomes. That makes a difference in attracting the most patients and funding.
There are areas of medicine where the competition for business is quite fierce. Cosmetic procedures are an easy example. However, I have seen publicly funded specialties waffle between feast and famine over the years.
Even with constant patient demand that outstrips human resources, there are often bottlenecks due to inadequate infrastructure planning. Like the physical plant or equipment for an OR or specialized unit.
Another aspect important to medicine is that we are largely dependent on government funding. That can make for situations where to get the best outcomes, they limit funding to specialized centers. It makes for longer waits because there is still a lot of friction to get that specialization. When the government feels the heat on something, they throw money at it. That is a great business opportunity for those who have pushed through the friction to specialize in a desirable area. Again, scope matters, and being too specialized also makes you vulnerable when the government’s focus shifts to the next crisis that has captured their attention.
Friction & Efficient Markets
In any business, one of the moats protecting you could be developing the best relationships and infrastructure. There can also be financial friction. The transaction fees or capital requirements in real estate investing are an example of that. Ophthalmologists buying their lasers and fancy equipment is another one.
For any business transaction, at least two parties are trying to find the best balance between the price paid and the value received. This is called price finding. Each party comes to the table trying to get the best deal for themselves. However, the information, perspective, resources, and goals that they bring are different.
The agreed-upon price is the aggregate of those sides. If this is occurring on a small scale with lots of friction, then there will be a large range of prices around the “optimal” value/price. That is because it is an inefficient market.
Being specialized can give you an advantage since you have the sought-after and hard-to-obtain knowledge, skills, or products. A specialist is also better positioned to spot and act on inaccurate pricing that favors them. An inefficient market gives a better chance for a specialist to thrive because it gives a larger margin for them to use their special advantages.
Specialize When It Matters For Business Success
Specialization, by its nature, requires a narrow focus. That, by definition, means that you are becoming less diversified. You are putting more of your eggs in one basket. However, you are also dedicating more of your resources to protecting and nurturing those eggs. You hope to increase the number of chickens that hatch. However, the consequences of an unanticipated upset of the basket are also much higher. So, it is really important to understand the risks of that happening in relation to your investment or business success.
Investing means taking calculated risks with the expectation of being rewarded. That is in contrast to gambling or speculative investing, where the statistical expectation is to lose money (coupled with the rare windfall that keeps you playing). You have limited time and resources. So, focus on where you can make a difference with that.
You can also win by accepting where you cannot gain enough of an edge by specializing. In this post, we discussed some of the features that make for good areas to specialize. In future posts, we’ll discuss investments where you should avoid specializing, and diversify instead. Like the highly competitive and efficient-enough public stock and bond markets.
