Assurance of Outcome: How to Design an Investment That Always Performs | EP. 9

0:00 – I sleep really well at night, and that’s not because I’m reckless, it’s not because I’m lucky,
0:04 – and it’s definitely not because I think that I’m smarter than Mr. Market. I sleep well because
0:09 – my investments work designed intentionally to survive. Can you say the same? Most investors,
0:15 – they spend their lives trying to predict the future, whether it’s interest rates or elections,
0:19 – recessions, inflation, they’re trying to predict the next black swan event, but my crystal ball is
0:24 – broken. And the truth is, so is yours. Prediction is a losing game. What actually matters is
0:30 – structure. I’m Brian Spear, and welcome to the Sage Investor Podcast, where our goal is to try
0:35 – to help you generate cash flow and build legacy wealth in a tax-efficient manner, because that’s
0:38 – what I’m trying to do for my family. We’re going to help as many people as possible do that
0:41 – as we can along the way. You’re catching us midstream in a seven-part series, and right now we’re
0:47 – in episode six, which is the second A of the acronym capital, where we’re digging into assurance
0:53 – of outcome. And right out of the gate, I want to be very clear about the assurance of outcome,
0:57 – okay? There are no guarantees in investing. There are no guarantees in life, but there are ways
1:04 – to dramatically increase the probability that you survive, that you compound, and you win
1:11 – over very long periods of time. And our sunrise capital strategy, it is engineered for one thing
1:17 – near certainty of result. In a perfect world, I’d just be betting on a sure thing. I would want
1:22 – with absolute assurance, every time that I make an investment, with 100% success rate, every single
1:27 – investment will work out exceptionally well. And that’s how we’ve engineered the sunrise capital
1:31 – strategy. Assurance of outcome is not about bravado petting yourself on the back. It’s not about
1:36 – forecasts, and it’s not about hype. It’s about designing your financial life, your business,
1:42 – and your investments, so that the base case is durable. And the range of outcomes is very narrow.
1:49 – You have near certainty of result. Before we talk about how investors actually engineer that
1:54 – kind of durability, we need to name the fear that actually drives this conversation, even if nobody
2:01 – really likes talking about it. Most high net worth investors, they don’t talk about this out loud,
2:05 – but I will. The fear isn’t failing to make more money. The fear is that one bad role of the dice
2:11 – is going to wipe out decades of progress, where you have pause distributions, capital calls,
2:17 – overleveraged deals, sometimes total loss of capital, partners who promised certainty,
2:22 – but ended up delivering chaos. You don’t need to swing for the fences anymore.
2:25 – Ultimately, you’ve already won the game. You’ve already become successful in the eyes of society.
2:29 – And your job is now no longer offense. Warren Buffett has set it for decades. Rule number one,
2:35 – never lose money. Rule number two, never forget rule number one. And that’s not conservative thinking
2:40 – that is just wisdom, concise wisdom. Assurance of outcome is what happens when you stop chasing
2:48 – upside and you start protecting survivability. If you’re listening to this and you’re notting along
2:53 – or if you’re, you know, feeling a little bit uncomfortable, that’s definitely worth paying
2:57 – attention to. You know, I honestly, I’d be curious, what is the real risk that keeps you up at night?
3:03 – That fear usually points directly to where better structure is needed in your portfolio.
3:08 – Before this show was actually named the Sage Investor, it was almost named a much simpler idea,
3:14 – a much simpler concept. And it was almost entitled the Infinite Cash Flow Investor. And that
3:19 – really derives from my personal investment philosophy and how I like to personally allocate my
3:23 – capital, my family’s capital. And when I say the Infinite Cash Flow Investor, what do I mean?
3:28 – Any time that I make an investment, what I’m trying to do is get all of the chips back off the
3:32 – table as quickly as I can so that my money is operating on an infinite cash on cash return.
3:38 – So when I’m making an investment into a deal, I know based on how I’ve structured the investment
3:44 – by mitigating all the downside risks, by ensuring that we have cash flow from inception and
3:48 – throughout the entirety of the holding period, we have a nice margin of safety, righted acquisition
3:52 – and throughout the entirety of the holding period, high quality cash on the balance sheet,
3:56 – good DSCR, all the myriad of things that I do inside of real estate investments,
4:00 – I know that it becomes a exceedingly high assurance of outcome. My confidence level is through
4:07 – the roof that at some point I will be able to inevitably get all the chips off the table and
4:12 – be operating from an infinite cash on cash return. And then from that point, what I have the ability
4:17 – to do is take that original investment dollar, go buy another income producing asset,
4:22 – implement the same exact business model, get all of those chips off of the table while retaining
4:27 – ownership of that asset because you’re using a cash out refinance to get all that capital back.
4:31 – Now you’ve got multiple streams of income off of that original investment dollar,
4:34 – go buy another investment to the same exact thing and ultimately what occurs is you get the
4:38 – compound effect. You begin creating a snowball where you have multiple streams of income off of
4:43 – the one single original investment dollar that inevitably leads to phenomenal outcomes over
4:48 – long periods of time on a high quality risk adjusted basis. That is the philosophy. The entirety of
4:53 – the sunrise capital investor strategy revolves around the concept of structuring the business
5:00 – with the near certainty of result and that’s what we mean when we say assurance of outcome.
5:07 – While there is no guarantees in life, this is as close as I can possibly structure an investment
5:12 – to ensure that we’ll get all the chips off the table and be operating on an infinite cash on cash
5:17 – return at some point in the future. So how do you increase the odds that the outcome actually looks
5:22 – like that? It’s not through optimism, through hope, but through a small number of repeatable
5:28 – principles. We’re going to cover a handful of those sage investment principles in today’s
5:33 – episode. The first sage principle that we’re underlining here in the assurance of outcome section is
5:39 – this quality over quantity concentrated excellence beats diversified mediocrity. You know,
5:47 – modern finance and portfolio theory oftentimes will teach diversification as a virtue,
5:52 – but Charlie Munger warned Buffett, some of the most sage investment principles of all time,
5:56 – they have a completely different perspective. Charlie Munger once said verbatim,
6:01 – the whole secret of investment is to find places where it is safe and wise to not diversify.
6:09 – Let that sink in for a minute. Safe, wise, not diversify. Why? Because if you have a simple
6:16 – business and you understand that business exceptionally well that’s thrown off cash flow for decades
6:23 – that will likely throw off cash flow for decades to come, then concentration does not increase
6:29 – risk. It actually reduces it and Warren Buffett does a great job of articulating this beautifully
6:34 – well in his 1996 Berkshire Hathaway annual meeting where he sits down in the discusses the idea
6:40 – and the concept of a diversification. I’m just going to literally read verbatim from the transcript
6:45 – here. If you have a really wonderful business, it’s very well protected against the vicissitudes
6:50 – of the economy over time and competition. I mean, we’re talking about businesses that are
6:55 – resistant to effective competition and three of those businesses will be better than 100
7:01 – average businesses and they’ll be safer incidentally. I mean, there’s less risk in owning
7:06 – three easy to identify wonderful businesses than there is in only 50 well-known businesses.
7:14 – And it’s amazing what’s been taught over the years and finance classes about that,
7:17 – but I can assure you that I would rather pick if I had to bet the next 30 years on the fortunes
7:24 – of my family that would be dependent upon the income from a given group of businesses. I would
7:30 – rather pick three businesses from those we own than a diversified group of 50 and the logic behind
7:37 – that is ironclad. So concentration doesn’t increase risk. It often reduces it. Why? If you have 50
7:45 – businesses that you’re going to invest in and you were to choose to diversify evenly, equitably
7:50 – and allocate all of your net worth across those 50 individual businesses, munger, buffet, the world’s
7:56 – greatest investors would say that that is exceptionally foolhardy. Why? If you’re investing them in order
8:01 – of priority where you personally understand the businesses and you know that the number one
8:06 – business is going to outperform the number 50 business, then it is illogical to put a diversified
8:11 – amount of capital across all those 50 businesses. Rather, you should bet heavily on your best
8:17 – business because you know with a significantly higher assurance of outcome that that’s definitely
8:21 – going to perform better than all the other businesses over time. Fewer variables, easier to evaluate,
8:27 – more certainty. Assurance of outcome improves when you reduce dependencies on dozens of different
8:34 – things going right and instead you place capital behind a handful of businesses that you truly
8:41 – understand. But if it says, look, you don’t need to be an expert on every company or even many
8:46 – different companies. You only have to be able to evaluate companies that are within your circle of
8:51 – competence. The size of that circle is not very important, but knowing the boundaries of your
8:58 – circle of competence is extremely important. It’s vital. So we like to just choose businesses that
9:03 – are simple, simple to understand, not easy, not easy to execute, but simple to understand businesses.
9:09 – This is why we love residential real estate, affordable housing. You know, it’s the most
9:13 – historically proven asset class, safe, predictable income over long periods of time, food, water,
9:16 – and shelter, the basic necessities of life. We understand that business. It’s simple to understand.
9:22 – And for that reason, we’re willing to put a lot of chips on the table because we have an exceedingly
9:25 – higher assurance of outcome. You know, once you’ve chosen what to own carefully, the next question
9:30 – becomes even more important. You know, what can go wrong? What actually can go wrong? The second
9:36 – sage principle that we’re going to talk about today is this, you must understand the difference
9:40 – between risk and uncertainty. Risk is measurable. Uncertainty is unknowable. Risk, you can model.
9:49 – Uncertainty, you literally cannot. And the biggest investment failures in history, they didn’t collapse
9:55 – because of risk. They collapsed because uncertainty showed up and there was no margin for error
10:02 – along the way. And that’s why leverage is so dangerous when it’s misused. It removes forgiveness.
10:08 – Assurance about comes not about pretending that black swan events aren’t going to occur. They
10:12 – most assuredly are. It’s about ensuring that when they do, they don’t end the game. You can still
10:18 – survive through them. And that’s why we obsess over conservative leverage, liquidity, essential
10:25 – use demand, redundancy. You don’t eliminate uncertainty. That’s inevitability, but you must be
10:32 – able to survive through it. You can calculate risk. There’s known probabilities. Quantifiable
10:38 – outcomes, right? It’s inside of the performer. There are assumptions there, but you can calculate
10:42 – that risk. Uncertainty is unknowable. There’s no historical data, unpredictable outcomes, right?
10:48 – Insurance is risk. Pandemics completely unknowable. Massive uncertainty. Great investors
10:55 – distinguish between these two. Risk can be managed with diversification and by hedging, but uncertainty
11:01 – requires a better structure. It requires a margin of safety, flexibility, humility, cash reserves,
11:09 – avoidance of leverage. You know, you’ve got to accept that you cannot predict the future. My
11:15 – crystal ball is broken. Your crystal ball is broken. And the Fed doesn’t even know what they’re doing.
11:20 – The truth is, if you were listening to what the Fed’s guidance has been every single quarter for
11:25 – the last decade, they would have steered you in an improved direction, many, many, many occasions.
11:30 – So you cannot trust them. Their crystal ball is broken and they’re supposed to be the brightest
11:34 – minds and economics, the world over. Nobody knows what the future holds. So you have to structure
11:40 – your life, your investment for survivability along the way to ensure that you have a higher level
11:46 – of assurance of outcome, because you cannot predict the future. It’s structure for resilience,
11:51 – not precision. You know, here’s a useful kind of pause point, right? If you’re evaluating
11:57 – investments right now, ask yourself this, am I being compensated for the risks that I can measure?
12:03 – Or am I being exposed to uncertainty that I truly don’t understand? And that single distinction
12:10 – eliminates more bad deals than almost any spreadsheet ever will. There’s a few more sage
12:15 – principles to cover. But first, let’s go ahead and talk about something most investors overlook,
12:20 – because it just feels so simple, almost too simplistic. And it’s the idea that great investments
12:26 – are boring. You know, there’s a quote from the towel of Warren Buffett. It’s another phenomenal
12:31 – book based on his investment philosophy. And Buffett has this quote that’s basically managing your
12:36 – career is like investing. The degree of difficulty doesn’t count. And that applies directly to investments,
12:42 – right? You don’t get a bonus. You don’t get bonus points for complexity. You don’t get rewarded
12:47 – for cleverness. You don’t get paid more for the extra suffering that you have along the way.
12:52 – The market doesn’t care how hard your investment was. It only cares whether or not it worked.
12:59 – So the third sage principle that we’re covering today is great investments are boring rent collection,
13:05 – recurring revenue, simple economics, and boring is beautiful. It doesn’t need to be flashy.
13:10 – The best real estate empires were built on rent collections, cost control, and disciplined
13:16 – acquisitions, not on adrenaline along the way. So build systems for boring excellence, high quality
13:24 – reporting cadence, generate great KPIs and drive efficiency in the portfolio. Make sure you have
13:29 – a quality reserve policy along the way. Make sure you’ve got a great buy box for the acquisition
13:33 – criteria. The basic blocking and tackling invest in durably wonderful businesses. Simple. It’s simple,
13:39 – but it is not easy. But if you can effectively implement a simple business model over an exceedingly
13:44 – long periods of time, you have a very high assurance of outcome. And Charlie Munger had another
13:49 – quote that perfectly explains why certain businesses they dominate over time. The best businesses
13:55 – are the ones that can charge you more and more for something that you need more and more. And that
14:02 – is the power of recurring revenue. Subscription businesses, contracts, service businesses,
14:08 – and I’d say the best of all real estate that provides visibility. They reduce customer acquisition
14:16 – costs. They compound customer lifetime value. And I mean real estate, especially residential real
14:21 – estate, is one of the most powerful recurring revenue models and existence. Mobile home parks sit
14:26 – at the intersection of necessity and resilience, food, water, and shelter, the basic necessities of
14:32 – life. And we are in a well documented affordable housing crisis. You know, our product that we serve
14:39 – to the marketplace is affordable housing. And the demand for our product goes up during periods
14:46 – of recession. Back to the quote, the best businesses are the ones that can charge you more and more
14:53 – for something you need more and more affordable housing. So when the recession occurs,
14:59 – there is a higher demand for our product, which is affordable housing demand goes up, which means
15:04 – we could charge more for a product when people need it even more. That is one of the best businesses
15:10 – in the world. It is well documented that we are in an affordable housing crisis, depending on the
15:15 – source that you use, whether you’re looking at the National Association realtors or Zillow or the
15:19 – government statistics, depending on the source, the United States is short on the low end, two
15:25 – million homes, sometimes three million homes, sometimes six or eight million homes, depending
15:29 – upon the source that you’re going to see. But regardless, that we are short millions of housing units
15:35 – in this country. There is no surplus. There is no relief valve. And there is no meaningful new supply
15:41 – coming online. And Green Street data suggests that there’s virtually no new mobile home park supply
15:47 – through at least 2029. And that’s been the case for literally decades. We pay tens of thousands
15:52 – dollars for institutional data on an annual basis to help escape where the puck is going. Green
15:56 – Street will only predict out to 2029. And there’s no new supply mobile home parks coming online.
16:01 – What does that do? It creates a massive moat. Now, any elastic demand and massive pricing power
16:07 – in the marketplace does not justify improvements. We’ve all seen what happens when greed overrides wisdom.
16:15 – Like the old infamous farmer, bro, where price gouging on a life-saving drug took him directly
16:22 – to prison. So, durably wonderful businesses, they don’t goug. They steward. If you have a long-term
16:28 – perspective of being successful over the course of many decades, you become a steward. But from a
16:33 – cold hard capitalist perspective, it is irrefutable. Affordable housing is something people need more
16:39 – and more and will continue to need for generations. And that’s exactly why Warren Buffett is literally
16:45 – the largest player in the manufactured housing ecosystem. He owns Clayton Homes, the largest
16:50 – manufacturer of mobile homes in the country. He owns Vanderbilt Mortgage, the second largest lender
16:54 – on mobile home parks in the entire country. And he owns 21st Mortgage, the largest lender on
17:00 – mobile homes in the country as well. He understands the economics. He understands the moat. And he
17:06 – understands the survivability over long periods of time. Mobile home parks, you’re protected
17:11 – against the vicissitudes of the economy. There’s going to be inevitable ups and downs over time,
17:16 – but the demand for our product goes up during the downturn. And so the business is protected
17:21 – from the ebbs and flows of the economy when you’re in a period of recession. In addition to that,
17:25 – you want to be in a business where you’re protected against competitors. And because there’s no
17:30 – new supply of mobile home parks coming online, you are hitting that dual point that Warren Buffett
17:35 – said. In the 1996 Berkshire Hathaway meeting where he’s explaining diversification as long as
17:39 – the business can protect against the vicissitudes of the economy, the inevitable ups and downs,
17:44 – and you’re protected against steep competition coming in and completely changing the market.
17:48 – You’re in an exceptional position. Then you could double down in that business. It’s why he’s so
17:52 – huge in the mobile home parks. And in our asset class, our business does exceptionally well
17:57 – regardless of the economic condition. And it has a scenario where once you own the assets,
18:03 – there’s no new supply coming online of mobile home parks. They’re not building anymore.
18:07 – The demand’s going up. There’s no new supply coming online. This creates the best long-term
18:11 – same store and a wide growth out of any respective real estate sector around period and story.
18:15 – That’s been the case for literally decades and will be the case for the foreseeable future. And
18:19 – it’s why you have the highest assurance of outcome. And it is why Warren Buffett’s the biggest
18:24 – player in the mobile home park sector. And the final sage principle that we’ll talk about today
18:28 – that kind of underpins this idea and this concept of assurance of outcome is this,
18:32 – real assets hold value, own things that matter. Over long periods of time,
18:37 – wealth is not preserved by paper promises investing in fiat currency, right? It’s preserved
18:43 – by ownership, currencies change, they ebb and flow, financial instruments, they come and go,
18:49 – entire monetary regimes rise and fall in time. But real assets, land, businesses,
18:57 – infrastructure, productive enterprises, they endure. Warren Buffett would say, look, I don’t
19:03 – care what kind of business that you’re investing in. What you need to do is ensure that you’re
19:07 – investing in income-producing assets. If you put your money under the mattress, it is guaranteed
19:12 – to go down and purchasing power over time. If you buy gold, you might retain your purchasing power,
19:17 – but you’re not going to be earning any sort of cash flow. You can’t live off of that respective
19:21 – investment. It is speculative because the only way to make money is to buy low and sell high.
19:25 – And that is the definition of speculation. So you must invest in income-producing assets.
19:31 – And Buffett made this point really powerfully when he’s kind of reflecting during the great recession,
19:36 – right? In 2008, when stock prices were plummeting tremendously, I’ll read the quote verbatim
19:40 – here from his op-ed. And he’s talking about the idea and the concept of investing in wonderful
19:44 – businesses. He says, in the 20th century, the United States endured two world wars and other
19:49 – traumatic and expensive military conflicts. The Depression, a dozen or so recessions and financial
19:55 – panics, oil shocks, a flu epidemic, and the resignation of a disgraced president, yet the
20:02 – Dow rose from 66 to 11,497. The point is that if you buy durably wonderful businesses,
20:12 – income-producing assets over long periods of time, you’re going to outperform comparatively
20:17 – speaking. And that distinction matters. If you hold cash, you’re holding a melting ice cube,
20:22 – inflation guarantees the loss of purchasing power over time. And if you hold non-productive assets,
20:29 – you’re speculating on sentiment. You’re betting on price appreciation. That’s gambling.
20:33 – But when you own income-producing real assets, you are aligned with the fundamental forces of the
20:40 – economy. Real estate is a perfect example. At its core, real estate is simply a bundle of packaged
20:46 – commodities. It’s got land, it’s got materials, it’s got labor. It’s got what is an apartment
20:51 – building made of? Bricks, copper, wood, packaged commodities. These are organized to provide shelter.
20:58 – And shelter is not discretionary. It’s one of the basic necessities of life. And it’s why residential
21:03 – housing has been one of the most historically proven asset classes over thousands of years.
21:08 – Consider the simplest concept, which is home ownership. For much of the middle class,
21:14 – the single most important wealth building decision is buying a home. Not because it’s
21:19 – unbelievably exciting, but because it allows time, amortization, and inflation to work together.
21:26 – Over decades, if you buy a house, you put down a modest down payment, you take out a 30-year mortgage,
21:30 – you hold it for three decades, that combination quietly converts income into significant net worth.
21:38 – And if you scale that logic up, when you invest in income-producing residential real estate,
21:44 – especially in segments with durable demand, you’re owning something that produces cash flow,
21:50 – benefits from inflation rather than being harmed by it, that serves as an essential human
21:55 – need, and it holds intrinsic value across any economic cycle. And that dramatically narrows the
22:03 – range of outcomes where you have a significantly higher assurance of outcome. Assurance of outcome
22:08 – improves when you move away from abstractions, right? And move towards assets, real, tangible
22:14 – assets that are productive and necessary. Owning things that matters, not about nostalgia,
22:19 – it’s about survivability. Real assets, they don’t need to be perfect. It doesn’t have to be
22:25 – perfect forecast to work. They just need time to breathe. And that’s why we do what we do. That’s
22:32 – why we’ve structured the sunrise capital strategy the way we have. We’re not betting on timing.
22:36 – We’re not betting on narratives. We’re not betting on appreciation or speculation. We’re betting
22:41 – on durable cash flow, essential use demand, massive moats, conservative structures, and businesses
22:48 – that survive cycles the next inevitable downturn. But assurance of outcome is not the finish line.
22:54 – It’s the gateway, the sunrise capital strategy. When you do it right, when you do it right,
22:59 – when you focus on cash flow first, when you add value, when you protect the downside,
23:05 – when you invest, you don’t speculate. When you have a taxi-fishing structure, you have an exceedingly
23:10 – high assurance of outcome. You dramatically increase the probability that your capital survives
23:16 – over time. And survival is a prerequisite for everything that comes next. Because once you reach
23:23 – a place where your outcomes are no longer fragile, once your income is durable, once your balance
23:30 – sheet can withstand any economic shocks, once your investments are no longer dependent on perfect
23:36 – timing, something very important changes. You stop playing offense just to survive. And you start
23:43 – playing offense with intent. And that’s where legacy begins. True legacy is not built in a single
23:49 – deal. It’s not built in a single decade. And it’s not built by chasing the highest possible return.
23:56 – Legacy is built when capital compounds quietly over time. And when wisdom is layered on top of wealth.
24:04 – And when the systems that you’ve designed ultimately outlive you, assurance of outcome is really what
24:09 – gives you the right to think behind yourself. And that brings us to the final pillar of the capital
24:15 – strategy. So in the next, in the final episode of this seven-part series, we’re going to talk about
24:19 – L legacy that is built to last. Because the ultimate goal was never to just make money.
24:24 – Building wealth is not enough. A real sage investor, the principal associated with being a sage investor,
24:31 – is not only to pass along a little bit of wealth, but also to pass along wisdom and a framework
24:36 – to the next generation. So that your insights, your wisdom, your philosophy can survive for many
24:41 – generations downstream so that your wealth, being the patriarch of your family, does not just go
24:47 – from bootstraps to bootstraps in three generations like so many fatal flaws of families before.
24:52 – The sage investment principles outlined can help you pass along not only wealth,
24:57 – but wisdom so that you can leave a real legacy that is built to last. And that’s what we’re
25:01 – going to dig into in the next episode of the sage investor podcast, a legacy that is built to last.
25:06 – But until next time, you’d be great.