Bet on the Jockey: Why a Great “Deal” Doesn’t Guarantee Returns  | EP. 19

0:00 – Most limited partners spend their time analyzing the deal. They’ll study the market, the asset,
0:05 – projections, the internal rate of return, but the longer that you invest, the more you realize
0:10 – something surprising. The deal is not what matters most. You can have a great asset in a great
0:16 – market with strong economic and still lose money. Why? Because the person managing the capital
0:24 – matters way more than the asset itself, which is why seasoned investors eventually arrive at a
0:29 – very simple conclusion, bet on the jockey, not the horse. I’m Brian Spear and this is the Sage
0:36 – investor podcast. My mission is to help you generate cash flow and build legacy wealth in a
0:40 – tax-efficient manner because that’s what I’m trying to do for my family and I’m sharing all the
0:44 – secrets that I learn along the way. In today’s episode, I’m going to explain why investors always
0:49 – focus on the person managing the capital, how great operators consistently outperform average
0:54 – ones, and how you can identify the right jockey before you ever invest in the horse. No matter
1:00 – how pretty a deal is, a bad sponsor can take the best deal and the best niche and drive it directly
1:06 – into the ground. Everybody loses their money in that scenario and really it happens all the time.
1:10 – Here is a quick example. Last week, while I was waiting to take the stage at a speaking
1:14 – engagement, I listened to the prior speaker and he said what happened during the interest rate
1:20 – run up over the last couple of years was, quote, capital stacks were bad as if that was the reason
1:26 – that really hurt investors. He said something along the lines of, it’s not like they were bad
1:30 – sponsors, it’s not like they were bad deals, but the capital stack was bad. But I couldn’t disagree
1:37 – more for those unaware back in 2022 and 2023 when interest rates really shot up a lot of folks
1:43 – in commercial real estate started to feel some pain and a lot of deals started going south. So
1:47 – in 2024, 2025, a lot of people lost a lot of money. Actually went up on stage next and I said,
1:54 – yeah, I know the capital stack was bad, but that’s not the deals fault that is the operator’s fault.
2:01 – If I invested a million dollars with a guy, I would call him a bad sponsor, right? If I lost my money,
2:07 – I would call him a bad sponsor because who put the capital stack in place? He did. And if he lost
2:12 – my money, he’s a bad sponsor, and that’s the truth. At the end of the day, it’s about the human
2:17 – being that is managing the capital, that is making the decisions. You can give a guy a pass and say,
2:22 – oh, he’s not a bad guy. He’s not a bad sponsor. Okay. And then watch the money fly away right
2:27 – out the door, right? From my perspective, I believe that that is stupid, right? The definition of
2:32 – insanity is doing the same thing over and over and over again and expecting a different result.
2:37 – And ultimately, investors have to judge the person who’s making those decisions, which brings
2:42 – the conversation back to the core principle here of bet on the jockey. In a minute, I want to
2:47 – break down exactly how to evaluate a jockey. But first, you have to understand why the deal
2:53 – itself is rarely the deciding factor. A great business run by a mediocre management becomes a
3:01 – mediocre investment, but a good business run by exceptional management can become an extraordinary
3:07 – investment because outcomes are not determined by spreadsheets. They’re determined by human
3:14 – beings making decisions. Ultimately, who decides how much leverage to use? When to refinance,
3:22 – when to sell? How to handle a downturn? It’s not the deal. It’s the person. It’s the human being.
3:27 – Bad management can destroy value faster than good assets can create it, which is why the human
3:32 – being managing the capital is the most important variable. Inevitably, spreadsheets can model. They
3:38 – can do some dirty work. They can model revenue, expenses, returns, but they cannot model judgment,
3:45 – discipline, integrity, behavior, under pressure, how people act when they’re under stress. And when
3:52 – you invest, you’re not just buying an asset. You’re delegating decision making, which is why two
3:58 – operators buying the same exact asset can achieve dramatically different results. The difference is
4:04 – not the deal in and of itself. The difference is the jockey. So let me ask you now, how much of your
4:10 – due diligence is actually focused on the operator, on the sponsor, on the human being making the decisions
4:16 – versus the deal itself? Are you going with the herd? Is that how you’re making your decisions?
4:21 – Warren Buffett talks about three respective traits, one evaluating people. He talks about integrity,
4:25 – intelligence, and energy. And he says, if you don’t have the first one, the other two are going to
4:31 – kill you. Why does integrity matter more than intelligence? Because a smart person with a lot of energy
4:37 – can justify bad decisions. They rationalize bad decisions. They may not be rational, but they rationalize
4:44 – the decisions when a disciplined investor avoids bad decisions in the first place. Buffett didn’t grow
4:51 – seized candies, one of his most phenomenal cash flowing businesses through innovation. His job
4:57 – was to just pick a great company with an exceptional manager and let them operate. He says this phrase
5:03 – that, you know, when we, when we buy businesses, right, we, we hire and we bring on board Mark McWire,
5:08 – we don’t teach them how to swing the back. We want to bring on great companies that have great
5:11 – macroeconomic tailwinds, great managers, great human beings, great integrity, and we just let them
5:16 – run the business. We get out of the way. He grew the business through discipline, protecting the
5:21 – brand, raising prices gradually, maintaining quality, generating consistent cash flow. None of
5:27 – that is flashy. That is the blocking and tackling of just running the day to day business. It’s just
5:31 – consistent, intelligent capital stewardship. Once he finds the right jockey, he just stands out of
5:38 – the way. Great operators do not create value through brilliance. They preserve it and they compound
5:45 – it through discipline. But here’s really where it gets tricky from a limited partners perspective
5:50 – because in strong markets, bad operators can actually look like great ones. So far we’ve established
5:55 – the operator drives the outcome. The human being making the decisions drives the outcome
5:59 – in the investment and great operators, they’re defined by discipline, not just intelligence,
6:05 – which brings us to the hardest part of investing in bull markets when the economy is running and
6:09 – everything is looking good. Almost everybody looks like a genius. In a scenario where
6:15 – cap rates are decreasing, as has been the case over the course of the last 40 years until the
6:18 – most recent interest rate run up, it was kind of like cap rates were kind of like going down
6:23 – an escalator with a yo-yo. Periodically they’d bounce up and down, but it was a slow study downward
6:28 – trend over long periods of time, which meant that simply buying and holding and doing nothing,
6:32 – not even being a great operator, you could still make a lot of money along the way.
6:35 – And in that scenario, high leverage works, aggressive strategies work, risk gets rewarded.
6:41 – So how do you tell the difference between a skilled operator and a lucky one? We went pretty deep
6:47 – on this in episode 14 and the episode about understanding risk, but in a nutshell, concisely,
6:53 – the difference between a skilled investor and a lucky idiot is that a skilled investor can
6:58 – take the same exact amount of risk and achieve a better rate of return. Or alternatively,
7:04 – they can generate the same exact rate of return, but ultimately takes significantly less risk
7:09 – along the way. And in this regard, they’re generating way better risk-adjusted returns.
7:14 – And the truth is, in an environment where all of the property prices are going up, it’s very,
7:21 – very difficult to tell if you’re investing with a skilled operator or simply a lucky idiot.
7:27 – The truth is, you really don’t know who’s swimming naked until the tide goes out.
7:32 – Down turns don’t create bad operators. They simply reveal them. The best jockeys,
7:38 – they protect the downside. They avoid excessive leverage. They think in decades, not quarters.
7:44 – And sometimes the truth is, they look wrong. In the near term, they look wrong. As evidence,
7:50 – I’d point out Warren Buffett in 1997, 1998. The internet bubble is running up. And ultimately,
7:55 – everybody is calling Warren Buffett old, outdated, stupid. He doesn’t understand it. His investment
8:01 – in philosophy doesn’t work anymore. And what ultimately happened? Fast forward another five years.
8:06 – The internet bubble pops. It’s now 2002, 2003, and everybody calls Warren Buffett still the best
8:12 – investor of all time. But leading up to that, when the tech bubble was running up,
8:16 – his rate of return on an annual basis was significantly worse than the S&P 500 and a lot
8:22 – of the other investors, his competitors in the immediate vicinity. So he looked wrong in the short
8:28 – term. But over the long term, that prudent philosophy, protect the downside, avoid excessive
8:34 – leverage. Think in decades, not quarters, eventually wins out. And that’s how you generate the
8:40 – best risk of just a return over exceedingly long periods of time. We’re looking for compounding.
8:45 – We’re not looking for the highest rate of return. We’re looking for the best risk-adjusted
8:50 – returns. Have you ever looked at an operator and thought, you know, that individual is too
8:55 – conservative, right? Only to realize later that they were the ones who actually survived during the
9:01 – downturn. Now, let’s, let’s bring this together into something that’s a little bit more practical
9:06 – for you. When you evaluate a jockey, you should be asking, do they actually have a track record
9:12 – across multiple cycles? How do they use leverage? How do they behave during a downturn? Do they
9:19 – have their own capital in the deal? Do they have skin in the game? Are the incentives actually
9:25 – aligned? Because alignment changes behavior. When somebody else’s money is at risk, decisions
9:33 – are different. But when their own money is at risk, everything changes. And how the sponsor
9:40 – structures the deal will tell you if they flip a coin, whether it is a Heads-I-Win tails you
9:46 – lose scenario or whether their incentives are actually aligned. And Warren Buffett has an
9:51 – exceptional framework for creating alignment of interest with investors. He outlined this message
9:57 – in his 1998 shareholder letter. And I literally have it printed on my desk and I will pick it up
10:04 – and read it periodically. He instructed CEOs of Berkshire subsidiaries to operate with three
10:10 – guiding principles. The first one is to run the business as if you own 100% of it. Secondarily,
10:18 – run it as if it’s the only asset that you and your family have or ever will have. And third,
10:25 – act as if it cannot be sold for at least 100 years. In that mindset, it forces long-term thinking.
10:33 – It creates significantly better alignment of interest and it drives the best risk-adjustive
10:38 – returns possible. In my own personal experience, when we started buying real estate, we did it with
10:44 – our own money, our own dollars and cents. And then eventually as we continued to scale, we started
10:50 – bringing on friends and family and organically grew that through the golden chain of referrals.
10:54 – But when you’re managing your own personal capital and your friends capital and your families
11:00 – capital, you’re going to make decisions a little bit differently than if you’re simply raising
11:05 – institutional capital with none of your own money on the line or capital from some far-out partner
11:09 – sponsor or anybody else that you do not know and you don’t have a real legitimate personal
11:13 – relationship with. You know, over at Sunrise, over 90% of my cumulative net worth is wrapped up
11:19 – in that individual business. And while I don’t personally own 100% of every asset that we end up
11:25 – acquiring, my entire livelihood, 90% of my net worth is wrapped up in the success of that
11:31 – enterprise. So every single decision that I make, I act as if I own 100% of it because if the
11:38 – business fails, my family’s in an exceedingly difficult position, it becomes a legitimate calamity.
11:44 – And you make different decisions when you invest millions of dollars into a venture. If you’re
11:50 – simply doing individual deal-specific syndications as a sponsor and you’re raising 100% of the
11:55 – equity, what is the scenario? It’s heads I win tails you lose. Let’s say the deal goes exceptionally
11:59 – well. The investors win. Congratulations. Life is good. They get a big check and you do too in the
12:04 – promote. But what happens in that scenario if the deal goes poorly? Investors lose all your money,
12:09 – but ultimately the sponsor, he kind of goes off scot-free, granted. He gets a little bit of a reputational
12:14 – hit, but he doesn’t lose any real money. And what happens is you end up having a situation where the
12:19 – decisions that that sponsor makes, he is incentivized to make extraordinary risky decisions because doing
12:26 – so is very, very favorable to him. It becomes a heads I win tails you lose structure. So you’ve got
12:32 – to try to ensure that when you’re allocating capital specifically as a limited partner,
12:36 – that there is the most pure alignment of interest that you could possibly find along the way.
12:40 – And from my perspective, the framework that Buffett puts in place is the most pure way to create
12:45 – the best alignment of interest. Before you invest, you should be asking, would I trust this person
12:51 – to manage my capital if the deal went sideways tomorrow? And if the answer isn’t clear, that is a
12:58 – signal. And all of this, all of this, it does not mean that the deal in and of itself doesn’t matter.
13:05 – The deal most assuredly does matter. A great operator, they cannot save a fundamentally broken
13:13 – asset forever. But when you’re choosing between the two, a great deal with an average operator
13:20 – or a good deal with a great operator, history tends to reward the latter. Investing often looks
13:27 – like it’s about assets and markets. But underneath all of that is something much more simple.
13:33 – It’s about people. It’s about people making decisions under uncertainty. The most important
13:39 – decision that an investor is ever going to make is choosing who they trust to make those decisions.
13:46 – Which is why experienced investors always come back to the same conclusion. Bet on the jockey,
13:51 – not the horse. You can have the best horse in the race. But if the jockey can’t ride, it doesn’t
13:57 – matter. And that’s the game. Bet on the jockey. But here’s where it gets really interesting. Even if
14:03 – you pick the right jockey, you still have and solve the real problem most investors miss.
14:09 – The cash flow riddle. Because net worth, it tells you what you have. But cash flow determines
14:16 – how you live. And if you don’t solve that, you can win the race and still lose your peace of mind.
14:22 – So next time we’re going deeper. The golden goose versus the nest egg. Are you building something
14:28 – that pays you or something you’ll have to slowly sell off just to survive? We’re going to dig into
14:34 – that next time. Until then, you’d be great.