The Cash Flow “Riddle”: Solve It, and You’re Free for Life | Ep. 4

In this episode of The Sage Investor podcast, Brian Spear breaks down the absolute baseline of durable wealth generation: putting cash flow first. This principle serves as the structural foundation of the C.A.P.I.T.A.L. strategy utilized by Sunrise Capital Investors. Spear introduces the concept of the cash flow “riddle”—the psychological and financial reality that no matter how large an investor’s net worth or nest egg becomes, they will experience persistent money anxiety unless their portfolio generates ongoing, distributable cash flow that exceeds their lifestyle expenses.

The discussion challenges mainstream financial wisdom, contrasting the flawed nature of accounting constructs like earnings, EBITDA, and net operating income (NOI) against the physical constraint of real, optimized free cash flow. Drawing on the philosophies of legendary capital allocators such as Warren Buffett, Charlie Munger, Jeff Bezos, and Henry Singleton, Spear highlights why market-timing speculation and a reliance on price appreciation consistently lead to financial vulnerability during downturns.

Listeners will learn how to transition away from the structural fragility of traditional accumulation strategies to the resilience of a “Golden Goose” framework. Spear shares an in-depth case study of Sunrise Capital’s acquisition of the North Beach Parking Plaza in Clearwater Beach, Florida, demonstrating how strategic capital allocation and structural de-risking can unlock compounding, predictable income streams capable of weathering any economic recession. This briefing provides high-net-worth investors and business owners with the exact decision-making principles required to turn fragile financial success into unbreakable peace of mind.

Key Takeaways

• Takeaway 1 True financial security cannot be achieved by a high net worth alone; your portfolio must generate predictable, distributable cash flow that exceeds your living expenses to permanently eliminate market-induced anxiety.
• Takeaway 2 Earnings, EBITDA, and net operating income are often misleading accounting constructs that mask structural fragility, whereas optimized free cash flow remains the ultimate physical constraint and lie detector of a healthy business.
• Takeaway 3 Relying heavily on price appreciation turns investing into speculation, leaving portfolios highly vulnerable to market-timing risks and unexpected economic downturns.
• Takeaway 4 Maintaining high liquidity and strong cash flow functions as both an emotional and financial weapon, enabling disciplined investors to play offense and seize elite opportunities while others scramble for survival.
• Takeaway 5 A CEO or investor’s long-term success is ultimately dominated by their ability to prudently allocate cash and capital, rather than just efficiently managing day-to-day operations.

Key Topics Covered

• The Cash Flow First Principle
• The Psychology of Money Anxiety and the Cash Flow Riddle
• Accounting Constructs vs. Physical Constraints (EBITDA, Earnings, and NOI)
• Historical Capital Allocation Strategies of Elite CEOs
• Speculation vs. True Cash Flow Investing
• Calculating Optimized Free Cash Flow and Managing Capital Expenditures
• Structural De-risking and the Golden Goose Strategy
• Public-Private Partnerships and Taking Assets Fully Private
• Capital Allocation as a Long-Term Value Driver
• Liquidity as a Strategic Weapon in Economic Downturns

Episode Chapters

00:00 Intro

Brian introduces the foundational principle of the C.A.P.I.T.A.L. strategy: cash flow first. He explains how a lack of distributable income creates existential anxiety for investors during market dips, regardless of their net worth.

01:17 The Most Powerful Force for Wealth

An exploration of how the world’s most enduring founders and investors develop a strict reverence for cold, hard cash rather than superficial accounting profits. Brian highlights cash flow as the biological heartbeat that keeps a business alive through structural shifts and recessions.

03:32 Don’t Trust “Earnings”

Brian breaks down why earnings are merely accounting constructs and reviews historical warnings from Warren Buffett, Charlie Munger, and Jeff Bezos regarding the dangers of optimizing for GAAP metrics or EBITDA instead of future cash flows.

06:01 Most Investors Are Completely Wrong

A deep dive into the difference between real estate investing for optimized free cash flow versus speculating on price appreciation. Brian clarifies how hidden capital expenditures can quietly erode nominal monthly gains over a holding period.

09:51 The Cash Flow “Riddle”

An explanation of the cash flow riddle from a personal finance perspective. Brian contrasts the anxiety of slowly eroding a traditional nest egg via the 4% rule against the peace of mind offered by the “Golden Goose” strategy.

14:13 Your Greatest Weapon

Brian discusses the defensive and offensive power of liquidity. Having robust cash flow allows investors to remain emotionally grounded, avoid forced liquidity events, and comfortably wait for superior opportunities.

17:33 Real Life Example

A detailed walkthrough of Sunrise Capital’s investment in the North Beach Parking Plaza in Clearwater Beach, Florida. Brian explains how they unlocked immense value by taking a public-private partnership fully private and de-risking the asset with a 10-year triple-net lease.

24:52 This Kills Investors

An analysis of why many syndicators and value-add sponsors faced paused distributions and capital calls in recent years due to over-leveraging and tracking NOI exclusively while ignoring the broader cash flow gas gauge.

26:38 Cash Flow ALWAYS Comes First

Brian summarizes why cash flow must serve as the mandatory prerequisite before adding value or protecting the downside, setting the stage for subsequent pillars of the investment framework.

Full Transcript

[Transcript begins]

Brian Spear: If you don’t solve the cash flow riddle, you will forever be riddled with anxiety. And I want to start there because that sentence, it captures more truth about investing and retirement and wealth than most textbooks ever will. Most people don’t realize they’re anxious because of how their portfolio is structured. They think it’s markets or inflation or politics or bad news cycles. But underneath all of that is something that is much, much, much more simple. Their wealth doesn’t produce enough distributable cash flow to cover their lifestyle expenses. So every market dip, it feels existential. Every recession, it feels very, very personal and every drawdown feels like a countdown clock. And that’s why the very first principle of the capital strategy, the C, it stands for cash flow first. Not growth first, not appreciation first, not legacy first, cash flow first always.

Welcome back to the Sage Investor podcast and this podcast, it exists to help really successful people answer one uncomfortable question honestly. How do I convert financial success into durable cash flow, real peace of mind and a legacy that outlives me all without taking some sort of unfortunate, unnecessary risk that I really can’t afford. And in this podcast, we’re going to dig really, really deep into letter C cash flow first. It’s the very first pillar of the seven pillars of the sunrise capital strategy. And it’s really kind of where our strategy stops being aspirational and really starts becoming structural. Because if you really misunderstand cash flow, everything else in your plan becomes exceedingly fragile.

Cash flow is the oldest, the least glamorous and the most powerful force in business. It’s not what gets you on magazine covers. It’s not what people really brag about around the water cooler at conferences. And honestly, most people don’t, they don’t even track it correctly. But if you study the world’s greatest founders, businessmen, entrepreneurs, investors, the ones who really lasted, the ones who survived all the recessions, all the wars, all the competitors that have popped up, all the technological shifts over time, and they made it through their own individual mistakes, you notice something strange. There’s a lot of similarities. They all develop the same reverence for cash, not accounting profits, not adjusted EBITDA, real cold hard cash.

Cash flow is the life flow of any business. Felix Dennis said it best, right? And he didn’t really dress it up at all. Cash flow is the heartbeat of your company. That line’s not motivational. It’s biological. The heartbeat stops and the story ends. That’s it. And Don Valentine, another phenomenal entrepreneur, investor over at Sequoia, one of the most important investors in the history of Silicon Valley, stripped it down even further. All companies that go out of business, they do so for the exact same reason. They run out of money. Different industries, different eras, different personalities, same exact ending. And once you really absorb that, a lot of business mysteries, they stop being mysterious. Why do great operators obsess over working capital? Why do they negotiate payment terms like their lives depended on it? Why do they track cash monthly, weekly, daily, sometimes down to the hour, dependent on the business? It’s because they feel what Michael Dell described perfectly. It was as if we were driving along watching only the speedometer, when in fact we were running out of gas. Because cash flow is the gas gauge. If you ignore it long enough, the engine is going to die quietly and suddenly without mercy.

One of the most dangerous ideas in modern investing is the belief that earnings equal value. They most assuredly don’t. Earnings are an accounting construct, but cash is the physical constraint. You’ve likely heard about Warren Buffett talking about EBITDA, right? Charlie Munger would call them bullshit earnings. Literally, that’s exactly what he says. Because he doesn’t believe in it, right? It’s literally an accounting construct that was conceptualized just a handful of decades ago. But cold hard cash, right? One dollar in, whenever you make an investment, one dollar in, how many dollars come back to you, that’s real. That’s a physical constraint. And Jeff Bezos understood this from day one, right? He said it so clearly in shareholder letters that he repeated it over and over and over year after year. When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of our future cash flows, we’ll take the future cash flows. And so when Warren Buffett and Charlie Munger are talking about EBITDA and how much they despise that concept, they’re discussing the fact that it’s not an actual representation of how much cash flow the business is actually throwing off over long periods of time. So if you think about how Jeff Bezos just conceptualized that and spoke through that, it really explains the entire history of Amazon in short order.

There’s a really phenomenal book out there called The Outsiders where a tiny group of CEOs ultimately discuss again how to allocate capital prudently. Warren Buffett would convey that Henry Singleton is the single best capital allocator in the history of the country. And he’s just a raving fan of Henry Singleton. And Henry Singleton is front and center inside of The Outsiders. And that group quietly compounded capital better than almost any group ever and they had one simple rule. And it is that cash flow, not reported earnings, is what determines long term value. Markets, they get it wrong. They get it distracted. They’re often trying to find what’s the top line revenue this quarter, what’s the profit this quarter. But the truth of the matter is how much cash flow the business throws off is far superior to whatever the quarterly number is, this particular quarter value always follows cash.

If I’m going to break it down in terms of real estate, what does that look like? And what we do, what we’re trying to do is buy safe, predictable, durable income streams over exceedingly long periods of time. And so rule number one inside of our seven pillar framework is ultimately cash flow first period end of story. And it means that you have to have sufficient cash flow to ride out the next inevitable recession, to make it through the downturns, to always be able to survive because cash flow is the life of the business. And the minute that you run out of cash flow, the business dies. So you have to maintain that cash flow. And so in terms of real estate, the reason that Warren Buffett and Charlie Munger kind of despise EBITDA and the out of the in real estate is that’s really what most folks track. They track NOI. What is NOI? It is revenue minus expenses equals profit, earnings before interest taxes depreciation and amortization. That’s literally what it is in a way. And around about way net, net operating income is exactly that. And that’s what most real estate operators are really focused on. But the truth of the matter is you should be focused on cash flow because that’s where so many folks get it wrong.

I would pose to you that the reason that so many investors believe that they’re investing, right? They believe that they’re investing, but they’re actually speculating because they’re not focused on real estate investing for cash flow. Unknowingly, oftentimes, they’re focused on price appreciation. And really, those are the two main aspects that we’re referring to, right? Income and appreciation, far too often, a huge percentage of an investor’s strategies allocated to how much is this going to appreciate over time, whether it’s immediate over the long term.

So when we talk about cash flow, we’re talking about optimizing for free cash flow. The first piece of that is operating cash flow, i.e., you got rents that come in, you got expenses that go out and you have a certain amount of net operating income at the end of the day. But that doesn’t tell the whole story. Why does it not? Because obviously you’re likely to have a pity payment, principal interest taxes insurance along the way, some of that stuff’s below the line. Then you have cash flow. We have to take care of the non-operating expenses. That amount of operating cash flow that you have on a monthly basis, again, it doesn’t tell the whole story.

I’ll use a very simple example of a single family residential property. Again, I was fortunate to be speaking in Pasadena a couple of months ago now. And I gave this example that, you know, if you buy a million dollar house and you’re going to rent it out as a single family rental, you’re going to have a couple of thousand dollars, a few thousand dollars of rental income on a monthly basis. And you’re going to have some expenses that come out of that. You’re probably going to be cash flow negative because the purchase price probably about a million bucks, you’re not going to be cash flow positive. But if you are, let’s say you’re net neutral or just barely cash flow positive, folks sometimes think that they’re cash flow positive, but they really haven’t thought through the business model in an, in its entirety and all the myriad of aspects associated with cash flow. Not only do you need to think about operating cash flows, but you also need to think about retained earnings on the balance sheet because feasibly when you buy a deal, you’re going to want to ultimately grow the value of that property over time. It can come from forced appreciation or it can just come from long term macroeconomic tailwinds that increase the value of that property as well. Regardless, you should hope that the value of that property increases over time. That’s the goal, right? Where you’re not only driving operating income, but you’re also increasing the value of the property. And when you add up the operating cash flows plus the long term retained earnings and then you subtract out whatever the capital expenditures are, that’s going to give you the real picture of the free cash flow of the optimized free cash flow of the business over time.

And far too often, you know, folks think they’re quote unquote cash flow positive. They’re discounting just how much capital expenditure needs to be dumped back into a business over time. They’re discounting all the water heaters that need to be replaced, all the, you know, the siding that needs to be replaced, the concrete that needs to be replaced, they’re minimizing the roof, right? In a single family example, right, whatever nominal operating cash flow you might have on a monthly basis. Let’s say you’re quote unquote cash flow positive for 10 years, but then you got to fix the roof and it cost you a massive four or five figure discount or five figure. It just wipes out an entire decade of cash flow. So you’re really not real estate investing for cash flow if you follow the logic. Clearly, you need to have sufficient cash flow throughout the entirety of the holding period, not for brief respites, but for the downturns for the rainy days in every way, shape or form. And for the next inevitable downturn because it is going to occur, I don’t know when it’s going to occur because my crystal ball is broken, your crystal ball is broken, the Feds crystal ball is broken, they don’t even know what they’re doing. So you just need to ensure that any investment that you make has to have a foundational pillar of cash flow.

And this is where I want to introduce the cash flow riddle from a personal finance perspective. The cash flow riddle is this, if your portfolio does not produce ongoing cash flow in excess of your monthly expenses, you will never feel secure no matter how large the number is no matter how big your portfolio gets. I don’t care if it’s $2 million, $5 million, $10 million, $15 million, it doesn’t matter. If you haven’t turned that net worth your portfolio, oftentimes eight figures into income that can provide for your lifestyle, then you’re going to feel anxiety. And that’s the riddle and most people never solve it. They’re told to build a nest egg. They’re told to follow the 60/40 portfolio. They’re told to withdraw 4% and hope that the math works. But what they’re really doing is they’re slowly consuming capital. Their base is lowering and they’re praying that longevity doesn’t outlast projections. And that strategy guarantees one thing, anxiety, because every single withdrawal feels like erosion. Every market downturn feels like theft and every year feels closer and closer and closer to running out.

And if you contrast that with what I like to call the Golden Goose strategy, where you don’t kill the Golden Goose, you don’t sell the Golden Goose and you build a portfolio of assets that lay eggs consistently, predictably and indefinitely into perpetuity. If you don’t solve the cash flow riddle, you will forever be riddled with anxiety. And that’s not philosophy. That is lived experience over time. When I say lived experience, what do I mean?

I have the good fortune of having an exceptional business partner, gentleman by the name of Kevin Bupp, started a podcast called Real Estate Investing for Cash Flow based on lived experience. Why? Because he’s an individual, seven years my senior, who ultimately has been there, done that and got the t-shirt. I like to say that he’s never had a real job, started buying real estate in his teens. And by the time that he was in his mid 20s, he was doing exceptionally well, bought about a hundred single family homes, was doing well, multi-million dollar net worth by the time that he was in his mid 20s doing exceptionally well, had all the materialistic toys, all the things that you would imagine by the time you’re in your mid 20s. But this was just before the great recession. And unfortunately, he was focused primarily on home price appreciation and not on real estate investing for cash flow. And when the great recession hit, the value of his properties and the prices dropped precipitously, ultimately crushing his portfolio and leaving him in a dire situation, basically lost everything, very, very precarious situation. And so after that, hitting rock bottom, realized that buying assets with the intent to see them go up in value over time is an imprudent way to ultimately manage a portfolio. So what you need to do is be focused on real estate investing for cash flow. It’s why 15 years ago or so we started a podcast called just that, aptly named Real Estate Investing for Cash Flow because the number one foundational piece of your portfolio that you must have to ensure that you will be successful over the long term.

So this is lived experience. And after that got up, looked around in the marketplace, tried a bunch of different types of real estate investments, bought some office, bought some mixed use, bought some retail, some self storage, litany of other things, but then found mobile home parks. And we’ve been doing mobile home parks ever since. I reached out to him after he bought a couple of different individual mobile home parks and knew that my skill set would partner exceptionally well with his because I knew that I could pour existing fuel on an exceptional business model and scale it significantly. And over the last decade, that’s what we’ve done, but it’s based on lived experience that first foundational piece and it’s not just his story. It is the story of thousands of investors, just like you that I’ve had conversations with over time that are successful in the eyes of society right, seven figures, eight figure net worth, but still frustrated and haven’t solved the riddle to be able to simultaneously live the life that you want today in a tax efficient manner while still being able to grow up. And grow and build a legacy over time, something that you could leave to the next generation. And that’s what the capital strategy is all about, trying to help people generate cash flow and build legacy wealth in a tax efficient manner.

We’ve talked thus far about cash flow in terms of, you know, defensively survival, but cash flow is not just about staying alive. It’s about optionality. Warren Buffett, his entire posture during crisis can be summarized in one sentence pretty eloquently: by being so cautious in respect to leverage and having loads of liquidity we will be equipped, both financially and emotionally, to play offense when others scramble for survival. And that word emotionally really, really matters here because cash flow buys time, cash flow buys sleep, cash flow buys clarity. And Charlie Munger takes it even further, right? It takes it even further and makes it unforgettable: the way to get rich is to keep $10 million in your checking account in case a good deal comes along. You know, obviously the number doesn’t matter, right? The point isn’t the amount, the point is the posture. It’s to be ready, it’s to be patient, and to not be forced liquidity. Liquidity is not laziness, liquidity is a weapon. So you have to have a sufficient amount of cash flow and a sufficient amount of cash on the balance sheet to ride out the next inevitable recession to ensure that your portfolio can make it through the downturn and you can exit and have liquidity events when market conditions warrant as opposed to having forced liquidity events and you could take advantage of the downturn if and when that ultimately arises. You could sleep well at night throughout the next recession, the next inevitable recession.

But not all cash flow is created equal. Charlie Munger had a brutally practical test for business quality. He said there’s two different kinds of businesses, right? There’s the first kind earns 12% and you can take it out, you actually get 12% cash on cash return in your account. And the second business earns 12% but all that excess account must be reinvested, all that excess cash got to be reinvested in the business and there’s never any actual cash. And we hate that kind of business. And that distinction separates compounding machines from treadmills. Some businesses consume everything that they produce and that’s why EBITDA is one of those things that they despise. And I would say NOI can be misleading in the same vein.

I would post to you that that’s why so many different individuals that have invested in syndications over the last handful of years have had very, very difficult times where they’ve had paused distributions, they’ve had capital calls and sometimes total loss of capital even if the sponsor is a quote unquote good operator. Why do I say that? Because the sponsor may have actually operated the business model the way that they would have otherwise anticipated. Let’s say they were a value add sponsor, they bought a deal, they ultimately implemented the value add plan, the NOI of said deal increased, rents increased, they implemented the value add plan, doesn’t matter. In a variable interest rate loan based on their imprudent manner of allocating capital, they took out too much debt, they had a variable rate interest loan, all the cash is ultimately siphoned and sucked out of the business because they’re focusing on NOI exclusively, i.e., the speedometer and not paying attention to the cash flow, i.e., the gas gauge. And if you’re doing that exclusively, right, you are a quote unquote good operator, you’ve implemented the value add plan the way that you would have thought, but now you’ve got market timing risk that’s created a really precarious situation. And a lot of those deals have ultimately blown up even with quote unquote good operators, guys that did the business model the way that they wanted to but they don’t have a full global view of what is necessary to actually manage capital in a prudent manner.

From my personal perspective, here’s a truth that separates the best CEOs of all time from just average CEOs, guys that run businesses. The job of a CEO is not just to run operations like we’re talking about here, it is also to allocate cash. So The Outsiders, again, that book defines it pretty clearly: CEOs needed to do two things well to be successful: they need to run their operations efficiently and deploy the cash that is generated by those operations. Most people just train for the first half of the marathon. They just train for the first half of the sentence. The second half is really where greatness shows up over exceedingly long periods of time. I’d post to you the Jim Collins Good to Great style scenario of businesses because cash flow is ultimately the raw material and then capital allocation is the craft, right? And over long periods of time, the allocation actually dominates the operations. That fix and flip thing, it can be good for a couple of few times in a short period of time, but over very long periods of time, how you allocate capital and look to extract out the most free cash flow over exceedingly long periods of time is a much better way to ultimately invest. I’d say that’s true investing as opposed to speculating.

So try to give you a couple of examples. I’ll give you at least one here. We got a deal in Clearwater Beach, Florida called North Beach Parking Plaza. Beautiful piece of property. It’s not glamorous, it’s not residential, it’s not headline worthy. That’s why we like the capital strategy because it’s not crystallized to one individual asset class, it’s just how to manage capital prudently. So in this asset, it’s a parking facility. From day one, it did one thing exceptionally well: it generated cash. Daily parkers, monthly contracts, low overhead, minimal capital expenditures. We didn’t buy it because it was clever and it was flashy, we bought it because it solved the cash flow riddle. It paid predictably, reliably and because of that, we had a lot of options. We can hold, we can refinance, we can redeploy the capital when the right opportunity appears. And that’s what cash flow does: it turns investing from guessing into positioning.

North Beach Parking Plaza is on Clearwater Beach, one of the best beaches in the entire world, in many occasions has been rated the number one beach in America and on numerous occasions the number one beach literally in the entire world. And for that reason, it is an exceptional location, location, location. But as a beach, it’s obviously a more modest size of land, there’s not a ton of land there but it’s attracting so much attention. We literally get over a million tourists every single year on this one tiny parcel of land on this one tiny beach, okay. And there’s only one way in and one way out, there’s one road that comes in and one road that goes out. And for many, many years, literally decades, the local municipality has tried to solve a problem and the problem is that there’s nowhere for everybody to park when you go to the beach. It’s just there’s nowhere to park, people circle over and over and over again, there’s nowhere to park.

So after a long period of time, the city suggested that they enter into a PPP, a public-private partnership where they said look, we’re going to go out and be willing to subsidize and fund the development of a brand new parking garage, we just need a developer to come along and partner with us. So a developer came in, partnered with the city and ultimately the developer is happy because it gets a discount, the cost associated with building that parking facility, and the city’s happy because at the end of the day, they get what they need to serve the tourists and the residents that are ultimately in Clearwater. Fast forward a handful of years, the 700-space parking facility, seven-story comes up, it’s absolutely beautiful and life is good. It’s a handful of years old but what happens is the city is not in the business of being in business. The private partner, what he cares about is driving the NOI, driving the cash flow, maximizing the value of the property because it’s an investment from his perspective. The city, they’re not in the business of being in business, they’re in the business of providing service to everybody that comes. They don’t care to maximize the property. At the time that was charging three dollars an hour for paid parking when it literally could have charged six, eight, ten dollars an hour undoubtedly given the demand that’s in the vicinity. All the different other flat lot parking lots in the vicinity charged many, many, many, many times what the three dollar per hour rate was.

And so the private partner was like look, can we just we need to increase this a little bit. And the city pushed back, they didn’t care. Why? Because they actually make money from other sources. They make money from tourist tax, anybody that stays in a hotel downtown, they make money from that. They make money from sales tax if they buy any sort of trinket from any of the shops in Clearwater Beach, the city makes money. They don’t make money exclusively from that parking facility, so they did not care to drive the NOI to the max degree.

And so it was a disgruntled partnership. And what we did to try to solve this problem is we went in and we bought the private portion from the developer and then we went to the city and negotiated with them to buy the public portion as well. And when we did, we ultimately took both of these pieces of the puzzle and we took both of them private. We took a public-private partnership, took it fully private and when we did so, we unlocked exorbitant amounts of value because then we were able to charge market rates, the free market rates.

And in doing so, prior to closing the transaction—and this is what cash flow first mindset is, okay—prior to closing the transaction, we went to the marketplace and we sought out a parking operator, engaged from them how much they would be willing to pay us for a triple-net lease over a 10-year horizon for the right and the privilege to run parking operations inside of that parking garage. And ultimately, they would be willing to sign a lease to us, a triple-net lease, they’d become our tenant and then they could run any of the parking operations that they would want. And in doing so, whatever their lease is that they’re paying on a monthly basis, any of the revenue over and above that would be the margin that they would ultimately keep, congratulations.

But from our perspective, it allows us to de-risk the investment, take the entirety of the risk and ultimately put it on the operator. So what we ended up doing was we negotiated the lease in such a way that it was a 10-year triple-net lease where the tenant, i.e., the parking operator ended up paying all of the respective expenses including all the capital expenditures, taxes, insurance and the litany of things associated with that respective property. We included a corporate guarantee and we also included 5% annual compounding growth rent escalators on an annual basis. So we went into that deal at about a seven and a half cap and when you added in some leverage, we’re about a 10% cash on cash return over the course of the first couple of years in that respective investment compounding at 5% each and every year. So when we bought that deal, we knew how much cash flow that deal was going to throw off for the next 10 years. Recession, depression, good times, bad times, boom times, busts, COVID, interest rate increases, doesn’t matter. We know how much cash flow this deal is going to throw off for the next 10 years. And that is a different perspective than what I would say a lot of different other folks come into the marketplace with.

So it allows us exorbitant amounts of flexibility. We didn’t buy it because it was clever, we bought it because it solved the cash flow riddle. It paid predictably, reliably and because it paid, we had options. We can hold, we can refinance, we can redeploy capital when the right opportunity appears. And that’s what cash flow does: it turns investing from guessing into positioning.

Cash flow is also a defense mechanism, right? It’s a defense mechanism against ego, against panic, against groupthink. And Charlie Munger warned about this constantly in his talks: it is difficult to identify and correctly weigh all the possible ways to deploy cash flow, which is why you see people chasing fads and following the herd. Munger would call it the institutional imperative, just chasing around what everybody else does and oftentimes they do it at the wrong time, right? Overpaying at the wrong time like lemmings following everybody along to slaughter. This is how I feel about the last handful of years leading up in 2020, 2021, 2022. Everybody’s buying and scaling to the moon in the syndication space when we’re just plotting forward buying brute, brute deals in our humble opinion and you know, feeling and yearning that we want to scale in a massive and material way but knowing that the deals don’t really make sense at that respective time. Fast forward a couple few years and all those individuals that were scaling to the moon based on ridiculous interest rates that were literally the lowest in five thousand years to quote unquote justify making those purchases are actually in very precarious situations, right? With paused distributions, capital calls, sometimes total loss of capital. And we’re just steadily plotting forward each and every quarter, thirty-something consecutive quarters on-time distributions to partners. Just don’t follow the herd.

And Michael Dell, he’s, you know, talked about the exact opposite problem where folks aren’t actually tracking cash flow at all. They’re running fast, they’re running to the moon as fast as they possibly can, growing revenue, feeling successful until suddenly you’re out of gas. Cash flow forces tradeoffs, it exposes weak economics and it keeps both fear and arrogance in check. Cash flow is ultimately the lie detector in a business.

Now let’s talk about sequence and why cash flow is the first pillar. Why does cash flow come first before the next pillar, add value? Why does it come before protecting the downside? Why does it come before everything else? Because without cash flow, adding value feels dangerous, downside protection feels theoretical, long-term investing feels stressful. But with cash flow, you can wait, you can be conservative, you can think generationally. Charlie Munger, again: the big money is not in the buying or the selling but in the waiting. Cash flow lets you wait. And that’s why it’s first, not because it’s exciting but because it makes everything else possible.

This is the difference between speculators and sage investors. Speculators chase returns, sage investors design income streams. Speculators need things to go right, sage investors get paid while they wait. Speculators worry about timing, sage investors worry about durability. Cash flow is not sexy, it’s empowering and it’s the foundation of peace of mind. Once the cash flow riddle is solved, once your portfolio produces more cash flow than your life consumes on an ongoing basis, once anxiety is removed from the equation, the next question becomes obvious: how do you grow that cash intelligently without gambling, without speculation, without needing luck? And that’s add value, and that’s where we’re going next. Cash flow first isn’t a preference, it’s a prerequisite. Because if your wealth can’t work without you, you don’t own freedom, you own a job with a nicer balance sheet. I’ll see you in the next episode.

[Transcript ends]