In one of his most cited quotes, the iconic and sometimes enigmatic Bruce Lee said:
“You must be shapeless, formless, like water. When you pour water in a cup, it becomes the cup. When you pour water in a bottle, it becomes the bottle. When you pour water in a teapot, it becomes the teapot. Water can drip and it can crash. Become like water my friend.”
Sometimes referred to as the ‘Godfather of Mixed Martial Arts’, Bruce was clearly referring to being adaptable and flexible when it comes to hand-to-hand combat. As a martial artist, Bruce was one of the first to recognise the importance of not being tied down to a single ‘style’ and flowing with whatever the situation or your opponent throws at you.
Like most timeless ideas of philosophy, this has a broader universal applicability beyond fighting. In fact, what Bruce was talking about is not a new concept, but rather a very old one. Both the Taoists and Stoics have written about living ‘in accordance with nature’, and flowing with the ebbs and flows of destiny instead of ‘forcing’ your way through life.
So how does this apply to to real estate investing?
The first level of looking at this would be to say that just like a fighter, a real estate investor needs to find the balance between staying his course and adapting to the changes of the market and calibrating his investments and strategies accordingly.
But a deeper layer of analysis would be to examine the water-like quality of capital itself, which is the basis of all property investments.
Just like water can take the form of a cup, bottle or teacup as Bruce said, capital is even more versatile and can literally take the shape of anything that carries value and be commoditised. Capital can turn into a physical object such as a computer, real estate, pizza, or even ‘invisible’ services such as a haircut or investment banking functions.
Even our language reflects this reality. Finance professionals often use terminologies such as an asset being ‘liquid’, ‘cash flow’ statements, credit ‘drying up’, ‘pools’ of capital or regulatory bodies ‘freezing’ laundered funds.
A bit of contemplation on this will reveal that capital permeates society and quite literally flows throughout it. The best financiers, entrepreneurs and investors know that the key is to create or acquire an attractive asset that capital can ‘pool’ around such as a company or real estate holdings.
When you have an asset, it is like a small pond or a lake that has small inlets or outlets of water. Water may flow in or out of it causing the lake to ebb, but as long as the asset holds value there will always be a ‘pool’ of water, or equity. The job of the investor is to create multiple ‘inlets’ of capital that brings new water into the pool of capital, and minimise unnecessary outflows of water. Having multiple ‘inlets’ ensures that if one of those were to get blocked up, the pool of water will not drain out and dry up.
In opposition to this principle, most people deploy the ‘containment model’ when it comes to their finances and investments. They only allow for one stream of income (often from their jobs) and attempt to limit outflows as much as possible by penny-pinching. They continue to do this (however long it takes) until they accumulate a sufficient ‘pool’ of capital, then ‘freeze’ the pool by purchasing an illiquid asset such as a home. If the individual is extremely frugal and diligent, this can be repeated two or three times throughout the life of the individual.
A slight shift in paradigm has the potential to dramatically accelerate personal wealth accumulation:
ACCESS to capital > OWNERSHIP of capital
While it can seem counterintuitive at first, this is a principle that separates the wealthy from the middle and lower classes. A simple example will illustrate.
Picture a cash millionaire and a broke man with $0 to his name. For whatever reason, the millionaire can only spend his own money, but the broke man has UNLIMITED credit, allowing him to borrow as much money as he likes, whenever he likes. Of course, he has to pay market interest and agree to pay the sum back within an agreed period.
Who is better off?
At first glance, the cash millionaire seems to have one-up on the broke man. After all, he his net worth is a whopping 1 million dollars higher than the broke man’s.
But the tables turn when they start investing in cash flowing real estate. The millionaire can buy 1 million dollars worth of real estate, which is obviously a significant amount. The broke man, however, can buy as much real estate as he wants provided that the assets provide a positive rate of return sufficient to pay his debts back (exactly HOW to do this safely is another post for another time). With access to basically all of the pools of capital in the world, he could even become a billionaire within a few years depending on how many good real estate deals he can find for himself.
As you can see, the key is to gain ACCESS to outside pools of capital and link it to a productive asset. After the capital has done it’s work, you can simply return it back to the original source along with some of the extra returns that it has generated.
When a young couple gets help from their parents to buy their first home, they are technically tapping into an outside pool of capital. However, since the residence is not an investment that produces returns, the assumption in most cases is that the amount borrowed will not be paid back to the parents, at least in the near future.
But what if that money was put into an income generating investment instead?
Many people carry various limiting beliefs and fears when it comes to accessing and using pools of capital that they don’t own themselves.
The first limiting belief is that they don’t have any access to capital outside of their parents or the traditional bank mortgage. However, a little outside of the box thinking and creativity will reveal that there are many more options than one might initially think, such as using bridge capital or private lenders for property investments or venture capital if you’re an entrepreneur. Another thing to realise is that access to capital is not free. You need to invest in your network, build relationships, and educate yourself to become a trusted custodian of other people’s hard-earned money.
A common fear is “What if I lose their money?”. This can be a legitimate fear if you are not financially educated and lack the experience, knowledge and competence to handle other people’s capital. However if you have educated and prepared for the task, you should recognise that by investing with other people’s capital you are providing them with a service that they need since many people who have money lack the time or knowledge to invest it. Take an extreme example of a person who happened to win the lottery, but has zero investment knowledge. If you help that person deploy that capital properly and grow it over the long term instead of blowing it on frivolous luxuries, you’ve undoubtedly created a true win-win situation.
I hope that this article has given you a new perspective on capital. It is not simply the pieces of paper or coins that you keep in your wallet, or bars of gold in some bank vault. Capital is like water, can take any shape it wants. When you pour water in a bottle, it becomes the bottle. When you pour water in a teapot, it becomes the teapot. Water can drip and it can crash. It’s always looking for the next asset to flow to.
Do you have access to it, and know a place for it to go?