What is life?
A question like that will often get answered in the form of a metaphor. “It’s a war”. “It’s a dance”. “It’s a journey”.
As you can imagine, each of these answers will evoke a dramatically different attitudes, behaviours and philosophy. As Carl Jung once wrote, “Until you make the unconscious conscious, it will direct your life and you will call it fate.” It’s imperative that we examine and consciously choose what kind of metaphors use.
One of the most common metaphors that I’ve heard for describing business, investing and entrepreneurship is that it is a game.
But what does this exactly mean?
Finite Vs. Infinite Games
The most common interpretation of this is that it is a competitive environment with fixed rules, scarce resources and known players who are all trying to ‘win’. In other words, it is a ‘finite game’ where the winner takes all. But this is not the only kind of game there is, nor is it the most accurate representation of business.
Simon Sinek, the best-selling author of ‘Start with Why’, wrote about this topic in his book ‘The Infinite Game’.
A ‘finite game’ is distinguished from an ‘infinite game’, where players come and go, the rules are changeable, and there is no defined endpoint. Both time and resources are abundant, and there are no winners or losers, only players that are ahead or behind. Business, politics and life are cited as examples.
According to Sinek, problems arise when players apply the wrong metaphor to a situation. Mistaking an infinite game for a finite game can lead to short-term thinking, misguided objectives and internal dissension within an organisation.
Without a doubt, the game of real estate investment and development is closer to an infinite game than a finite game. Players come and go, the rules are always changing, and there is no defined endpoint.
However, I disagree with Sinek’s point that there are no winners or losers in an infinite game. After all, you can still lose the game by getting knocked out of the game altogether.
This changes everything– including the primary objective of ‘the game’.
Staying in the Game
Unlike a finite game where the clear objective is ‘winning’, in an infinite game the objective becomes ‘staying’. Since there is no clear endpoint, staying in the game in itself becomes a goal.
The winner takes all the glory in a 100m dash. Everyone who completes a marathon is celebrated.
So how do you not get knocked out of the game? By being consistently not stupid. Charlie Munger, a player who has outlasted most if not all other players who started with him, says:
“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”
Provided you stick to solid fundamentals, there is no need to be overly intelligent and try to ‘beat’ other investors by generating higher returns than them. You just need to not be stupid and stay in the game for the long term.
Some stupid things in real estate that can knock you out of the game:
- Being overly leveraged
- Buying expensive assets
- Not doing proper due diligence
- Not getting insurance
- Having negative net cash flow
- Being overly dependent on a specific niche
- Being overly diversified across too many niches
- Panic selling because of fear and emotion
- Doing larger and larger developments without building capital reserves (eventually one WILL fail and you will get wiped out)
- Trying to accurately predict the market and time everything
$1,000,000 Per Month
Recently, I was sent an off-market portfolio of 60+ fully-tenanted houses and freehold apartment blocks in the North of England, generating a steady GBP 925,000/month (˜USD 1.2 million) in gross rental income. It was owned by a single landlord.
Over 1 million USD in gross rental income every single month. This won’t be his net figure, but regardless, nobody could complain about that level of monthly income coming in.
So how did he get there?
I can’t disclose any specifics here, but basically he has been steadily building his portfolio since the early 90’s. His assets are what you would call ‘bread-and-butter’ properties, with nothing fancy or special about them — he simply stayed in the game over the long-term. Over 30 years, he steadily acquired average properties with average, steady cash flows, and most importantly– he was consistently not stupid.
I tip my hat at his consistency, and wish him the best of luck to sell his portfolio and ride off into the sunset.
Becoming Lindy
According to the Lindy Effect, as the time you spend ‘in the game’ extends, something interesting starts to happen. Your mortality rate, or chances of getting knocked out, decrease over time. Some things like religions, ideas, books or even cultures begin to last longer as they last longer. In the investment realm, Berkshire Hathaway has gained tremendous momentum over decades, and now benefit from the Lindy effect. I wouldn’t be surprised if Berkshire long survives Charlie and Warren, unless they make the stupid mistake of not picking a predecessor who is consistently not stupid.