“More businesses are ruined by over-expansion than by almost anything else.” Charlie Munger
Real Estate Income & The Real Estate Cycle
You won't find another chart that better tells the real estate story of the last 15 years.
The gray bars show income in global private real estate. Remarkably steady for 15+ years, through:
• COVID
• Rate hikes
• The deepest correction since '09
The orange bars...not so much.
Appreciation gains / losses swing hard. They've finally turned positive after a few years of bummer declines.
Real estate largely moves at a glacial pace. Painfully slow sometimes. But there is an opportunity in that "sloth". Real estate has been reliably cyclical since basically forever.
My framework for real estate cycles:
The length of the cycle is a function of the froth or pain from the prior cycle. Hence the epic run post major GFC crash.
Therefore, this is the part of the cycle where patient capital gets rewarded. Not a lot of fire sales, but still a compelling time to put money to work.
You're not buying (or lending) at peak valuations today. So real estate investors / lenders will be investing in durable income streams provided they can get the lender onboard with the year one math (no negative leverage).
Because ahead of us is a favorable / reduced new supply picture given the lack of recent development. It might take 5-10 years before buyers and lenders take things too far and times get dark again.
And around and around we go.
In frothy times it's easy to forget that real estate is a cash flow game.
Revisit this chart to remind yourself what to focus on and when to get bullish.
CapEx Gone Wild
Is this AI CapEx super-cycle sustainable? The "all-in" approach to chips + datacenter spending is a massive gamble on future returns. But are we forgetting a fundamental rule of business:
Capital Efficiency > Brute Force.
Look at the divergence in strategy:
The Hyper-scalers: Microsoft, Google, and Meta, are spending billions to protect their moats.
Apple: Spends nothing while their hardware flies off the shelves as the preferred hub for AI agents.
Most of Mag 7 is spending to build and defend their market share; while Apple bides its time to figure out the best path forward without lowering their ROIC (return on invested capital).
Hard to know which group is making a mistake.
These are all still unreal businesses but the moats are shifting. We’ll likely own Meta and Google in client dividend growth portfolios (they pay small dividends today, but we expect large dividends from these companies as they continue to mature).
However, if these companies continue to spend at these crazy CapEx levels, they will transition from truly exceptional businesses to more pedestrian, high-quality businesses (so still worth owning, just with lower return expectations than the last 5 years).
Why We Don’t Recommend Venture Capital Funds
5 reasons we don't put client money in VC funds:
1. Capital is becoming less effective at driving results
2. The returns of even the top quartile funds are...meh
3. We don't invest with people that wear Patagonia vests (kidding!)
4. IPOs are gone. “We can't even chew our arm off to get out of this VC Fund.”
5. ZERO CASH FLOW
To be fair that last one is more of a me thing; we like income investments.
When would I change in this policy?
• A small fund of private employee shares (discounted)
• If Sequoia Capital would stop being mean and let us invest
If you can get into the tippy top Venture Firms (top 1-3% track record), by all means, wire away!
If not, most VC funds aren't worth the opacity, fees and "this feels like a bad marriage" hold periods.
Disclaimer
None of this is tax, legal or investment advice, and the numbers here are simplified illustrations. The real work is sitting down with your CPA, attorney and/or advisor, mapping which of these moves actually fit your facts.
