The Investor's Dilemma: Weighing Risk and Reward
How investors weigh reward against the risk taken to pursue it, and what due diligence examines before capital is committed.
Read the transcript
A lot of people buy a rental home, a rental property. What's your cost of debt? Five and a half percent. So you have negative cash flow. So really, what that is, from my perspective, is a negative cash flow, relatively low rate of return investment that you have massively levered up.
How you actually win, and the risk
And really, the way that you win is if you have fixed rate debt and we either have massive inflation or we have a really incredible booming economy and prices go up as wealth is shared. You're chasing appreciation, which means that today you actually have negative margin of safety, because you have negative cash flow.
Control what you can
And so that would be an example of something where the idea is: worry about the things that you can control, and try, by the grace of God, to just accept that which you cannot. And it's hard advice to live by, but it will lift the burdens off your chest if you work on that. And so from an investor standpoint, what do I control? I can control whether I get into this deal or not. Do I want to get into a deal where I have negative cash flow, massive leverage, and no margin of safety?
Transcript edited for readability from the video. Machine-transcribed; may contain minor errors.
