One of my favorite analogies for business was given by Jim Collins in his book Great by Choice. It involves Roald Amundsen, who was the first explorer to ever reach the South Pole.
In 1911, Amundsen and his team faced off with Robert Falcon Scott and his team in the effort to be first. Amundsen won and unfortunately, Scott and most of his team didn’t survive the journey.
Collins believes these dramatically different outcomes were the result of their different approaches. For one, Amundsen prepared ahead of time much more effectively than Scott. But furthermore, Amundsen practiced what he called “20 mile marching.” Here’s how Collins describes it.
“Amundsen adhered to a regime of consistent progress, never going too far in good weather, careful to stay far away from the red line of exhaustion that could leave his team exposed, yet pressing ahead in nasty weather to stay on pace. Amundsen throttled back his well-tuned team to travel between 15 and 20 miles per day… When a member of Amundsen’s team suggested they could go faster, up to 25 miles a day, Amundsen said no.”
Scott would instead go as far as he could on good days and hunker down on bad ones. This exhausted the team on good days and reduced morale on bad ones. Indeed, there’s no better way to destroy morale than to sit around doing nothing in freezing cold weather.
How 20 Mile Marching Relates to Real Estate Investment
Collins uses the analogy of 20 Mile Marching to describe what him and his research team found was the most effective approach to business; consistent, unwavering effort. But unlike what one would immediately think, this applies in both good times and bad time. Collins again,
“The 20 Mile March is more than a philosophy. It’s about having concrete, clear, intelligent and rigorously pursued performance mechanisms that keep you on track. The 20 Mile March creates two types of self-imposed discomfort: (1) the discomfort of unwavering commitment to high performance in difficult conditions, and (2) the discomfort of holding back in good conditions.”
The natural temptation is to get ahead of ourselves and go overboard when things are going well and to hunker down and miss all sorts of opportunities when we hit a roadblock.
A real life example of this discipline is Southwest Airlines. Every year, despite receiving hundreds of requests to add flights in new cities, they would only open two to four new locations. One might ask why they would choose to limit their growth so much. Yet, when every other airline was bleeding money, Southwest prospered as they put up over 30 consecutive profitable years. Their consistent, unwavering effort paid off big time.
This strategy is especially important in real estate investment. Since purchasing and rehabbing real estate requires a large amount of capital up front, it’s easy to get overleveraged or to rehab out all of the equity in a property. It’s also all but axiomatic that real estate investors—at least in the early going—are cash poor. Going too fast, even in good times, can be very risky.
Power of Real Estate Investing
On the other hand, the wealth-generating power of real estate accelerates over time. Particularly for buy and hold investors, it becomes like a snowball going downhill. At first, it takes a little while to get going, but then it becomes unstoppable.
If you have a mortgage, every year you pay off more principal than the year before. In addition, as real estate appreciates (which over the long run, it always has and will likely continue to do so), it continues to appreciate off a higher and higher basis. If you buy a property for $100,000 and appreciation is four percent, after one year it will be worth $104,000. After two, it will be worth $108,160 and so on.
As time goes by, the accelerating principal paydown and appreciation become exponential. And if you are continuing to acquire properties (especially with built-in equity by buying right), that increases your wealth all the more.
In a way, it is a similar principle to dollar-cost averaging, or buying a fixed dollar amount of a particular investment on a regular schedule. Go too fast and you teeter on the edge with excessive risk. Go to slow and you miss out.
Real estate is the ultimate Get-Rich-Slow strategy. But like in any business, there are ups and downs. The key is to anticipate them and continue to grow and a steady and sustained pace through both the good and bad. Soon enough, the long run will come.