The Self-Contained Engine
I genuinely enjoy breaking down the pros, cons, and underlying mechanics of different investing approaches as I learn about them.
I watched a recent video on the Better Call Paul YouTube channel that made me think about the approach some people take of getting a loan to invest and then using distributions from that investment to pay down the debt. This can be summarized more simply as frontloading exposure and then deleveraging over time.
Distributions do not make an equity investment self-funding in any guaranteed sense. If returns merely match borrowing costs, some invested value may effectively be converted into a lower loan balance. Strong returns let you deleverage while retaining growth. Weak returns expose the flaw because the debt remains even when the investment falls.
In bull markets, that’s obviously where you can have your cake and eat it too. But when things go downhill, that’s where this idea of a “self-contained engine” breaks down.
This is the part I keep coming back to: the assumption that something can simply be self-contained. With a guaranteed product offering sufficient and predictable cash flow, perhaps, but not with a product tied to equity exposure.
The distributions may power the engine, but the market still determines whether it is moving forward or consuming itself. That assumption of self-containment also seems to be behind some of the mistakes Chris openly admits to in the video, and I appreciate his willingness to share them with the audience.
For some, the takeaway might simply be, “Well, I just have to pick the good funds.” But that’s easier said than done. It starts to sound a lot like a stock picker saying, “I just have to pick the good stocks.”
