When capital flows freely and asset values consistently climb, even businesses with fundamental weaknesses can appear remarkably robust. However, as economic conditions tighten, these superficial strengths tend to evaporate, revealing underlying fragilities. This was a central theme in a recent discussion on the “Stocks Neat” podcast, featuring Steve Johnson, Chief Investment Officer at Forager, and Julian Biggins.
The core takeaway from their conversation was that businesses are seldom undone by a lack of ambition. Instead, their downfall is far more frequently a consequence of inherent fragility.
The Perilous Grip of Leverage
As Biggins articulated, “leverage is the killer.” He drew parallels to the aftermath of the Global Financial Crisis (GFC), observing that in many distressed property situations, the underlying assets themselves weren’t inherently worthless. The critical issue was the excessive debt burden carried by the owners, which prevented them from weathering the downturn and forced them into distressed sales at the most disadvantageous moments.
This principle extends far beyond the property market. Across various investment landscapes, the distinction between a sound investment and a detrimental one often lies not in the asset itself, but in the financial structure surrounding it. A fundamentally decent asset burdened by excessive leverage can quickly transform into a catastrophic liability. Conversely, an average asset, managed prudently and financed conservatively, can endure through challenging periods and ultimately prove to be a valuable investment.
Looking Beyond the Superficial Label
A second significant lesson imparted during the discussion was the importance for investors to look past simplistic labels and delve into the substance of what lies beneath. Just as “equities” encompass a broad spectrum of risk, so too does “private credit.” Within any given asset class, there exists a wide range of risk profiles. Biggins highlighted mezzanine lending in residential development as an example. While such investments might appear attractive on paper due to higher projected returns, they occupy a far more precarious position within the capital structure. Should difficulties arise, this layer of debt is susceptible to being wiped out rapidly, even as senior lenders remain insulated.
This serves as a crucial reminder in an environment where financial products are frequently marketed based on headline yields or broad category classifications. A standalone return figure for a broad category offers little genuine insight. The critical factors are the underlying assumptions, the investor’s position within the capital stack, and the extent of adverse developments required to jeopardise capital. As Biggins emphasised, the devil is truly in the details.
Cash Flow: The Unshakeable Foundation
A similar level of scrutiny is warranted in the property sector. The divergence between an asset that appears appealing based on surface-level metrics and one that consistently generates durable cash flow is paramount. Biggins’ sentiment was unequivocal: “cash flow is king.”
Metrics such as capitalisation rates, accounting yields, and headline rental income can be misleading if they fail to adequately account for essential costs. These include tenant incentives, ongoing capital expenditure for maintenance, leasing commissions, and the operational effort required to sustain income streams.
His examples underscored this point effectively. A Bunnings warehouse with a long-term lease can function much like a fixed-income security, offering a degree of protection against inflation. In stark contrast, a shopping centre is a highly operational asset where subtle factors – such as traffic flow, accessibility to the surrounding population, the tenant mix, and the physical layout – can significantly influence its financial performance.
The Power of Specialisation and Resilience
This leads to another key theme: the most successful investors are rarely those who attempt to pursue every opportunity. Instead, they are the individuals who possess a clear understanding of their specific areas of expertise and where they hold a distinct advantage. Biggins reiterated the notion that “you just can’t hunt everything.”
In highly competitive markets, the breadth of an investment strategy is often overvalued. Deep domain knowledge, localised insights, and robust operational control tend to be far more impactful.
The Strategic Advantage of Tailwinds
The conversation also offered a valuable strategic insight regarding the importance of tailwinds. Biggins observed that even a brilliant idea can falter if it is fighting against prevailing economic currents. In investing, simply being directionally correct about a business or an asset is rarely sufficient; it is immensely beneficial when the broader environment is working in your favour rather than against you. He cited, for instance, how stricter bank capital regulations and a more cautious approach to commercial real estate lending have created opportunities for private credit providers to fill market segments previously dominated by banks.
However, the deeper lesson here was not to blindly “find a tailwind and buy anything.” Rather, it emphasised that strong businesses cultivate resilience, ensuring that no single product, individual, or funding source can unilaterally bring about their downfall. Biggins spoke to the importance of diversification – not in an abstract portfolio management sense, but more fundamentally: ensuring “no one thing can kill you.” This principle holds true for both investment portfolios and individual companies.
Ultimately, the discussion consistently circled back to a core principle: endurance is more valuable than fleeting excitement. Investors need to concentrate their efforts in areas where they possess expertise, avoid overextending themselves financially, and remain invested long enough for market cycles to eventually turn in their favour.
MA Financial was presented as an illustrative example of this enduring mindset in practice. Its growth trajectory and sustained success have been significantly influenced by the conviction that resilience is more critical than superficial appeal. As Biggins articulated, “You don’t need to win in everything. You just need to pick a few that you’re very good at and go through the cycle.” This philosophy is evident in MA’s strategic pivot away from the inherent volatility of traditional investment banking towards more consistent, defensive earnings streams, such as asset management, private credit, and lending.
The overarching lesson is not to chase whatever appears strongest during periods of easy money. Instead, it is to pose a more challenging question: what is fundamentally built to withstand the inevitable tightening of conditions? While this approach may seem less glamorous, it is frequently the more prudent and ultimately more successful path. In the long run, endurance is not a separate element from success; it is the very foundation upon which success is built.
