Manuel Villar: The Scaling-Up Strategy
Episode #6 of the course 10 billionaires and their lessons on success by John Robin
Welcome to our sixth lesson about the world’s billionaires and their lessons on success.
So far, we’ve learned from five billionaires, and our tour has taken us from the coasts of Africa, across Asia, and yesterday, to North America.
Now, we’re moving to the southern hemisphere to learn from a man who is worth as much as Maria Aramburuzabala.
Manuel Villar: Keeping Your Loan Maxed out for Maximum Growth
Today’s billionaire hails from the Philippines. In fact, he is the richest person in the country! As of August 2020, Manuel Villar, aged 70, is worth ₱269 billion, which is $5.6 billion in US dollars.
Manuel’s success reflects a progressive upward journey through life. He had two watershed moments that led him to his path of success. The first was when, at age six, he helped his mother sell shrimp at a local market. The second was when he worked as a financial analyst selling World Bank loans.
His childhood experience compelled him to try selling seafood. But his financial influence taught him the value of selling loans. When many of his customers couldn’t afford food, he negotiated loans with a repayment structure, and this worked well for him. Later, this experience would influence his perspective in his job of selling World Bank loans.
He had saved up a mere ₱10,000 but saw its potential. First, he bought two trucks and then used them to finance a sand and gravel delivery company. That earned a profit, but he already saw how loans, used well, can pay off, so he raised the ante by taking out a 7-year, low-interest bank loan to buy and rebuild houses.
He was smart about what he built. Rather than expensive homes, he built cheap homes for low-income families. From how he managed his seafood business, he understood the needs of those without much money. With his initial loan, he was able to develop 160 homes.
But he kept going. Years of doing this have now allowed him to build a real estate empire encompassing 200,000 homes. He also continued to invest in other ventures, using the same strategy, and that has led him to be the billionaire he is today.
Manuel’s Billionaire Lesson
Manuel’s success is a good example of the paradox of thrift. This is an economics principle that tells us that, though it seems contradictory, you have to take on more debt if you want to get richer.
Let’s imagine once again that you have $10,000 to invest. This time, however, it’s a $10,000 loan with a 12% annual interest rate.
Like Manuel, you are going to use all that money to buy a productive asset. This is something you own that makes money for you. A good example of a productive asset would be supplied to run a small business.
Say you know three friends who want to start a landscaping company but don’t have the money for equipment. You loan them your full $10,000 to buy used trucks, refurbish them for business, and buy other initial supplies to get your friends in business, with the agreement that you receive 40% of their revenue.
This is where the paradox of thrift comes in. You could stop there at $10,000 and hope your 40% share pays off the $10,000 loan and then becomes a steady cash cow. Or, once your friends get in motion, you can think like Manuel Villar:
Why not buy more trucks? Buy more supplies? If you see the business growing, then you have the incentive to keep your $10,000 maxed out and take out other loans to go all in.
This principle, in fact, is how the nations of the world manage their economies and why you always see countries in debt. They know they have to keep spending on the resources needed to keep growth happening.
Imagine this debt-success balance like a teeter-totter:
• Observe the success rate—a monthly average of your 40% revenue cut
• Observe the debt rate—monthly interest you pay on your loans
• Keep them balanced by taking on debt to match your success
For example, say after 16 months of doing business, your monthly average revenue cut is $1,100/month. Assuming, on all of your loans, you have an average interest of 12%—or 1%/month—this means you can cover the debt on $110,000 of loans.
With this kind of debt potential, you can fund the growth of a big landscaping company. Because you’re in the habit of spotting small, scalable opportunities, you might even help out a few other small startups too with your growing debt capacity.
It’s all a game of balancing the debt-success teeter-totter, and following Manuel Villar’s example, that game stacked up to the billions!
Stay tuned for tomorrow’s adventure, which will take us to a new continent!
Recommended book
How to Invest In Debt: A Complete Guide to Alternate Opportunities by Michael Pellegrino
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