The sleeves were six inches too short.
When John Arrillaga needed a jacket for his high school senior photo in Inglewood, California, he had to borrow one from his chemistry teacher. The 6-foot-4 teenager’s arms dangled awkwardly from the too-short sleeves, but it was better than no jacket at all.
In his family of seven, dinner was oftentimes bread stuffed with lettuce. On ‘steak nights,’ they all shared a single flank. His father ran a small produce market. His mother took in neighbors’ laundry to help make ends meet.
When he died in 2022, Forbes estimated his net worth at $2.5 billion.
Fortune called him “perhaps the richest man in Silicon Valley who didn’t make his money starting a tech company.”
He didn’t get rich from his basketball scholarship at Stanford, where he juggled six jobs (dishwashing, mail delivery, gardening) to pay for books and living expenses. He didn’t get rich from his geography degree. And he didn’t get rich from dot-com stocks, crypto, or gold.
What he did was remarkably straightforward.
He invested in Silicon Valley commercial real estate. That’s it.
While typical developers diversified across major metros like Dallas, Manhattan, and Miami, Arrillaga never left the Valley. He developed 20 million square feet of office space, all in one region. He housed Intel, Apple, Google, the companies that changed the world. But he did it all from the same backyard where he once washed dishes.
Charlie Munger loved telling this story. As he put it, Arrillaga’s circle of competence wasn’t real estate broadly. It wasn’t even California real estate. It was Silicon Valley commercial property, period.
He worked with the same people for decades, and most deals with his construction crews were done with a handshake instead of formal contracts. When he rebuilt Stanford Stadium, he personally chose the concession food, the seat material, even had specific palm trees dug up and relocated from another property.
This obsessive local focus might seem limiting. But Warren Buffett captured it perfectly: “The size of that circle is not very important; knowing its boundaries, however, is vital.”
And there was another thing Arrillaga did differently: leverage.
Or rather, he didn’t use it.
Here’s what Charlie Munger said about him at the 2006 Wesco Annual Meeting:
“Normal developers would borrow and borrow. What John did was gradually pay off his debt, so when the crash came and 3 million of his 15 million square feet of buildings went vacant, he didn’t bat an eyebrow. The man deliberately took risk out of his life, and he was glad not to have leverage.”
Borrowing was anathema to Arrillaga. He used his own capital. This allowed him to hold properties through downturns while leveraged developers got wiped out.
Consider the contrast with Long-Term Capital Management. They had Nobel Prize winners (literal geniuses like Myron Scholes and Robert Merton) who leveraged up 25-to-1. Their sophisticated models controlled over $1 trillion in derivatives.
Then came August 1998. Russia defaulted on its domestic debt. The correlations their models depended on shattered overnight.
LTCM went to zero.
Warren Buffett says it best: “A long string of impressive numbers multiplied by a single zero always equals zero.” And sometimes, even highly intelligent folks forget this basic law of mathematics.
Meanwhile, Arrillaga (the guy who once couldn’t afford a jacket) sailed through every crash. As Munger noted, when 3 million of his 15 million square feet went vacant, he didn’t even flinch.
No leverage meant no wipeout. Simple as that.
I thought about all this last week at Starbucks when my friend leaned forward with that familiar intensity.
“Why aren’t you invested in Bitcoin? Don’t you think it’s going to change the world?”
I could sense his agenda. That vibe when someone’s there to challenge anyone who doesn’t share their beliefs.
Here’s something I’ve learned as I’ve gotten older: sometimes people ask questions because their mind is open and they want to learn. Other times, they’re just looking for confrontation confirmation. I’ve become better at differentiating between these two. Saving my energy from the latter, and giving it to the former where I can actually create impact.
So I took another sip of my flat white and asked about his kids. Because if there’s anything anyone loves talking about more than their investments, it’s their children.
Which is why I’m writing this to you, because I know you’re here to learn, not to hear an echo.
Maybe you’ve felt this pressure too: friends getting rich on crypto, colleagues leveraging into real estate, that voice asking if you’re missing out.
People often ask me why I’m not invested in Gold, Bitcoin, or whatever asset class has soared recently. Why don’t I concentrate more? Maybe take on some leverage to “move the needle” and get richer faster?
They forget these moves cut both ways.
Especially during bull markets, any thought about downside gets thrown out the window. They underappreciate that the way to grow wealth in the long run is to survive. Without survival, nothing else matters.
I don’t need to spread myself thinly over every asset class that’s trending. I’m looking for timeless investment principles. I want to pay less than what something is worth, based on the future cash flows I can reasonably expect. It’s exactly how I analyze every stock for Steady Compounding Insider Stocks members. No exceptions.
If I can’t do that, I pass.
What matters isn’t the size of your circle of competence, but knowing exactly where the boundaries are, and having the discipline to stay inside them.
My friend at Starbucks will probably keep chasing the next hot asset class. Whatever’s trending this quarter.
Me? I stay within my boundaries. No leverage. Steady compounding.
John Arrillaga proved you don’t need to invest in every asset class that’s had a spectacular run recently. Hell, even within real estate, he only touched Silicon Valley. Nothing else.
He knew who he was. He knew what he knew.
And he never forgot where he came from. That kid in the borrowed jacket with the too-short sleeves.
The billions didn’t come from following the crowd. They came from boundaries and no debt. Lessons that started with a borrowed jacket and never left.
What’s the one investment everyone keeps telling you that you’re “missing out” on?
Tell me in the comments below.
Thomas
P.S. Arrillaga’s buildings outlasted LTCM’s algorithms. In investing, boring beats brilliant if brilliant forgets about risk.