You may or may not be familiar with this term, “Margin of Safety”. The idea is that in investments, there is no guaranteed returns of precise calculation of valuation. Thus, we always need to be prudent and be conservative.
Now, I may linking this to the using of Margin or Leverage because I have heard from friends who have picked up an investment skill or two and started to use margin or leverage. Basically, the idea they have in mind is that since they can make 10% or 15% from investment, and the borrowing costs is only 3% or 5%, might as well borrow the money at 5% and use it to make 10% so we can make money using other people’ money.
Excellent theory! So simple, so effective, so…. naive.
I am not here to say that this doesn’t work, but I am here to ask this question, “What IF it doesn’t work?” What if the investment did not turn out the way you want to? Can you stomach the lost of that investment and the debt?
As of now, I have seen many riches to rags story because of the using of margin. Initially, all seems fine and wow, we can use other people’s money to double our returns, but then alas, the fateful day will come when one move from the market wipe away everything we had made and worst, leave us in debt.
Now, here is what Warren Buffett said about “I’ve seen more people fail because of liquor and leverage – leverage being borrowed money. You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing.”
Now, here is my take: Investments are never guaranteed but debts are. Your expectation of the investments can surprise you negatively, but your obligation to return debt seldom will pleasantly surprise you.
So my dear friends, avoid debt and aim to build wealth slow and steady. The fastest way to get rich quick probably is to give up trying to get rich quick.
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Mind Kinesis Research Team