There’s no better place to look for financial advice than from the winners of the game. While leverage (debt) can be perceived as a useful tool, you may be surprised at what billionaires think about it.
The advice may seem so uncommon and yet their results are so uncommon. Is it good fortune that created this mindset, or did this mindset create good fortune?
Read the following quotes from these billionaire investors and decide for yourself.
Charles Schwab (Net Worth: $6B)
“If there’s not enough money in the bank account, you don’t spend it.”
“When I was 14, I did all kinds of different odd jobs. I had a chicken farm, had an ice cream operation in the summertime, worked as a caddy; all things to make money and save money. Save money in order to invest – that was the first step”
Ken Griffin (Net Worth: $7B)
“All financial institutions live and die by their liquidity. We are a financial institution. The fact that many people don’t think about it is beyond me. It is the essence of what we do.”
Mark Cuban (Net Worth: $3B)
“Pay off your debt first. Freedom from debt is worth more than any amount you can earn.”
“If you’ve got $25,000, $50,000, $100,000, you’re better off paying off any debt you have because that’s a guaranteed return”
Andrew Beal (Net Worth: $8B)
“I’m not that much of a risk taker. I just take situations that people perceive to be high risk, and I decide that they can be managed to low risk.”
Ronald Perelman (Net Worth: $12B)
“Happiness is a positive cash flow.”
John Paulson (Net Worth: $8B)
“The problem in the U.S. financial system is one of solvency. In general, financial institutions are undercapitalised and have insufficient tangible common equity to support their overlevered and deteriorating balance sheets.”
“Remarkably, the average tangible common equity to total tangible assets for the 10 largest U.S. banks is only 3.4 percent, or 30 percent leverage. The solution to solve the problem is to strengthen their balance sheets”
“Our goal is to preserve principal, not to lose money.”
You might notice that many of these successful investors focus on how much they could lose rather than how much they could gain. They limit things like expenses and wealth draining forces like interest. There’s a reason why these billionaires are so successful.
David Tepper (Net Worth: $11B)
“It’s our contention that equity may be in the money, depending on where the liabilities lie.”
Ray Dalio (Net Worth: $15B)
“People who acquire things beyond their usefulness not only will derive little or no marginal gains from these acquisitions, but they also will experience negative consequences, as with any form of gluttony.”
Charlie Munger (Net Worth: $1B)
“A banker who is allowed to borrow money at X and loan it out at X plus Y will just go crazy and do too much of it if the civilization doesn’t have rules that prevent it.”
Thomas Peterffy (Net Worth: $12B)
“Never bend the rules. You bend the rules a little bit and then it’s a slippery slope.”
Warren Buffett (Net Worth: $65B)
“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.”
“I do not like debt and do not like to invest in companies that have too much debt, particularly long-term debt. With long-term debt, increases in interest rates can drastically affect company profits and make future cash flows less predictable.“
To end this article, here’s another quote from Ken Griffin that perfectly sums up why debt should be avoided. Debt becomes shackles that prevent investors from experiencing freedom.
“Economic freedom is core to the ethos of our country. It’s the idea that any person can pursue their dreams, whether it’s starting a business or who they choose to work for. It’s made America America.”