2/7/14

Leverage Is Almost Always A Bad Idea

Warren Buffett
"Unquestionably, some people have become very rich through the use of borrowed money. However, that’s also been a way to get very poor. When leverage works, it magnifies your gains. Your spouse thinks you’re clever, and your neighbors get envious. But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices. And as we all learned in third grade – and some relearned in 2008 – any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. History tells us that leverage all too often produces zeroes, even when it is employed by very smart people."

-- Warren Buffett, 2010 Berkshire Hathaway Annual Report 


The preceding from Warren Buffett is undeniably true.  

Interestingly, the amount loaned by brokerages to clients to buy more stocks is at an all time high except three weeks before the financial meltdown in 2008.

It's always a great idea to be careful and borrowing money to buy stocks is a terrible idea.  

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