Concepts to mark the investor on fire. Chapter 1: Indebtedness

Therefore, it is worthwhile to dedicate some articles to remember some of his most interesting quotes and reflections he has made public throughout his long life.

The reasoning, phrases and conclusions that we will include in this series of articles are drawn from the multiple Letters to Shareholders that Berkshire Hathaway has published over decades, conferences, university symposia, interviews in multiple media, personal essays or comments made in the Commission of Investigation on the Financial Crisis.

Indebtedness that will be delicious for any investor

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In this Chapter 1 we will discuss some thoughts related to indebtedness that will be delicious for any investor:

Essentially there are two types of indebtedness, the public or the State, and the private or the public (we will focus on private indebtedness, since everyone knows that the public is often used in a nefarious and abusive way to such enormous levels of indebtedness like the current ones in developed states). Within private indebtedness, it is also essential to distinguish two types: Debt for consumption and indebtedness for investment / savings.

Debt for consumption is a bad thing

Debt for consumption is a bad thing

Since it only drains investment potential and reduces the chances of making money in the future. Examples of debt for consumption would be a credit to buy a car, to make a good holiday or the same credit cards. While savings or investment indebtedness has a more positive component, since they allow the exchange of capital fractions over time for other assets that, theoretically, should be appreciated during that same period of time.

The most commonly known example is that of a mortgage, in which we exchange money, which we will pay back fractionally, for the acquisition of bricks that in principle will maintain or exceed the value of the money invested over time. Other borrowings for investment are, for example, the lines of credit that allow expanding a business, either by buying other companies or expanding with new facilities, machinery, personnel, etc. All this with the intention that the capital to be amortized over time is transformed into other assets that maintain or exceed their initial value.

The recommendations to avoid borrowing in an important way are clear

The recommendations to avoid borrowing in an important way are clear

However (or with him), the recommendations to avoid borrowing in an important way are clear: If you are intelligent you do not need credit, and if you are not you should not use it. Indebtedness is the only way to ruin an intelligent person. If you are free of debt, avoid getting into trouble when things do not go as planned, which happens on most occasions.

Buying a company using a large amount of indebtedness, or assuming a large existing debt in that company, generally gives a negative result. It’s like driving with a dagger on the steering wheel pointing to your heart. You better be an excellent driver and be extremely cautious, which will avoid many accidents, but when you have one it will be deadly. That is the perverse effect of indebtedness, which counteracts the many benefits that can bring you if everything goes surprisingly well. It’s like alcohol, a drink is satisfactory, but 10 drinks bring many problems and can easily ruin your life.

Indebtedness is also addictive. When things go well one thinks he is the smartest in the class, and his friends, neighbors and surroundings seem to confirm it with his admiration and applause. When that happens, our human nature prevents us from stopping and getting off the train. The same happens when Mr. Market goes up and down without stopping, greedy investors only see their meritorious ability to earn money on the stock market. No matter the price of the companies you are buying, only the benefits you get day after day. Until something twists. At that moment the dagger of the steering wheel crosses, quickly and irremediably, the heart of the euphoric indebted driver.

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