Borrowing and leverage

In One Sentence

Buying stocks with borrowed money magnifies your gains and your losses alike, and it may leave you unable to hold on until the day the market recovers.

Why It Matters

In the same crash, people who didn't borrow see a sale, while people who did may face margin calls and be forced out at the bottom. As an article interpreting Buffett's 2017 letter puts it, investing with borrowed money means putting your judgment, your peace of mind and the ammunition you'd use to add more all on the table at once. The only certainty about the market is that it can't be predicted, so my rule is: no borrowing, no leverage.

One Number

Taiwan's stock market fell about 80% in 1990, about 67% in 2000–2001 and about 60% in 2007–2008. So far it has returned to a new high every time, though no one can guarantee it always will — and only if you could hold on until that day (Taiwan Stock Exchange and other sources · Chapter IV).

In the Book

Chapter IV sounds the alarm with two widely told cautionary tales. Chapter V states plainly that borrowing and leverage are strictly off-limits. The thermometer in Chapter VI uses margin debt to measure how much money people have borrowed to buy stocks.

Go Further

• Defensive investing No borrowing and no leverage is the first rule of defensive investing.
• Fear and greed The moment you most want to borrow is usually when greed is highest and your head is least clear.
• Buying in crashes Without debt, you have room to add more in a crash — and even then, you never borrow to do it.
• André Kostolany His advice comes down to one line: "Never borrow money to buy stocks." (translated from the Chinese edition)
• Assets and liabilities Borrowing to spend is bad debt; it only takes money out of your pocket.