You Owe me Beer!
There are two types of people in the world. There are those who owe beer to others and those who are owed all the beer.
I don’t want to owe any beer to anyone else because then, I won’t be able to enjoy drinking. I’ll just be thinking: Dang, I shouldn’t be drinking this… this is the beer I owe my buddy. That kind of feeling would pretty much ruin any enjoyment I got from my drink. Blech.
I think it would be much better to go through life randomly being given gifts of beer from strangers on the street. Imagine yourself walking down Main street when a nice fellow just comes by and says: “Here’s that beer I owed you, bud!”
Ah yes… that’s the life!
And as with all things in life, beer is the best metaphor to use. Here’s what a few great thinkers had to say about beer and debt:
“Rather go to bed beerless, than rise in debt.”
“When you get in debt you become a slave.”
“Never spend your beer money before you have it.”
Ah… Messieurs Franklin, Jackson and Jefferson how wise you are! Bet it was a close call for Ben, though!
And yet, if you do have debt, isn’t there some way to put it to good use? Some way to get richer through increased debt?
2 financial advisors I know have decided to try just that by paying a minimum of cash for their house in favour of a large mortgage. In both cases, their logic was the same: Get as much low-interest-rate debt as possible to free up as much cash as possible. Then, invest that cash at high rates of return. Use the returns to slowly pay off the mortgage, taking full advantage of the tax-code AND build a nice retirement nest-egg automatically at the same time.
OK, it’s perfect on paper but I’m not sure how it’s working out in real-life. One of my advisors mentioned this plan to me back in 2003. I have to wonder how the 2008-9 crash affected his plan.
A quick internet check reveals that he seems to be doing well for himself, actually. Good job, then!
So, if you can use debt at a low rate to get high returns, you’ll be pretty happy. The questions then really are: Is it possible? Is it advisable?
Credit cards have rates of 13% on average in the U.S. Ouch, you’d pretty much have to guarantee being able to get an annualized return of 26% or better to justify this kind of margin! I can’t do that and I wouldn’t advise you to try.
Even mortgages have rates of about 4%. 8% annualized gains? Not for me, sorry.
So there you have it. Here at the Beervestor, we will not be using any type of margin to boost our returns (or worsen our losses) because we simply can’t guarantee that type of high return for the long-term. 5% is the most we’re presently comfortable with as far as forecasting future returns.
Using debt to gamble on stocks is NOT something we will do and we advise you to NEVER try it yourself!
Debt then is not for gambling. It’s to buy present necessities that you really need now but can’t afford. It also reduces how much stuff you can buy in the future. Remember that: Having debt directly and unequivocally means that you can buy less stuff later. Debt is a net drain on your resources!
So we’re clear that you shouldn’t get into debt to invest but which should go first? Paying off extra debt or investing? I’ll tackle that one next time.
In other news, AUY has reduced their dividend considerably, so the CEO is NOT completely nuts.
ISCO is slowly releasing its initial Parkinson’s study results. They just said that the majority of the subjects in their first experiment showed signs of recovery. That’s why the stock has been moving up this week.
NNVC is preparing some litigation because they’re angry at the recent short-attack. I understand the feeling but I fear that it’s wasted money that should be used towards finishing up their research instead of enriching lawyers.