Mental Models discussed in this podcast:
- Leverage
- Risk Management
- Uncertainty / Probabilistic Thinking
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You can find out more information by listening to episode 11 of this podcast.
Show Outline
What is good about leverage?
- Using other people’s money to make investments has the potential to improve your long-term financial outcomes.
What is bad about margin debt?
- Callability (#1)
- High-interest rates
- Non-fixed interest rates
- Can be forced to sell your investments at a bad time
- Solution: We need a method that is the opposite of margin debt:
- Result: Mortgage Debt
What is good about mortgage debt?
- Non-callable
- Low fixed interest rates
- A missed mortgage payment doesn’t force you to sell your investments.
- The bank you owe the mortgage to is often a different financial entity than the custodian of your equity portfolio.
Would you rather have home equity or stock equity?
- Risk tolerance
- Return Potential
Summary:
Over the long-term, you will maximize your investment returns if you can somehow use other people’s money to invest. Debt leverage allows you to access other people’s money for your personal benefit. However, we must remember Benjamin Graham’s words: “On what terms and at what price?” The terms of the debt matter and the price of the debt also matters. Margin debt has bad terms and a high price. If you choose to leverage your portfolio, you need to select the best form of debt in which to do so. Mortgage debt tends to have the best government protections.
