“Borrow for growth, not Consumption” –Rule quoted by Financial Planner
“Blow it out your ear” –Big Cajun Man
No, I am not saying you should borrow for consumption either, you should notÂ borrow. Buying a house is the only thing I can see as a good reason to borrow money. Borrowing money to invest just strikes me as asking for a swift kick in the lower abdomen.
Interestingly, I tripped across this in my archive of articles that I started and then stopped. Robb E. over at Boomer and Echo went and asked a whole bunch of folks about this, and got some interesting answers to the question, Should You Borrow to Invest. Lots of exciting ideas in that article. No, I am not condoning the advice, simply saying that it is an interesting read.
Borrowing money to buy a single stock can be viewed as buying on margin (in a simple understanding). The advantage is that you can buy lots more of the stock with your borrowed funds, and enjoy huge profits. However, the best way to do this is to find a sure thing that will deliver profits that out-strip your borrowing rate. That stock is? Anyone?Â In the ’90s, it was Nortel, Enron or WorldCom, not sure what they are now. The con of this are you could have borrowed money and end up with a less valuable (or worse worthless) asset at the end of things.
Selling Short is another way to borrow. This is where you find someone willing to sell their stock and you guarantee that you will buy it back for them in a prescribed period. This is usually when the person who loaned you the shares says they want their shares back. The exciting part about this one is you can lose infinite money with this one. This can only happen if you believe infinite growth is possible in the market. Let me explain:
- I convince Michael James to sell his International Buggy Whip at $10 a share
- The world decides that buggy whips are making a big comeback, and the share price skyrockets to $100 a share
- I decide not to buy back yet, because the market will drop out, but it keeps going up, and up….
This will never happen!Â Don’t know, but I bet there are folks that Short Sold Apple in the 90s that might disagree with that statement.
I am not sure who devised this heuristic, but this is one I subscribe to:
Put no money into the Stock Market that you are not willing to lose
Surprisingly when I started looking at the markets in 1981 that was one of the rules, I wonder what happened to it. Does anyone hear anyone espouses this “Debbie Downer” point of view of the markets (aside from the sky is falling bloggers like me)?