leverage
Leverage and ignorance
The rule
Smart people go broke three ways: liquor, ladies and leverage. Borrowing turns a mistake you could survive into one you cannot.
Where it flips
But borrowing is not always reckless. A small, well-understood amount against a stable base can be sensible. The danger is borrowing plus the belief that being smart or right removes the need for room to be wrong.
An investor who used no borrowed money and is wrong simply holds a cheaper position and can wait. Borrowed money removes the waiting. Now the lender's terms, not your patience, decide when the position must be closed. Buffett's point is that being clever does not save you here. Borrowing turns a normal mistake, the kind everyone makes, into the one kind you cannot come back from.
A worked example
A reader borrows against a portfolio to double their bet on a stock they have studied carefully. The reason is even broadly right over two years. But a six-week slump forces a sale at the bottom to repay the loan. So the correct call still ends in a real loss. [illustrative]
How to spot it
- ·borrowed money funding a high-conviction bet
- ·a plan that needs you to be right on the lender's clock
- ·belief that skill removes the need for a safety margin
Warren Buffett · Berkshire Hathaway shareholder letters