Its hard not to comment on a post titled “Leveraging into Equities: The ONLY Source of Wealth?” The post’s argument is nicely summed up in the following passages:
Of the 400 richest [on the Forbes list], 37 made it there as mutual fund or hedge fund managers, and 22 are investors – all investing in equities. 28 made it in real estate, but really it was by building a real estate company. Even Oprah Winfrey built a media and entertainment business.
Businesses are equities. Whether they borrowed to invest in one business or many, the ONLY real way to major wealth is by leveraging into equities.
This leads to the obvious question – if leveraging into equities is the ONLY “yellow brick road” to wealth, why don’t more people do it?
Let’s charitably accept the argument that starting a business is the same thing as investing in publicly-traded companies (it actually isn’t, but it is a favourite argument of the Smith Manoeuvre cult-members). Let’s also charitably accept that successful businesses engage in leverage, though many good businesses have gone bankrupt by taking on too much debt and Warren Buffett, third on the richest list, has this opinion on the subject:
The most dramatic way we protect ourselves is we don’t use leverage. We believe almost anything can happen in financial markets… [so] even smart people can get clobbered with leverage. It’s the one thing that can prevent you from playing out your hand.
Even after accepting the above fallacious conclusions, we are left with a case of survivorship bias. Yes, most of the individuals on the Forbes 400 list got there by starting a business but it doesn’t follow that all individuals who start a business will end up on that list. In fact, most startups, even those run by very smart people, fail in the first few years. Someone starting a business today faces very long odds of just becoming successful, let alone landing on the Forbes 400 list.
But forget all these arguments for a moment and think about what you want. If you are like me, you want to pay off your home, save for retirement, send your kids to University and eventually, not having to depend on a paycheck. You are not aiming for a spot on the Forbes 400 and couldn’t care less about the list. Do you need leveraged investments to achieve your goals? Not really. A far simpler and less-risky path is to spend less than you earn and invest the difference in a low-cost, diversified portfolio. Why take more risks than you need to?