Warren Buffett quotes on leverage. Why Warren Buffett avoids debt – and what alternatives to debt he
uses to still gain leverage.
Debt/Borrowed money is the weak link
Warren Buffett writes that debt can often be the fatal weak link that leads to the terrifying collapse of a fund that might always have had a stellar record of outperforming the market. In 1998, it was Long Term Capital Management. Exactly a decade later, it was Lehman Brothers. History has a way of repeating itself that we should all take heed as aspiring investors.
Senior notes through Salomon Brothers
However, there were still a few times when Warren Buffett did use debt. In 1973, he borrowed money
when he saw too many opportuntieis in the market but had too little cash to invest. Thus, he raised $20 million in senior notes through Salomon Brothers, but made sure that the borrowed money satisfied two conditions: first, it was cheap; second, it could be structured on a long-term fixed rate basis (so it would remain cheap).
To finish first, you must first finish
Another way to explain the point above is another quote from Buffett: “As one of the
Indianopolis ‘500’ winners said, ‘To finish first, you must first finish.’” Buffett has always felt a strong sense of obligation to his investors, who may have entrusted a significant portion of their wealth to him. Instead of worrying about whether he may be forced into a compromising position because of the debt he might have assumed, he tries to avoid the situation altogether. He observes that in retrospect, he could probably have used debt to juice up his returns a little and have succeeded on most occasions, but he values a good night’s sleep more than a few extra percentage points in return.
Alternative Sources of Leverage
Instead, Buffett prefers the following alternative sources of leverage: float, and deferred taxes. These alternatives are cost-free, have no covenants or due dates attached, and thus are much safer sources of leverage.