Warren Buffett’s advice on leverage feels more relevant than ever in 2024. Back in his 2010 annual letter, Buffett made a clear point: borrowing money can make you rich, but it can also destroy you. With interest rates now at their highest in decades, the risks he warned about are starting to play out for companies and investors who thought debt was a shortcut to success.
“Unquestionably, some people have become very rich through the use of borrowed money. However, that’s also been a way to get very poor,” Buffett wrote. It’s a simple concept that too many overlook. Leverage amplifies your gains, but it also magnifies your losses. And as Buffett reminded everyone, a significant loss can erase years of progress. “History tells us that leverage all too often produces zeros, even when it is employed by very smart people.”
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In 2024, the shift from a low-interest environment to a high-rate one has made Buffett’s words feel especially urgent. Companies and individuals that borrowed heavily when rates were low are now finding themselves in a tight spot. Refinancing debt is harder and more expensive and businesses that assumed credit would always be available are discovering just how dangerous that assumption can be. Buffett’s comparison of credit to oxygen sums it up: when it’s abundant, nobody notices it; when it’s gone, it’s the only thing anyone can think about.
Buffett and his partner, the late Charlie Munger, had always prioritized financial stability over short-term gains and you can see that approach in Berkshire Hathaway’s current strategy. This year, the company has been trimming its stakes in major holdings like Apple and Bank of America while building its cash reserves to an all-time high of $325 billion. In a market full of uncertainty, that cash pile is a safety net – and maybe a war chest for future opportunities.
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What’s striking about Buffett’s approach is how disciplined it is. He doesn’t chase trends or gamble with leverage. Instead, he focuses on survival first. “To finish first, you must first finish,” he wrote in that 2010 letter, drawing a parallel to auto racing. It’s a philosophy that’s kept Berkshire resilient through market cycles and crises.
For individual investors, Buffett’s advice on leverage is just as applicable. The temptation to borrow money in pursuit of bigger gains is always there, but the risks are enormous. His strategy – invest in businesses you’d be happy to own for the long haul – cuts through the noise of market speculation and focuses on what matters.
Buffett’s warning about leverage wasn’t just about personal finance but the broader system. The 2008 financial crisis showed how excessive debt could destabilize entire economies. As Buffett explained:
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Dom. Dic 29th, 2024
