Leverage, All I Really Lost Was Time

My friend Mark builds dream homes. He is a master craftsman and his attention to detail is impeccable. He made a fair amount of money in the good times and built a mansion in an up-and-coming neighborhood. He took out loans and piled money into the home and then it happened, the big crash, and in 2008 he declared bankruptcy.

Today, he is still a master craftsman building dream homes, but they are for someone else now. He's 10 years older and he'll tell you, "All I really lost was time." He gained experience, wisdom, and humility. From these, he may make (again) his fortune and more.

When investing, one of the great and tempting mistakes is to use leverage. Brokers call it "margin." Often times, margin is a mistake. Borrow against my stock portfolio to buy more stocks; if everything works out, then I've got a much larger account than if I only had the stocks. But if it doesn't work out, we're stuck with our friend Mark, minus his craftsmanship.

Lending money is the flip side of leverage. You could, if you want, loan money to a growing company who promises to pay you a great (fixed) rate of return. The stock market is so crazy. Colorado's economy is booming; perhaps I could just lend money to one of these companies down the street. Especially as we near retirement, these dreams are so enticing!

We suffer from the fantasy of receiving a high fixed income with (the illusion of) safety.

A retired couple visited me recently with a portfolio more than 40% invested in several loans they've made to a local, fast-growing, company. They were earning between 8% and 10% per year in income and wanted to know what else I might have to compete with that. They gave me a glance at the company's financials and the terms of the note. Even if it was legitimate, how could anyone know? I felt myself shivering and sweating, as if it was I who was gambling with my retirement.

I told them, "I'm scared for you." We agreed that I could help with everything else outside these risky loans. First they have to extricate themselves. I could not help until then. Too often, these things go awry. The income is real but the risk is invisible. Too much of this thing, even it if is good, is too much risk. "Run, don't walk, to the company and explain how much of your life's savings depends upon their largesse and see if they might let you out."

James and Sarah visited me about 10 years ago with very little in financial assets. They trusted my advice and acted on it. They spent less, saved more, and didn't do anything too risky. In a few months they will retire with enough money to achieve their dreams. They will build their dream home on the lake in the mountains. They will be able to pay for their children and grandchildren to visit them. They will have money that outlives them, life insurance, and investments, to continue their legacy. James and Sarah are no smarter than anyone else, but they might be better listeners. They took prudent advice and acted on it and now they have more than just financial success; they have time to achieve significance.

"Is this real? Are you sure? Can we really do this?" They ask, when they visit me, as the retirement date approaches. Yes.

My friend, Mark, lost time. My guests are running out of time. My clients have the time to achieve their dreams.

We only want to retire once. Enlisting the advice of professionals greatly improves our chance of success.

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