On Mr. C And Leveraging

A very nice commenter left a message on one of the posts asking for more of Mr. C’s story. While he had found what I had previously written, I think that there is one major point that I never did highlight in my last post on Mr.C’s success.

Leverage.

 

Mr. C uses leverage heavily in his investment stratagems. For every dollar that he invests from his own pockets, he invests two to three dollars of other people’s money. Yes, that’s right. He borrows to invest. He concedes that there is no other way he could have made such big leaps in wealth accumulation if he had stuck only to what he could afford in cash.

Cue the “Debt is BAAAADDDD!!!!” chorus.

But wait.

 

Mr. C asks:

• ·         What are your goals?
• ·         How fast do you want to achieve them?

 

See, for Mr. C, wealth is not just a means to an end, but an end in itself. He sees it as a challenge to see just how much he is able to accumulate in his lifetime. It is a passion with him, just like how longer and longer marathons are with some runners. To meet his goal of making the most by the shortest time possible, he is realistic enough to realise that he has to be willing to take risks – hence the leveraging.

 

And for those who are not willing to take on the debt and are willing to modify their goals and timelines accordingly, Mr. C (and I, of course) thinks that is perfectly fine. But we confess to not understanding those who refuse to consider leveraging (or “debt” if you will), but continue to lament how impossible it is to accumulate substantial wealth by a certain age on a meager salary. Look, some people have done it, but there is no gain without pain.

 

He also acknowledges that leveraging means risk, but he contends that many people just bandy the word about without differentiating between calculated risks and non-calculated ones.

 

•       What are the worst case scenarios in your investments?
•       Under what circumstances will they come about?
•       Is it something within or outside your control?
•       What are the possibilities of these scenarios happening?
•       How will you feel if they came to pass?
•       Do you have a plan for that?
•       What will you do next if investment goals are achieved?

Mr. C makes sure he has detailed answers for each of the above questions, before he jumps onto anything, including heavy leveraging, and he backs up his investments with a lot of homework. Is there risk? Yes. But he knows what they are and are prepared to deal with them. In fact, he has dealt with them – 1997, the year of the Asian financial crisis; the year he lost half a million in assets. But, are you?

Just for information, I, too, have answered those questions, and come out with somewhat different answers. Except for my massive mortgage, I find it difficult to use leverage in my other investments because I am not prepared to spend time and effort to mitigate the downsides.

 

But that doesn’t mean leveraging, or debt, in itself, is wrong. Leverage and debt are just neutral tools. It is how one uses them that make all the difference.

 

NB 1. And by the way, in case anyone wonders, Mr. C is one of the happiest people I know. I don’t know why people think that the pursuit of wealth and happiness cannot coexist.

NB 2. In case any one is interested, Mr. C has no consumer debt. All his debts are investment-related. He has mad negotiation skills, and borrows at around 1.5 to 2% APR and he easily beats that with his investments.