主题： Investing

When leverage works, it magnifies your gains. Your spouse thinks you’re clever, and your neighbors get envious. But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices. And as we all learned in third grade—and some relearned in 2008—any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. History tells us that leverage all too often produces zeroes, even when it is employed by very smart people.

Extreme leverage has been, generally speaking, a net minus. The analogy has been made (and there’s just enough truth to it to get you in trouble) that in buying some company with enormous amounts of debt, that it’s somewhat like driving a car down the road and placing a dagger on the steering wheel pointed at your heart. If you do that, you will be a better driver—that I can assure you. You will drive with unusual care. You also, someday, will hit a small pothole, or a piece of ice, and you will end up gasping. You will have fewer accidents, but when they come along, they’ll be fatal.

If you don’t have leverage, you don’t get into trouble. That’s the only way a smart person can go broke. I’ve always said if you’re smart you don’t need it and if you’re dumb you shouldn’t be using it. My partner, Charlie, says that there’s only three ways that a smart person can go broke. He says, “Liquor, lays, and leverage.” Now the truth is the first two he just added because they started with L. It’s leverage. And when somebody tells you how they came back and made a second fortune, I’m not impressed, because why the hell would they lose their first fortune?

Long ago, mark Twain said: “A man who tries to carry a cat home by its tail will learn a lesson that can be learned in no other way.” If Twain were around now, he might try winding up a derivatives business. After a few days, he would opt for cats.

If you think about it, you can’t go out and insure my house against fire because you do not have an insurable interest, as they call it in the trade. Because once you insure my house against fire and you may decide that dropping a few matches around my lawn might be a good idea. And credit default swaps, if you don’t own underlying debt and you buy a credit default swap, you have an interest in that place getting into trouble. When a lot of people have an interest in a place getting in trouble, they may start putting out misleading statements about it. I mean, if you were short the stock of a bank, and there wasn’t any FDIC, you might go out and hire 100 movie extras to stand in front of that bank. And in effect, you would create your own reality. Now buying credit default swaps and talking about them and causing the price of credit default swaps to go up creates its own reality to some degree.

When your neighbor has made a lot of money by buying Internet stocks, you know, and your wife says that you’re smarter than he is and he’s richer than you are, you know, so why aren’t you doing it? When that gets to a point, when day trading gets going, all of that sort of thing, very hard to point to what does it.

You may recall a 2003 Silicon Valley bumper sticker that implored, “Please, God, Just One More Bubble.” Unfortunately, this wish was promptly granted, as just about all Americans came to believe that house prices would forever rise.

When times are good, it is kind of like Cinderella at the ball. She knew at midnight that everything was going to turn into pumpkins and mice, but it was just so much damn fun, dancing there, the guys looked better and the drinks got more frequent and there were no clocks on the wall. And that’s what happened with capitalism. We have a lot of fun as the bubble blows up, and we all think we are going to get out five minutes before midnight, but there are no clocks on the wall.

When people think there’s easy money available they’re not inclined to change. Particularly if somebody said a month or two ago, “Watch out for this easy money,” and then their neighbors made some more money in the ensuing month or two, it’s just—it’s overwhelming.

Excessive leverage leads to trouble. Wherever it pops up, not necessarily in the banking system—it can be in households—but the idea that you have to leverage yourself to buy something you can’t pay for in its entirety, has its merits and limitations. It’s kind of like alcohol. One drink is fine, but 10 will get you in a lot of trouble. With leverage, people have a great propensity to use it because it’s so much fun when it works. There should be some ways of controlling leverage, and that applies to individuals with home mortgages. The idea of people buying houses at 2–3 percent down is going to lead to trouble.