The best way out of the debt trap is not to get in the first place. Especially when it comes to investments.
- Debt can be dangerous
- When debts are justifiable
- No bank debt please!
- Only something for beautiful weather sailors
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Debt can be dangerous
Saving money starts with smart investments. It is worthwhile to set the course early for a lifelong economy. The approach "10 percent of the gross model" is a painless entry. It is tempting for entrepreneurs and investors to work with credit. But debtors live dangerously. My experience tells me: equity is better.
A young acquaintance, student of business administration at a well-known German University, told me recently about his second semester. We talked about entrepreneurship and how to start your own business. He proudly gave me the conclusion of his lectures on the subject Financing In any case, and without fail, the entrepreneur should always work with as much credit as possible and with comparatively little equity. He spoke of “leverage effects” and the great return on equity. I could hardly believe it. I was downright shocked. Also his older brother, who recently had a little Company founded in the media industry was flabbergasted. This theoretical nonsense is widespread. The dangers of borrowing are largely underestimated.
When debts are justifiable
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For me, debts are justifiable in two cases: First, when financing real estate with long-term mortgages. Although that is also a matter of taste. I know a lot of investors who basically pay houses without bank help by their savings to 100 percent. That makes you free and independent. And if one day you are confronted with a vacancy of the property and the rental losses drag on, you will not be asked to report by an unfriendly banker. In addition, when certain age limits are reached, for example to the 75. Birthday, the lending banks' propensity for loan extensions is declining rapidly.
On the other hand, credit financing for inventory and customer orders has been common practice with merchants for centuries. This is usually about short terms clear Calculable profit margins that are processed on a project-by-project basis. For the prudent businessman, the trade credit is a crucial tool.
In this case, the challenge for the merchant of these days lies in a different area: First of all, find a bank that will deal with goods at all Money borrows. An export merchant came to see me recently. He has years of experience doing business in Iran. After the cancellation of the political blockages he now wants to use his country contacts and boost the export business to Iran. Even with firm orders with really enormous profit margins, he cannot find a bank that will grant him 50.000 euros in credit (so much for the real effect of the central banks' zero interest rate policy to stimulate the economy!).
No bank debt please!
I advise against bank debt in almost all other cases. Basically, the compound interest effect is underestimated by borrowers. Loan rates that run against you and are not repaid immediately add up to large sums. For example, if you borrow 100.000 euros at 7 percent per year and want to pay them back after ten years, you will receive a final bill of 196.715 euros. It has always been this way: savers with reinvested interest or dividend income get richer over time. The loan interest payers, on the other hand, are getting poorer and poorer.
When I look for good companies in the stock market, I avoid companies with high levels of bank debt. I'm not so concerned about the interest effect. The independence and security of the respective stock corporation is important to me. During crises, it has been shown time and again how dangerous bank debt can be for companies. If overnight, as in 2008 and 2009, in some Industries the orders collapse, things get uncomfortable with the banker. Many entrepreneurs have told me that their Eyes and ears could hardly believe. The tone and atmosphere, once friendly and understanding, changed dramatically in the bank meeting room. The dear financiers of yore were hardly recognizable. The thumbscrews were applied. Of course there are laudable exceptions, but as a company leader I wouldn't hope for those.
The probability that, in the event of a crisis, the banks would massively interfere in the business policy of the Company intervened is high. I praise the Lindt & Sprüngli AG in Switzerland. In 2008, the Management Board announced in no uncertain terms that it would stick to its five-year investment program to improve production processes, despite the difficult and uncertain global economic situation at the time. I enjoyed that. The banks do not play a major role at Lindt & Sprüngli when it comes to financing issues. The company has a lot of equity, reserves from decades and a strong cash flow. That's what I like to look for as a stock market investor. I find the so-called »leverage effect« through the targeted use of borrowed capital on the one hand and a reduction in equity on the other to be too dangerous.
Only something for beautiful weather sailors
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This is something for »SchönWetterSailors«. I don't go on board with them. My Capital these companies do not get on the stock exchange. As far as the investor is concerned, he too should reconsider his position. Investments at the stock exchange are always with us risks tied together. And even the best stocks, no matter how much equity and wonderful market share in their industry, can crash in price in a stock market panic. 50 or 70 percent and more in price losses, that has happened more often in the past - also for »blue chip« stocks. And that will always be the case. Because the share prices on the stock exchange are not based on objective evaluation criteria of what is actually available. No, theCourses are made purely by supply and demand. When nobody wants to buy, but others do sell then share prices collapse to zero. As unpleasant as it is when I have financed my deposit with my savings, I can sit out a phase of irrationality and madness. But with bank debt? How is it going to be on my nerves?
I therefore advise against Lombard loans, i.e. lending on a share portfolio in order to be able to buy more shares. No matter how low the loan interest rate, the stock investor is playing with fire. In the large Internet and Telekom Crash in 2002 and 2003 we had such cases. I know investors who, with good persuasion and applause from the bank, had borrowed 25 percent of their deposits at sky-high rates. By the time prices bottomed in March 2003, they had lost their entire fortune. Their shares were forcibly sold by the bank. That's the effect of Lombard loans: Debts remain or continue to grow due to interest charges, while Telekom shares, for example, fell from EUR 80 to EUR XNUMX at the time.
Regardless of Lombard loans, I say that those who have bank debts should generally not acquire a stock portfolio. First pay off your debts, save real equity and only then venture onto the trading floor. This is old fashioned and may take a few years of patience. In the next financial crisis you will (hopefully) think of me.
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