SS202: The Impact of Debt on Businesses and Investing

SS202: The Impact of Debt on Businesses and Investing

Debt plays a significant role in business operations and investment decisions. In this episode, Charles discusses how debt impacts a company’s financial health and an investor’s portfolio.

Watch The Episode Here:

Listen To The Podcast Here:

Talking Points:

  • I read dozens of websites and blogs every week. A couple of months back, I came across an article on The Collaborative Fund blog written by Morgan Housel that I was instantly intrigued with. I have linked to the article in the notes for you to read as well. I like reading his blog posts because I find his point of view very practical and interesting. This article on debt intrigued me since many people are overleveraged in real estate, business, and life in general today.
  • In his article “How I Think About Debt,” Morgan explains that Japan has 140 businesses that are at least 500 years old, with some claiming to be more than 1,000 years old.
  • It’s astounding to think what these businesses have endured – dozens of wars, emperors, catastrophic earthquakes, tsunamis, depressions, and on and on endlessly. And yet they keep selling, generation after generation.
  • Just think that 80 years ago, in 1945, the country’s economy and literally parts of the country itself were destroyed after World War II. The Japanese GDP in 1945 was only 11% of the GDP of the United States, and the Japanese GDP in 1945 had experienced nearly an 80% decline since 1940. Now, add another 420 years of events and issues out of the control of these Japanese businesses into the equation, and you realize how ultra-durable these businesses truly are. The Japanese call them “shinise,” the one common trait is that they hold tons of cash and have no debt.
  • Morgan breaks down this simple principle by noting that all businesses and people will experience volatility, peaks, and troughs during their lifetimes. The ability to weather these events, including recessions, divorce, illness, moves, natural disasters, income fluctuations, etc., is commonly determined by the person or business’s cash and debt position. As we pile on debt, the range of volatility that one can experience decreases.
  • No, debt, in general, is not bad; it is the question of whether the level of debt is appropriate relative to the asset’s value, the debt pledged against it, and the ability for income and value fluctuations of that asset. The more stable an asset is, the more leverage can be used. The riskier an investment is, the less leverage it is prudent to use. Problems usually arise when a risky asset is overleveraged. Leverage works both ways; when an asset goes well, you make more, but when an investment goes south, it is the more you lose.
  • There is an old adage to never forget the 6-foot-tall man who drowned crossing a river that was 5 feet deep on average. You need to make it through the low points of an investment or life, and the more debt you have, the less likely you are to do that.
  • Morgan states, “As debt increases, you narrow the range of outcomes you can endure in life.”
  • A business or person with no debt and a cash reserve can weather nearly every storm. Suppose you are building a business now or a real estate portfolio and hope to be alive 20, 30, 40, or 50 more years from now. In that case, the chances that you will have to deal with wars, recessions, health issues, family emergencies, health crises, and career and income fluctuations are 100%. Most of it is probably out of your control.
  • Debt, in any form, narrows the survivability and outcomes of the asset or person it is pledged upon.
  • It was a fascinating read. I’m not a no-debt person, especially in real estate, but there is a time and a place for it, and as you add more and more of it into your life, it starts constraining your options and flexibility.

Transcript:

Charles:
Spend any amount of time on financial websites or social media channels, and you will hear people explaining their stance on using debt. But what does debt actually do to you and your investments when it’s utilized?

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo, and today we’re gonna discuss why having too much debt might be your biggest risk. We’ll explore why some of the most enduring businesses in history stay debt free and what that means for us in today’s fast-paced world. We’ll also uncover how you can use this knowledge to protect your investment and ensure long-term success stick around because understanding the true impact of debt could change how you approach your finances forever. So let’s get into it. I read dozens of blogs and websites every week and a few months back I came across an article on the Collaborative Fund blog written by Morgan Hausel that I was instantly intrigued with.

Charles:
I have linked the article in the notes for you to read as well, and I like reading his blog post because I find his point of view very practical and interesting. And this article on debt intrigued me since many people are over leveraged in real estate, business and life in general. Today. In his article how I Think about Debt, Morgan explains that Japan has 140 businesses that are at least 500 years old with some claiming to be more than a thousand years old. It’s astounding to think what these businesses have endured. Dozens of wars, emperors, earthquakes, tsunamis, depressions, and on and on endlessly, and they keep selling generation after generation. Now, just think that 80 years ago, in 1945, the country’s economy and literally parts of the country itself were destroyed after World War ii and the Japanese GDP in 1945 was only 11% of the GDP of the United States.

Charles:
And the Japanese GDP in 1945 had experienced nearly an 80% decline since 1940. Now at 420 years of events and issues outro the control of these Japanese businesses into the equation. And you realize how ultra durable these businesses truly are. The Japanese call them xxi, and the one common trait is that they hold tons of cash and they have no debt. Now Morgan breaks down this simple principle by noting that all businesses and people will experience volatility peaks and troughs during their lifetimes. The ability to weather these events, including recessions, divorce, illness moves, natural disasters, income fluctuations, et cetera, is commonly determined by the person or the business’s cash and debt position. As we pile on debt, the range of volatility that one can experience decreases no debt in general is not bad. It is the question of whether the level of debt is appropriate relative to the asset’s value.

Charles:
What is the probability of the value and the income fluctuations of the asset? The more stable an asset is, the more leverage that can be used. The riskier investment is the less leverage should be utilized. Problems usually arise when a risky asset is over leveraged and leverage works both ways. When an asset goes well, you make more money, but when an investment goes south, you lose more. Now, there’s an old adage to never forget the six foot tall man who drowned crossing a river, and that was five feet deep On average, you need to make it through the low points of, of an investment or life. And the more debt you have, the less likely you are to do that. Morgan states. As debt increases, you narrow the range of outcomes you can endure in life. And a business or person with no debt and a cash reserve can weather nearly every storm.

Charles:
Suppose you are building a business now or real estate portfolio and hope to live 20, 30, 40, or 50 more years from now. And in that case, I mean the chances that you’ll have to deal with wars, recessions, health issues, family emergencies, health crises, career and income fluctuations are 100% and most probably out of your control. So debt in any form narrows the survivability and outcomes of the asset or person is pledged upon. And it’s a fascinating read. I’m not a no debt person, especially in real estate, but there is a time and place for it. And as you add more and more of it into your life, it starts constraining your options and your flexibility. So I hope you enjoyed. Please remember to rate, review, subscribe, submit comments and potential show topics at globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs at syndicationsuperstars.com. That is a syndication superstars.com. Look forward to two more episodes next week. See you then.

Charles:
Have you always wanted to invest in real estate, but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding and didn’t want tenants calling you. Since 2006, I’ve been buying income producing properties and great locations that provide us with consistent passive income. While we wait for appreciation in the future and take advantage of tax laws while we’re waiting and unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out to investwithharborside.com. If you like the idea of investing real estate, if you like the idea of passive income partner with us at investwithharborside.com, that’s investwithharborside.com.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

Links Mentioned In The Episode:

Are You a Fan? Subscribe, Rate, Review & Share – Click Here To Learn How

What question do you always wish I would ask but I never do?

Connect with the Global Investors Show, Charles Carillo and Harborside Partners:

Scroll to top