The 3 L’s: Liquor, ladies and leverage

“There’s only three ways that a smart person can go broke…‘liquor, ladies, and leverage.”
-Warren Buffett

If you had leveraged 100% (2x) to buy Warren Buffett’s Berkshire Hathaway shares, you would have been completely wiped out.

The 50.7% decline during 6 months of the global financial crisis would have meant that you lost 101.4%.

Leverage is one of those strategies that works great until it does not. Shares of Warren Buffett’s Berkshire Hathaway has had an annualized gain of 20.9% since 1965. Despite this incredible track record, there have been periods where the shares have suffered major dips:

Source: Buffett’s 2017 annual letter to shareholders

This data “offers the strongest argument…against ever using borrowed money to own stocks. There is simply no telling how far stocks can fall in a short period.” — Warren Buffett

Leveraged investing isn’t for the faint of heart. Nobel Economist Daniel Kahneman says that we mere mortals are inherently loss averse — we fear loss twice as much as we relish success. So rather than trying to get rich faster and magnify the effect of a portfolio’s outcomes, we will all sleep better at night if we focus on building our wealth with the money we actually have.

Originally published Mar 2, 2018 on endowus.com.