There’s a financial bloodbath everywhere. Almost all assets are falling off the cliff.
Most people are losing 30-50% percent on their portfolios. But some are losing everything.
There’s one guaranteed way to go broke, and that is leverage.
Leverage is the strategy to use borrowed capital for investment, especially if you expect significant profits. In a way, it’s a deal with a devil, and you must prepare to lose everything if you sign that contract.
But don’t take my word for it.
As Ray Dalio put it,
“Using leverage is like playing Russian roulette. It means that you are inevitably going to get a bullet in the head.”
Or, as Charlie Munger, a life-long partner of Warren Buffett, said,
“Smart men go broke three ways: liquor, ladies, and leverage.”
And last but not least, Warren Buffett teaches,
“You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing.”
The biggest trap
While investing legends are all well aware of evils of margin trading, we live in a debt-based economy and financial leverage is available everywhere. It’s easy to get at a click on a button.
However, leverage is a trap to which it’s simple to get into but hard to get out of. It boosts profits on the way up, but if markets turn agains you, it can ruin you financially.
Liquidity on the sidelines is the only insurance against a margin call.
The current market collaps taught us an important lesson. High leverage combined with extreme volatility can make the markets a deadly zone for uninformed traders.
Investing with leverage is like using drugs. The buzz happens immediately, giving you a high, but the next day you get headache and depression. And that is many times the main reason why so many people get sick financially.
In short, self-educate yourself, and avoid leverage like the plague, and you’ll save yourself financially.