Thursday, 10 March 2011

No fear of debt

For some debt is a fearsome thing. It's a monster which must continually be fed and if it ever gets the better of you the consequences will be, at the best disgrace in your peer group, and at worst homelessness, hunger and penury.

Most of us have a healthy apprehension of debt.

But there's a another group of people who know no fear of debt at all. They love it. The more they can borrow the better. These people have a name, they're called billionaires. Here are a couple of choice specimens:

Tchenguiz Brothers: Property billionaires

This pair of chancers made their fortune by borrowing as much as they possibly could, investing the cash in property, then using financial leger-de-main to use the property as security to borrow even more cash and start all over again.

In this manner these London-based, Iranian jews built a business empire once worth more than a billion pounds.
But just as a rising tide floats all boats so when the tide retreats you get to see who has been swimming naked. (Apologies to Warren Buffet for blatant quote theft!) And it seems the tide as just gone out on the Tchenguiz brothers. They were arrested at 6.30am yesterday by a team of 130 police officers, including a couple of cops from Iceland. It seems they have questions to answer on the general subject of the collapse of the Kaupthing Bank.

There are two approaches to the borrow as much as you can and assume the day of reckoning will never come school of business. One, you just hope that day will never come, or at least not until you're dead and buried, or at least too old and gaga to be prosecuted. If the day comes then take it on the chin and tell yourself that at least you lived in the lap of luxury for most of your life even if you end your days in prison. This could be called the Bernie Madoff method.

The second, and more subtle way is to insulate yourself from the debt so that if and when the day to pay comes it turns out you don't actually owe anything.

The Tchenguiz brothers strike me as being of a subtle nature. 

The hope of the "billionaires" of course is always that the rising tide will continue to rise for so long that being long in physical assets and short in cash will eventually shrink their debt to the point where they are genuinely rich and debt-free. Never forget that money continually loses value, and tangible assets rise for decades at a time.

Sometimes though, the door to genuine, debt-free wealth slams shut on you just as you're about to jump though. Bummer!

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