CHAPTER 6
The Tumor of Long-Term Debt
Debt: Friend or Foe?
When it comes to the subject of debt, there seem to be two opposing thoughts in the world of financial gurus.
Either:
1. Debt is good and should be used in large quantities to leverage business and real estate investments.
Or:
2. The presence of any level of debt on the balance sheet, even for business and investment purposes, is the equivalent to standing next to the gates of hell.
So, which is correct? Is debt a good thing that can lead to riches or is it a fast track to eternal damnation? Let us turn to our coach, Warren Buffett, for the answer.
First, though, let us evaluate the two debt paradigms in the eyes of the paradigmers.
Wrapping Your Brain around Debt versus No Debt
1. Debt is good and should be used in large quantities to leverage business and real estate investments.
Two primary reasons exist for the advocacy of investment debt:
1. The use of other people’s money, or OPM
2. The benefits of leverage
As an investor/business owner, it is not necessary to start your own business using your own personal cache of money if you can use other people’s money, which in most cases is the bank’s money. The bank, of course, does not freely hand out money (there’s this thing called interest), and they want to see that you can repay the loan via the cash flow of the business. Typically, this proof of the pudding is found in the business’s cash flow projection. The bank knows that in many cases the projection is merely ...
