Value Investors Tribe

Warren Buffett and Charlie Munger have been asked on several occasions about using leverage i.e. borrowed money to trade securities. In the 2009 Berkshire Hathaway Annual meeting, Warren Buffett said, “You can’t let somebody else get you in a position where you have to sell out your position. Leverage is what causes people trouble in this world. You never want to be in a position where somebody can pull the rug out from under you. And you also never want to be emotionally in a position where you pull the rug out from under yourself. I mean, you don’t want to have other people force you to sell and you don’t want to let your own fears or emotions to cause you to sell at the wrong time.”

In these 3-4 sentences, Warren Buffett shares multiple key lessons about investing. First and foremost Warren Buffett does not recommend using any form of leverage. In case of market crashes or even temporary downturn, margin calls can lead you to sell your securities. This is not only harmful since you have to sell because of leverage but it also interrupts compounding!

Secondly, Warren Buffett also states that not using leverage can help us keep our emotions in check and not impact our judgment because of fears and emotions going around in the market. There have been multiple instances wherein the Berkshire Hathaway stock have been down more than 50%. In such cases, focusing on business, assessing it’s competitive position and intrinsic value as well as not letting emotions get better of you can help you outperform the rest. Charlie Munger has stated on multiple occasions that they (He and Warren) and not the smartest, we just avoid dumb things. Leverage is one such element which can cause you to alter your judgment and cause irrational behavior which affects compounding in the long run.

Key Takeaways:

1. Leverage is a big NO as per Warren Buffett and Charlie Munger.
2. Use of leverage not only leads to unnecessary risks of margin calls, it also affects our emotions and can cause fears leading to irrational behavior.
3. Use of leverage can interrupt compounding which leads to significant impacts in the long run.