7 ms·

You don't build wealth by saving. You do it by investing using leverage. The system subsidises debt and risk-taking (within limits) by inflation and the structu

by chvid 7y ago

You don't build wealth by saving. You do it by investing using leverage. The system subsidises debt and risk-taking (within limits) by inflation and the structure of the tax system. You need to let go of the idea that it is immoral. Buy a house and when you can buy a bigger house. Put your money in the growth part of the stock market (technology ... big names like Apple and Amazon is good). Use your income to take on more debt; do not save cash as it will be taken from your via inflation, tax or now negative interest.

al_chemist 7y ago
> You don't build wealth by saving. You do it by investing using leverage. For some reason, this sounds like "you don't build wealth by saving. You do it by lottery and scratchcards!"
- dgacmu 7y ago
  Agreed, the GP phrased this poorly. You build wealth by saving and investing the savings in a way that has an appropriate balance of risk and returns for your life circumstances. That may or may not involve leverage.
- ping_pong 7y ago
  That's because you don't understand finance. Leverage is the easiest way to make a larger percentage on your money, as long as it's used prudently. Borrowing money to buy real estate and then collect income is a very common way to leverage your money. Over time that builds real wealth. My friend has bought 5 properties and is renting them all out. When he retires, the properties will have been paid for, and the rental money will act like his pension until he dies.
  - mindslight 7y ago
    > Borrowing money to buy real estate and then collect income is a very common way to leverage your money. Over time that builds real wealth. My friend has bought 5 properties and is renting them all out This only "builds real wealth" for one person. For the larger system consisting of all 6 people, it's a net loss (the interest payments are still leaving, upwards). We've built a financial system where it is in everybody's self interest to make everybody else worse off. The positive sum progress from the economy was enough to outrun this setup when there was abundant energy and foreign countries to colonize, hence the focus on "growth". But that era is over, and we're now stuck with a black hole of debt that still needs to be serviced...
    - marcus_holmes 7y ago
      I used to own a house. Now I rent. The ability to walk away from the obligations that house-owning involve is worth a lot of money to me. I probably lose financially, maybe, but meanwhile I get to have a much better standard of living.
      - mancerayder 7y ago
        Ditto. And in this crisis, they're suspending evictions and presumably suspending mortgage payments too. I feel very lucky to have gotten out of that chain. Now I'm renting and fairly comfortable compared to the much larger structure I used to own which included land (now I'm in a one bedroom condo). I just wish I could drill a pull-up bar and TV articulating arm into the wall. However, I'm able to rent and live in a much nicer area than where I could afford to buy.
        marcus_holmes 7y ago
        I recently moved to Berlin, and the whole rental market here is awesome. Rent controls mean the rents aren't huge (but they are rising because of the high demand). But the amazing thing (to someone from UK/Australia anyway) is that I can repaint, make alterations, drill holes in the walls, etc. I might have to put it back the way it was at the end, but the landlord can't stop me from doing what I like to the place while I'm here. A whole different attitude to renting.
        tathougies 7y ago
        > I might have to put it back the way it was at the end, but the landlord can't stop me from doing what I like to the place while I'm here. A whole different attitude to renting. This is the same in the US, FWIW. Most landlords aren't going to care what you do, as long as you don't damage common areas and return it in mint conditoin.
        mancerayder 7y ago
  - soperj 7y ago
    That's fine unless he was in Detroit.
  - marcus_holmes 7y ago
    Which is great in a rising market, but will ruin him when the market falls (which it looks like it's about to do). Leverage works both ways, it will amplify both gains and losses.
    - pba 7y ago
      The market falling as a whole does not mean that every single individual investment one could have a position in during that time loses value.
    - gnopgnip 7y ago
      Leverage does not work the same way for real estate. There is no margin call like there is with stock. Even if you are upside down on the mortgage in many cases you are still cashflow positive and can ride it out. And if you are not, even in recourse states in practice the losses are not amplified and a strategic default, deed in lieu, or short sale are still possible.
      - marcus_holmes 7y ago
        Utterly not true outside the US. I've seen lots of people in negative equity, unable to afford the mortgage and unable to sell (the mortgage liability doesn't go away if you sell the property. If the mortgage is bigger than the current house price, selling doesn't help). People with multiple properties and multiple mortgages are in worse trouble. It's very easy to go bankrupt in this situation, I've seen it happen.
  - jbay808 7y ago
    If it was so certain to work, why we would anyone lend me money to do it when they could just buy the property themselves?
- ilikerashers 7y ago
  You're equating buying a house to buying a lottery ticket. These are opposite ends of the risk scale. These are not alike in any way.
  - elsewhen 7y ago
    I agree that lotteries are close to one side of the risk scale but real estate is closer to the middle than to the other extreme. The other extreme is U.S. treasuries. The last recession was a great illustration of the risk inherent in real estate.
    - SketchySeaBeast 7y ago
      And the US treasuries won't even keep up with inflation. If you invested yesterday you'd need to lock in for at least 20 years before you got even 1% return.
  - Ididntdothis 7y ago
    Ten years ago a lot of people learned that housing is not as safe as they thought.
    - abstractbarista 7y ago
      It actually is. You just can't be over-leveraged. The bank will give you waaayy more money than should ever responsibly be taken. Combined with emergency savings, you are quite safe as a homeowner.
      - Ididntdothis 7y ago
        Yes if you stay within your limits. But if you start loading up on debt because of low interest then things can go bad very quickly. So the advice go stop saving is bad.
      - amiga_500 7y ago
        And how do you bid in a market where every house has >1 bidder and banks are lending waaayy more than is responsible?
- sigstoat 7y ago
  > For some reason unfamiliarity with the term "leverage", probably
- adaisadais 7y ago
  Warren Buffett talks about how cash is a bad thing to have over time as it can’t keep up inflation (1). He does advocating having enough on hand to “sleep at night”. But you really can’t build wealth by stocking money away in a savings account. Trump and his administration could have really done something awesome. He essentially got given the golden ticket for presidents: create a legacy. T. Roosevelt had parka, FDR had the new deal. Eisenhower built highways (which he copied from Hitler’s autobahn). JFK said we would put a man on the moon (and ultimately did). Trump could have said hey, let’s build high speed rail across our country! Let’s reinforce our highways. Let’s dump a bunch of money into building new schools or paying teachers more. When the virus is gone the economy will be humming! The markets would have soared. The U.S. would have had something qualitative to show for the $2T line of debt we just took out on ourselves. (1) https://www.cheatsheet.com/uncategorized/history-and-warren-buffett-say-cash-is-a-terrible-investment.html/ https://www.cheatsheet.com/uncategorized/history-and-warren-...
  - deleted 7y ago
    [deleted]
  - s1t5 7y ago
    In the meantime Buffett currently holds more cash than just about anyone else on the planet - over $120 billion in cash equivalents at the end of last year. Yes, his point that cash loses its value over time is true. No, he didn't get to where he is just by holding cash. Yes, your situation and mine are vastly different from Buffett's. But it just shows that things aren't as simple as "cash=bad".
    - tathougies 7y ago
      Cash equivalents include commercial paper and bonds. Cash equivalents are not the same as cash.
      - bwanab 7y ago
        There’s a reason they’re called cash “equivalents”.
- deleted 7y ago
  [deleted]
- nemonemo 7y ago
  That is not true. There are nearly risk-free methods of making investment returns, and when the upside is small but risk is minimal, leverage is the way to amplify the upside. Playing lottery means high risk of losing money and that is not an investment, though the line may seem blurry. (Some turn lottery into a reasonable investment, so it is truly blurry.)
  - SketchySeaBeast 7y ago
    > There are nearly risk-free methods of making investment returns Do you have suggestions for these?
    - mkaymalright 7y ago
      Spot-Futures arbitrage, especially if your brokers allows you to collateralize your futures position with the profits from your spot position which would allow for higher leverage on the futures side. Let's say the futures price is higher than the spot price and there is 3 months left until maturity. You sell the same (USD equivalent) amount in the future (expensive) and buy in the spot (cheap). You just made a profit and no matter where the price goes - you're hedged. The only thing is that you're stuck with 2 positions now. Just wait 3 months until maturity and the futures and spot price will converge to the same price. Now buy in the futures and sell in the spot and you've done it! Of course, while being pretty much risk free the upside is also limited to how much (percentually) the future is above/below the spot.
      - chvid 7y ago
        No. Buy a house and some stocks in growth sectors.
        Der_Einzige 7y ago
        No - You're wrong and the person you're replying to is right. Futures are how you multiply your money with relatively low risk. Stocks are how you get 5% returns amortized YOY if you're lucky
- AndrewKemendo 7y ago
  I agree with this, it's basically just a more sophisticated version of gambling.
- tathougies 7y ago
  This is absolutely bonkers. Leverage is not the lottery. IS buying a house a lottery? Then why is other property different?
  - burntoutfire 7y ago
    Buying it during a housing market bubble is - you can't effectively tell if the bubble will pop or keep growing.
Ididntdothis 7y ago
This is gambling. If house prices or stock markets go down you suddenly sit on a big pile of debt. The debt is low interest rate but it’s still debt.
- walshemj 7y ago
  Not really binary bets or\day trading are gambling, if you can afford it and have spare cash it would make sense over the long term to invest - though not in individual shares for most. As Benjamin Graham said “Buy when most people, including experts, are pessimistic, and sell when they are actively optimistic.”
  - SketchySeaBeast 7y ago
    My parents retired a year ago. If they'd kept all their money in the stock market until this month they'd be in a lot of trouble, and probably will be for the foreseeable future - how is that not a gamble? "You need to diversify" would be an argument against gambling in the stock market, and getting into something safer.
    - tathougies 7y ago
      If they stick to a reasonable withdrawal rate, they likely would not be. The stock market will rise in time, and has almost certainly risen in value since the time they made investments, even with the current drop in share prices.
    - stevesimmons 7y ago
      Even if your parents put everything in the stock market, they would presumably draw down that capital gradually over the coming 20+ years. i.e. They are diversified over time.
    - pbk1 7y ago
      In addition to the withdrawal rate as others have mentioned, the prudent approach to retiring now would be gradually changing their allocation to a less risky mix over the course of several years. Had for example they rotated some equity into a modest amount of Treasuries, that portion of their portfolio would actually be doing well right now (see for example $TLT).
enilakla 7y ago
Sounds like a recipe for disaster for many
buboard 7y ago
I think the question is what do you do with the wealth after you build it. Having your entire wealth constantly invested is making it a cog that works to make other ppl richer.
wejowejfoiwejf 7y ago
>You need to let go of the idea that it is immoral. >Buy a house and when you can buy a bigger house. Put your money in the growth part of the stock market (technology ... big names like Apple and Amazon is good). Your advice is sound, but I still argue that the system is extremely immoral. Consider what this mindset has done to the environment. The reality of Keynesianism is that by allowing the government to manipulate the market via inflation, we have encouraged a massive over-consumption of resources. People who would have otherwise saved their money and been satisfied with their current rate consumption are essentially threatened into spending their money faster. But hey, the system's worked for 87 years and only created the least equitable distribution of wealth ever seen on Earth, so I'm sure it will work for the next 87.
- zemvpferreira 7y ago
  Serfdom and slavery would like to have a word with you about inequality.
  - viklove 7y ago
    Please explain to me how wage-workers are different from serfs.
- pjc50 7y ago
  Blaming consumerism on Keynesianism rather than, say, advertising and the profit motive is a hell of a bizarre take.
amiga_500 7y ago
> You need to let go of the idea that it is immoral. How are living standards versus the '60s? It's not just immoral, it's bad news. If your country has too many wealth appropriators and not enough wealth creators you are going to have a bad time.

by chvid 7y ago

al_chemist 7y ago

> You don't build wealth by saving. You do it by investing using leverage. For some reason, this sounds like "you don't build wealth by saving. You do it by lottery and scratchcards!"

dgacmu 7y ago
Agreed, the GP phrased this poorly. You build wealth by saving and investing the savings in a way that has an appropriate balance of risk and returns for your life circumstances. That may or may not involve leverage.
ping_pong 7y ago
That's because you don't understand finance. Leverage is the easiest way to make a larger percentage on your money, as long as it's used prudently. Borrowing money to buy real estate and then collect income is a very common way to leverage your money. Over time that builds real wealth. My friend has bought 5 properties and is renting them all out. When he retires, the properties will have been paid for, and the rental money will act like his pension until he dies.
- mindslight 7y ago
  > Borrowing money to buy real estate and then collect income is a very common way to leverage your money. Over time that builds real wealth. My friend has bought 5 properties and is renting them all out This only "builds real wealth" for one person. For the larger system consisting of all 6 people, it's a net loss (the interest payments are still leaving, upwards). We've built a financial system where it is in everybody's self interest to make everybody else worse off. The positive sum progress from the economy was enough to outrun this setup when there was abundant energy and foreign countries to colonize, hence the focus on "growth". But that era is over, and we're now stuck with a black hole of debt that still needs to be serviced...
  - marcus_holmes 7y ago
    I used to own a house. Now I rent. The ability to walk away from the obligations that house-owning involve is worth a lot of money to me. I probably lose financially, maybe, but meanwhile I get to have a much better standard of living.
    - mancerayder 7y ago
      Ditto. And in this crisis, they're suspending evictions and presumably suspending mortgage payments too. I feel very lucky to have gotten out of that chain. Now I'm renting and fairly comfortable compared to the much larger structure I used to own which included land (now I'm in a one bedroom condo). I just wish I could drill a pull-up bar and TV articulating arm into the wall. However, I'm able to rent and live in a much nicer area than where I could afford to buy.
      - marcus_holmes 7y ago
        I recently moved to Berlin, and the whole rental market here is awesome. Rent controls mean the rents aren't huge (but they are rising because of the high demand). But the amazing thing (to someone from UK/Australia anyway) is that I can repaint, make alterations, drill holes in the walls, etc. I might have to put it back the way it was at the end, but the landlord can't stop me from doing what I like to the place while I'm here. A whole different attitude to renting.
        tathougies 7y ago
        > I might have to put it back the way it was at the end, but the landlord can't stop me from doing what I like to the place while I'm here. A whole different attitude to renting. This is the same in the US, FWIW. Most landlords aren't going to care what you do, as long as you don't damage common areas and return it in mint conditoin.
        mancerayder 7y ago
- soperj 7y ago
  That's fine unless he was in Detroit.
- marcus_holmes 7y ago
  Which is great in a rising market, but will ruin him when the market falls (which it looks like it's about to do). Leverage works both ways, it will amplify both gains and losses.
  - pba 7y ago
    The market falling as a whole does not mean that every single individual investment one could have a position in during that time loses value.
  - gnopgnip 7y ago
    Leverage does not work the same way for real estate. There is no margin call like there is with stock. Even if you are upside down on the mortgage in many cases you are still cashflow positive and can ride it out. And if you are not, even in recourse states in practice the losses are not amplified and a strategic default, deed in lieu, or short sale are still possible.
    - marcus_holmes 7y ago
      Utterly not true outside the US. I've seen lots of people in negative equity, unable to afford the mortgage and unable to sell (the mortgage liability doesn't go away if you sell the property. If the mortgage is bigger than the current house price, selling doesn't help). People with multiple properties and multiple mortgages are in worse trouble. It's very easy to go bankrupt in this situation, I've seen it happen.
- jbay808 7y ago
  If it was so certain to work, why we would anyone lend me money to do it when they could just buy the property themselves?
ilikerashers 7y ago
You're equating buying a house to buying a lottery ticket. These are opposite ends of the risk scale. These are not alike in any way.
- elsewhen 7y ago
  I agree that lotteries are close to one side of the risk scale but real estate is closer to the middle than to the other extreme. The other extreme is U.S. treasuries. The last recession was a great illustration of the risk inherent in real estate.
  - SketchySeaBeast 7y ago
    And the US treasuries won't even keep up with inflation. If you invested yesterday you'd need to lock in for at least 20 years before you got even 1% return.
- Ididntdothis 7y ago
  Ten years ago a lot of people learned that housing is not as safe as they thought.
  - abstractbarista 7y ago
    It actually is. You just can't be over-leveraged. The bank will give you waaayy more money than should ever responsibly be taken. Combined with emergency savings, you are quite safe as a homeowner.
    - Ididntdothis 7y ago
      Yes if you stay within your limits. But if you start loading up on debt because of low interest then things can go bad very quickly. So the advice go stop saving is bad.
    - amiga_500 7y ago
      And how do you bid in a market where every house has >1 bidder and banks are lending waaayy more than is responsible?
sigstoat 7y ago
> For some reason unfamiliarity with the term "leverage", probably
adaisadais 7y ago
Warren Buffett talks about how cash is a bad thing to have over time as it can’t keep up inflation (1). He does advocating having enough on hand to “sleep at night”. But you really can’t build wealth by stocking money away in a savings account. Trump and his administration could have really done something awesome. He essentially got given the golden ticket for presidents: create a legacy. T. Roosevelt had parka, FDR had the new deal. Eisenhower built highways (which he copied from Hitler’s autobahn). JFK said we would put a man on the moon (and ultimately did). Trump could have said hey, let’s build high speed rail across our country! Let’s reinforce our highways. Let’s dump a bunch of money into building new schools or paying teachers more. When the virus is gone the economy will be humming! The markets would have soared. The U.S. would have had something qualitative to show for the $2T line of debt we just took out on ourselves. (1) https://www.cheatsheet.com/uncategorized/history-and-warren-buffett-say-cash-is-a-terrible-investment.html/ https://www.cheatsheet.com/uncategorized/history-and-warren-...
- deleted 7y ago
  [deleted]
- s1t5 7y ago
  In the meantime Buffett currently holds more cash than just about anyone else on the planet - over $120 billion in cash equivalents at the end of last year. Yes, his point that cash loses its value over time is true. No, he didn't get to where he is just by holding cash. Yes, your situation and mine are vastly different from Buffett's. But it just shows that things aren't as simple as "cash=bad".
  - tathougies 7y ago
    Cash equivalents include commercial paper and bonds. Cash equivalents are not the same as cash.
    - bwanab 7y ago
      There’s a reason they’re called cash “equivalents”.
deleted 7y ago
[deleted]
nemonemo 7y ago
That is not true. There are nearly risk-free methods of making investment returns, and when the upside is small but risk is minimal, leverage is the way to amplify the upside. Playing lottery means high risk of losing money and that is not an investment, though the line may seem blurry. (Some turn lottery into a reasonable investment, so it is truly blurry.)
- SketchySeaBeast 7y ago
  > There are nearly risk-free methods of making investment returns Do you have suggestions for these?
  - mkaymalright 7y ago
    Spot-Futures arbitrage, especially if your brokers allows you to collateralize your futures position with the profits from your spot position which would allow for higher leverage on the futures side. Let's say the futures price is higher than the spot price and there is 3 months left until maturity. You sell the same (USD equivalent) amount in the future (expensive) and buy in the spot (cheap). You just made a profit and no matter where the price goes - you're hedged. The only thing is that you're stuck with 2 positions now. Just wait 3 months until maturity and the futures and spot price will converge to the same price. Now buy in the futures and sell in the spot and you've done it! Of course, while being pretty much risk free the upside is also limited to how much (percentually) the future is above/below the spot.
    - chvid 7y ago
      No. Buy a house and some stocks in growth sectors.
      - Der_Einzige 7y ago
        No - You're wrong and the person you're replying to is right. Futures are how you multiply your money with relatively low risk. Stocks are how you get 5% returns amortized YOY if you're lucky
AndrewKemendo 7y ago
I agree with this, it's basically just a more sophisticated version of gambling.
tathougies 7y ago
This is absolutely bonkers. Leverage is not the lottery. IS buying a house a lottery? Then why is other property different?
- burntoutfire 7y ago
  Buying it during a housing market bubble is - you can't effectively tell if the bubble will pop or keep growing.

Ididntdothis 7y ago

This is gambling. If house prices or stock markets go down you suddenly sit on a big pile of debt. The debt is low interest rate but it’s still debt.

walshemj 7y ago
Not really binary bets or\day trading are gambling, if you can afford it and have spare cash it would make sense over the long term to invest - though not in individual shares for most. As Benjamin Graham said “Buy when most people, including experts, are pessimistic, and sell when they are actively optimistic.”
- SketchySeaBeast 7y ago
  My parents retired a year ago. If they'd kept all their money in the stock market until this month they'd be in a lot of trouble, and probably will be for the foreseeable future - how is that not a gamble? "You need to diversify" would be an argument against gambling in the stock market, and getting into something safer.
  - tathougies 7y ago
    If they stick to a reasonable withdrawal rate, they likely would not be. The stock market will rise in time, and has almost certainly risen in value since the time they made investments, even with the current drop in share prices.
  - stevesimmons 7y ago
    Even if your parents put everything in the stock market, they would presumably draw down that capital gradually over the coming 20+ years. i.e. They are diversified over time.
  - pbk1 7y ago
    In addition to the withdrawal rate as others have mentioned, the prudent approach to retiring now would be gradually changing their allocation to a less risky mix over the course of several years. Had for example they rotated some equity into a modest amount of Treasuries, that portion of their portfolio would actually be doing well right now (see for example $TLT).

enilakla 7y ago

Sounds like a recipe for disaster for many

buboard 7y ago

I think the question is what do you do with the wealth after you build it. Having your entire wealth constantly invested is making it a cog that works to make other ppl richer.

wejowejfoiwejf 7y ago

>You need to let go of the idea that it is immoral. >Buy a house and when you can buy a bigger house. Put your money in the growth part of the stock market (technology ... big names like Apple and Amazon is good). Your advice is sound, but I still argue that the system is extremely immoral. Consider what this mindset has done to the environment. The reality of Keynesianism is that by allowing the government to manipulate the market via inflation, we have encouraged a massive over-consumption of resources. People who would have otherwise saved their money and been satisfied with their current rate consumption are essentially threatened into spending their money faster. But hey, the system's worked for 87 years and only created the least equitable distribution of wealth ever seen on Earth, so I'm sure it will work for the next 87.

zemvpferreira 7y ago
Serfdom and slavery would like to have a word with you about inequality.
- viklove 7y ago
  Please explain to me how wage-workers are different from serfs.
pjc50 7y ago
Blaming consumerism on Keynesianism rather than, say, advertising and the profit motive is a hell of a bizarre take.

amiga_500 7y ago

> You need to let go of the idea that it is immoral. How are living standards versus the '60s? It's not just immoral, it's bad news. If your country has too many wealth appropriators and not enough wealth creators you are going to have a bad time.