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> 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 lo

> 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
        Nah, it depends on the building rules. There's no such law. In my building you need to give a deposit just to install curtain rods, for example, or hang a TV.
  - tathougies 7y ago
    That's why we have a stock market, a futures market, businesses, etc. The commenter above gave an example of a real estate investor. That is a particular type of investor which has to deal with some particular kinds of risk that not everyone is suited to or wants to deal with. For those people, there are other investments they would be good at, and they should engage in.
    - mindslight 7y ago
      You didn't actually respond to my points, but just pointed out the existence of other types of business where the centralizing flow is less obvious than real estate.
      - tathougies 7y ago
        If everyone participates in acquiring assets, then everyone builds wealth. Your claim is that real estate builds wealth for one person (or in aggregate, particular people). This is certainly true. If there are 300 million Americans, then, if everyone were a landlord holding 4 other properties (other than their house), only 60 million Americans could benefit from real estate. However, the other 240 million could benefit from owning a business, or owning a stake in one, or owning any of the myriad of assets available to invest in. Societal wealth is built by one person building a lot of wealth based on others paying him, and just replicating that millions of times over the population.
        mindslight 7y ago
        > Your claim is that real estate builds wealth for one person (or in aggregate, particular people). No, leaving out the critical piece does not represent my claim. Rather you're just shoehorning into the traditional narrative that each person trying to build the most individual wealth inductively extrapolates to society as a whole becoming richer. The critical part of my claim is: > For the larger system consisting of all 6 people, it's a net loss Not merely a loss for 5 and a gain for 1, but a net loss for all 6 parties summed together. Draw a boundary around them and analyze cross-boundary flow. The interest payments flow away, meaning the group is worse off even though the landlord individually benefits. Our economy is based around debt rather than positive wealth. For someone to have financial wealth, others must be in debt. The shining ideal where everybody is financially independent is impossible under the current system. And the more the financial bubble grows in relation to actual physical wealth, the truer this becomes.
- 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.

> 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
        Nah, it depends on the building rules. There's no such law. In my building you need to give a deposit just to install curtain rods, for example, or hang a TV.
- tathougies 7y ago
  That's why we have a stock market, a futures market, businesses, etc. The commenter above gave an example of a real estate investor. That is a particular type of investor which has to deal with some particular kinds of risk that not everyone is suited to or wants to deal with. For those people, there are other investments they would be good at, and they should engage in.
  - mindslight 7y ago
    You didn't actually respond to my points, but just pointed out the existence of other types of business where the centralizing flow is less obvious than real estate.
    - tathougies 7y ago
      If everyone participates in acquiring assets, then everyone builds wealth. Your claim is that real estate builds wealth for one person (or in aggregate, particular people). This is certainly true. If there are 300 million Americans, then, if everyone were a landlord holding 4 other properties (other than their house), only 60 million Americans could benefit from real estate. However, the other 240 million could benefit from owning a business, or owning a stake in one, or owning any of the myriad of assets available to invest in. Societal wealth is built by one person building a lot of wealth based on others paying him, and just replicating that millions of times over the population.
      - mindslight 7y ago
        > Your claim is that real estate builds wealth for one person (or in aggregate, particular people). No, leaving out the critical piece does not represent my claim. Rather you're just shoehorning into the traditional narrative that each person trying to build the most individual wealth inductively extrapolates to society as a whole becoming richer. The critical part of my claim is: > For the larger system consisting of all 6 people, it's a net loss Not merely a loss for 5 and a gain for 1, but a net loss for all 6 parties summed together. Draw a boundary around them and analyze cross-boundary flow. The interest payments flow away, meaning the group is worse off even though the landlord individually benefits. Our economy is based around debt rather than positive wealth. For someone to have financial wealth, others must be in debt. The shining ideal where everybody is financially independent is impossible under the current system. And the more the financial bubble grows in relation to actual physical wealth, the truer this becomes.
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.