Warren Buffett and the Dangers of Debt

In 2010, billionaire investor Warren Buffett wrote in his Berkshire Hathaway letter to shareholders about the dangers of debt. He shared a few paragraphs where he detailed how dangerous it is for companies and individuals to borrow large amounts of money.

It is a great lesson to learn. It is a warning of sorts for investors to not take debts availability for granted.

Here is exactly what Warren Buffett had to say:

“Unquestionably, some people have become very rich through the use of borrowed money. However, that’s also been a way to get very poor. When leverage works, it magnifies your gains. Your spouse thinks you’re clever, and your neighbours get envious. But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices. And as we all learned in third grade – and some relearned in 2008 – any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. History tells us that leverage all too often produces zeroes, even when it is employed by very smart people.

Leverage, of course, can be lethal to businesses as well. Companies with large debts often assume that these obligations can be refinanced as they mature. That assumption is usually valid. Occasionally though, either because of company-specific problems or a worldwide shortage of credit, maturities must actually be met by payment. For that, only cash will do the job.

Borrowers then learn that credit is like oxygen. When either is abundant, its presence goes unnoticed. When either is missing, that’s all that is noticed Even a short absence of credit can bring a company to its knees. In September 2008, in fact, its overnight disappearance in many sectors of the economy came dangerously close to bringing our entire country to its knees.”

So heed Warren Buffett’s warning. Pay attention to what he has to say. This is invaluable advice and information.