Comments on: Debt as a hedge against inflation? http://7million7years.com/2009/06/23/debt-as-a-hedge-against-inflation/ How to make 7 million in 7 years ... Thu, 24 May 2012 09:20:05 +0000 hourly 1 http://wordpress.org/?v=3.3.2 By: Andee Sellman, One Sherpa http://7million7years.com/2009/06/23/debt-as-a-hedge-against-inflation/comment-page-1/#comment-3108 Andee Sellman, One Sherpa Fri, 26 Jun 2009 05:57:43 +0000 http://7million7years.com/?p=2679#comment-3108 Hi Adrian, The limitations we put on debt are where there is NO RETURN from the capital which is supported by that debt. Also using a DEBT / EQUITY measure gives each individual the opportuity to have a risk profile which suits their appetite for risk. SHAPE is the key here which is governed by the RETURN on EQUITY which takes into account BOTH the interest costs and the investment profits. Bottom line for me is that DEBT should be paid back when the capital it is supporting can not get a return which is at least 3 times the cost of the debt. Hi Adrian,
The limitations we put on debt are where there is NO RETURN from the capital which is supported by that debt. Also using a DEBT / EQUITY measure gives each individual the opportuity to have a risk profile which suits their appetite for risk.
SHAPE is the key here which is governed by the RETURN on EQUITY which takes into account BOTH the interest costs and the investment profits.
Bottom line for me is that DEBT should be paid back when the capital it is supporting can not get a return which is at least 3 times the cost of the debt.

]]> By: Adrian http://7million7years.com/2009/06/23/debt-as-a-hedge-against-inflation/comment-page-1/#comment-3106 Adrian Fri, 26 Jun 2009 00:56:33 +0000 http://7million7years.com/?p=2679#comment-3106 @ Andee - Yep! The counter-argument is one that you put forward in your <a href="http://www.thefinancialfence.com/game.html" rel="nofollow">Financial Fence game</a>, that: a) there are commonly-accepted ratios for business that tell you when you have too much debt, and b) your game puts forward some ratios for private investors to ensure that they, too, do not acquire TOO MUCH DEBT. My question is: if "paying off the debt can lower your opportunity to invest that money into investments which bring in returns well in excess of the interest on the debt" ... ... why isn't MORE debt of this type better? Why do we place (and, measure via these ratios) restrictions on the amount of debt that we take on??! @ Andee – Yep! The counter-argument is one that you put forward in your Financial Fence game, that:

a) there are commonly-accepted ratios for business that tell you when you have too much debt, and

b) your game puts forward some ratios for private investors to ensure that they, too, do not acquire TOO MUCH DEBT.

My question is: if “paying off the debt can lower your opportunity to invest that money into investments which bring in returns well in excess of the interest on the debt” …

… why isn’t MORE debt of this type better? Why do we place (and, measure via these ratios) restrictions on the amount of debt that we take on??!

]]> By: Andee Sellman, One Sherpa http://7million7years.com/2009/06/23/debt-as-a-hedge-against-inflation/comment-page-1/#comment-3105 Andee Sellman, One Sherpa Thu, 25 Jun 2009 20:59:55 +0000 http://7million7years.com/?p=2679#comment-3105 Another great post Adrian. When I think about DEBT it is always in the context of what it is supporting. So DEBT on a credit card is completely different in my mind to DEBT on a business. As investors a key indicator of performance is RETURN on EQUITY and the higher the better. If I want to achieve higher returns it usually requires more investment than I have personally which is why we turn to the use of debt( leverage) to achieve the higher investments. So IF I've used DEBT to acquire more investments then the returns on those investments should pay off the interest on the debt and leave me with a great NET return on investment. PROVIDED the returns are in excess of the interest everything should be sweet. The risk? Interest is a fixed amount and payable in cash. Returns are fluid and may not always be in cash. So in many circumstances, paying off the debt can lower your opportunity to invest that money into investments which bring in returns well in excess of the interest on the debt. Another great post Adrian.
When I think about DEBT it is always in the context of what it is supporting. So DEBT on a credit card is completely different in my mind to DEBT on a business.
As investors a key indicator of performance is RETURN on EQUITY and the higher the better. If I want to achieve higher returns it usually requires more investment than I have personally which is why we turn to the use of debt( leverage) to achieve the higher investments.
So IF I’ve used DEBT to acquire more investments then the returns on those investments should pay off the interest on the debt and leave me with a great NET return on investment. PROVIDED the returns are in excess of the interest everything should be sweet.
The risk?
Interest is a fixed amount and payable in cash. Returns are fluid and may not always be in cash.
So in many circumstances, paying off the debt can lower your opportunity to invest that money into investments which bring in returns well in excess of the interest on the debt.

]]> By: Lynn http://7million7years.com/2009/06/23/debt-as-a-hedge-against-inflation/comment-page-1/#comment-3104 Lynn Thu, 25 Jun 2009 18:19:24 +0000 http://7million7years.com/?p=2679#comment-3104 Great site very helpful information Great site very helpful information

]]> By: Scott http://7million7years.com/2009/06/23/debt-as-a-hedge-against-inflation/comment-page-1/#comment-3095 Scott Wed, 24 Jun 2009 14:05:36 +0000 http://7million7years.com/?p=2679#comment-3095 Yeah I definitely understand that effect on my student loan, but I'm more interested in deflation or even disinflation's effect on my war chest and the return I can get by taking advantage of the current market FAR more than I'm concerned about it's effect on my low-fixed, locked-in student loan. The only reason I brought up my student loan is because like you said in your post, it makes more sense to leave it be and focus on far greater returns than what the interest rate on the loan is. But I had to mention that in addition to my strategy to just pay the minimum on that loan so that I can build up more war chest money, I got rewarded with a 1% interest rate drop on an already ridiculously low interest rate on the student loan. ;) Best of both worlds occurring at the same time, gotta love that. ;) Yeah I definitely understand that effect on my student loan, but I’m more interested in deflation or even disinflation’s effect on my war chest and the return I can get by taking advantage of the current market FAR more than I’m concerned about it’s effect on my low-fixed, locked-in student loan.

The only reason I brought up my student loan is because like you said in your post, it makes more sense to leave it be and focus on far greater returns than what the interest rate on the loan is. But I had to mention that in addition to my strategy to just pay the minimum on that loan so that I can build up more war chest money, I got rewarded with a 1% interest rate drop on an already ridiculously low interest rate on the student loan. ;)

Best of both worlds occurring at the same time, gotta love that. ;)

]]> By: Adrian http://7million7years.com/2009/06/23/debt-as-a-hedge-against-inflation/comment-page-1/#comment-3093 Adrian Wed, 24 Jun 2009 13:39:45 +0000 http://7million7years.com/?p=2679#comment-3093 @ Scott - if inflation makes your fixed rate loan cheaper in the future, then deflation must do the opposite! However, deflation tends to be a shorter term effect, so I don't really 'buy' the deflationary argument IF you intend to buy/hold for the long-term and can produce cash from your investment from the get-go ... at least, that's my opinion. Mike? @ Scott – if inflation makes your fixed rate loan cheaper in the future, then deflation must do the opposite!

However, deflation tends to be a shorter term effect, so I don’t really ‘buy’ the deflationary argument IF you intend to buy/hold for the long-term and can produce cash from your investment from the get-go … at least, that’s my opinion. Mike?

]]> By: Scott http://7million7years.com/2009/06/23/debt-as-a-hedge-against-inflation/comment-page-1/#comment-3091 Scott Wed, 24 Jun 2009 12:17:02 +0000 http://7million7years.com/?p=2679#comment-3091 I guess I don't understand why it's not a good idea to borrow in a deflationary(actually I think this is more of a disinflationary time than deflationary)recession market? When would you be able to find cheaper prices on anything? As the old saying goes, buy when there's blood in the streets. Get greedy when everyone is fearful. Do opposite of the herd. From everything i've read and studied now about finance, more millionaires are made from a recession than any other times in history because of cheap real estate, cheap businesses, cheap stocks, etc.. etc... I guess I don’t understand why it’s not a good idea to borrow in a deflationary(actually I think this is more of a disinflationary time than deflationary)recession market? When would you be able to find cheaper prices on anything?

As the old saying goes, buy when there’s blood in the streets. Get greedy when everyone is fearful. Do opposite of the herd.

From everything i’ve read and studied now about finance, more millionaires are made from a recession than any other times in history because of cheap real estate, cheap businesses, cheap stocks, etc.. etc…

]]> By: Adrian http://7million7years.com/2009/06/23/debt-as-a-hedge-against-inflation/comment-page-1/#comment-3090 Adrian Wed, 24 Jun 2009 11:19:47 +0000 http://7million7years.com/?p=2679#comment-3090 @ Mike - I agree; but, I'm also suggesting that paying down low-interest loans rather than keeping a war-chest to buy 'recessionary discounted' income-producing investments may not be such a good idea either ;) @ Mike – I agree; but, I’m also suggesting that paying down low-interest loans rather than keeping a war-chest to buy ‘recessionary discounted’ income-producing investments may not be such a good idea either ;)

]]> By: Mike Hunt http://7million7years.com/2009/06/23/debt-as-a-hedge-against-inflation/comment-page-1/#comment-3088 Mike Hunt Wed, 24 Jun 2009 08:22:08 +0000 http://7million7years.com/?p=2679#comment-3088 Borrowing in a deflationary / recessionary market is not such a wise idea. -Mike Borrowing in a deflationary / recessionary market is not such a wise idea.

-Mike

]]> By: Adrian http://7million7years.com/2009/06/23/debt-as-a-hedge-against-inflation/comment-page-1/#comment-3085 Adrian Wed, 24 Jun 2009 07:24:25 +0000 http://7million7years.com/?p=2679#comment-3085 @ Steve - Thanks for sharing. @ Steve – Thanks for sharing.

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