Investing with borrowed money can be a temptation for many investors who want to increase their profits. However, you need to understand the risks involved.
In this article we will analyze these risks from the perspective of the large investor André Kostolany, of which we have already commented on his biography and investment style on this website.
Kostolany's opinion on investing with borrowed money
André Kostolany makes his position about investing on credit very clear in his book "Teachings of Kostolany":
"Only those who have other assets greater than the credit that they owe can buy securities on credit. I am even inclined to say that stocks should not be bought with credits under any circumstances, unless one is a true lover of chance. "
This great investor helps us understand the risk involved in investing with borrowed money through two stories that happened to him during his career: the heart attack of Dwight Eisenhower and the rebellion of four French generals in Algeria.
Eisenhower's heart attack
This history dates back to the mid-50s of the last century. During that time the economy grew, the US led the world thanks in part to the management of the This story took place in February 1.962. Kostolany was back in France, with his assets invested in the Paris Stock Exchange, but this time without borrowing money. Unexpectedly, four French generals rebelled against the government of Charles De Gaulle for his intention to liberate Algeria. This caused panic to explode in the French stock market and the bags fell sharply.
It seems that history was repeating itself, but this time Kostolany was prepared. That day instead of going to the Paris Stock Exchange, he decided to go to his favorite restaurant "At Louis”. In the middle of his lunch, a colleague informed him with fear of the fall that the stock market was experiencing due to the Algerian rebellion. His answer was a simple "so?" And he continued eating calmly. This time he had no reason to worry.
Kostolany knew that this incident would eventually be resolved, as it did, and that the bag would also recover. He was able to stay calm by not investing with borrowed money that put pressure on him. This time, André was able to keep his investments and see how they recovered in a short period of time, thanks to his ability to learn from mistakes.