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Warren Buffett has quoted his longtime enterprise accomplice Charlie Munger extra instances than he can rely. However probably the most memorable strains? It had a rhythm — and a warning.
“My accomplice Charlie says there’s solely 3 ways a sensible particular person can go broke: liquor, girls and leverage,” Buffett mentioned throughout a 2018 CNBC interview. Then got here the twist: “Now the reality is — the primary two he simply added as a result of they began with L — it is leverage.”
So whereas the road will get laughs, Buffett wasn’t joking. And he wasn’t being refined.
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Leverage — borrowing cash to chase greater beneficial properties — is the actual menace, the one one on that checklist Buffett says can truly take somebody down. It would not matter how good you might be. If the numbers flip in opposition to you, debt would not blink.
“Unquestionably, some individuals have turn out to be very wealthy by using borrowed cash,” Buffett wrote in his 2010 shareholder letter. “Nevertheless, that is additionally been a strategy to get very poor.” Then he delivered the sort of bottom-line fact most individuals ignore: “Historical past tells us that leverage all too typically produces zeros, even when it’s employed by very good individuals.”
Even Munger admitted they left cash on the desk by enjoying it secure. In a 2023 CNBC particular recorded shortly earlier than his dying, he mentioned, “Berkshire may simply be price twice what it’s now. And the additional danger you’d’ve taken would’ve been virtually nothing. All we needed to do is simply use a bit of extra leverage that was simply obtainable.”
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However they did not. And Munger defined why.
“The rationale we did not is the thought of disappointing lots of people who had trusted us after we had been younger,” he instructed CNBC’s Becky Fast. “If we misplaced three quarters of our cash, we had been nonetheless very wealthy. That wasn’t true of each shareholder.”
For Munger, that wasn’t a theoretical danger. After divorcing his first spouse in 1953, he was left with nearly nothing. Within the e-book “Rattling Proper: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger,” his daughter Molly mentioned he “misplaced the whole lot within the divorce” — together with the household dwelling. However he confirmed up for his children, labored his manner again, and ultimately constructed a fortune with out borrowed cash.
