Investing successfully in finance: beware of debt trap

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Text comes from: Des klugen Investors Handbuch: Warum man mit Nein! das meiste Geld verdient und mit welchen Großaktionären man sich ins Bett legen darf (2016) from Dr. Markus Elsässer, published by Münchener Verlagsgruppe (MVG), Reprints by friendly permission of the publisher.
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The best way out of the debt trap is not to get in the first place. Especially when it comes to investments.

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Here writes for you:


Dr. Markus Elsässer is considered one of the best bankers and fund managers in Europe.


From the author:



Debt can be dangerous

Saving money starts with smart investments. It is worthwhile to set the course early for a lifelong economy. The approach "10 percent of the gross model" is a painless entry. It is tempting for entrepreneurs and investors to work with credit. But debtors live dangerously. My experience tells me: equity is better.

A young acquaintance, a student of business administration at a well-known German university, recently told me about his second semester. We talked about entrepreneurship and how to become self-employed. He proudly presented the conclusion from his lectures on financing: In any case and absolutely, the entrepreneur should always work with as much credit and comparatively little equity. He spoke of "leverage" and the great return on equity. I could hardly believe it. I was really shocked. His older brother, who had recently founded a small company in the media industry, also fell out of the clouds. This theoretical nonsense is common. The dangers of borrowing are largely underestimated.

When debts are justifiable

For me, debts are justifiable in two cases: First, when financing real estate with long-term mortgages. Although that is also a matter of taste. I know a lot of investors who basically pay houses without bank help by their savings to 100 percent. That makes you free and independent. And if one day you are confronted with a vacancy of the property and the rental losses drag on, you will not be asked to report by an unfriendly banker. In addition, when certain age limits are reached, for example to the 75. Birthday, the lending banks' propensity for loan extensions is declining rapidly.

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On the other hand, credit financing of inventories and customer orders has been common for merchants for centuries. This is usually about short terms with clearly calculable profit margins, which are project-related. Commercial credit is a crucial tool for the level-headed merchant.

The challenge for the merchant these days is in a different area: first find a bank that lends you money on goods transactions. I recently had an export merchant with me. He has years of experience doing business in Iran. Now that the political blockades have been lifted, he now wants to use his country contacts and boost export business to Iran. Even with firm orders with really enormous profit margins, he finds no bank that grants him 50.000 euros in credit (so much for the real effect of the zero interest rate policy of the central banks to stimulate the economy!).

No bank debt please!

I advise against bank debt in almost all other cases. Basically, the compound interest effect is underestimated by borrowers. Loan rates that run against you and are not repaid immediately add up to large sums. For example, if you borrow 100.000 euros at 7 percent per year and want to pay them back after ten years, you will receive a final bill of 196.715 euros. It has always been this way: savers with reinvested interest or dividend income get richer over time. The loan interest payers, on the other hand, are getting poorer and poorer.

If I am in the stock market after good Company Keep an eye out, then I avoid companies with high bank indebtedness. I am not so much concerned with the interest effect. The independence and security of the respective stock corporation is important to me. Crises have repeatedly shown how dangerous bank debt can be for companies. If orders break down overnight in some industries, as in the years 2008 and 2009, things get uncomfortable with the banker. Many entrepreneurs told me that they could hardly believe their eyes and ears. The tone and atmosphere, once friendly and understanding, changed dramatically in the bank meeting room. The dear financiers of yore were hardly recognizable. The thumbscrews were put on. Sure, there are commendable exceptions, but I wouldn't hope for them as a company leader.

The probability that the banks will intervene massively in the company's business policy in the event of a crisis is high. I praise Lindt & Sprüngli AG in Switzerland. In 2008, the board of directors announced clearly that - despite the difficult and at the time uncertain global economic situation - it would stick to its five-year investment program to improve production processes. I enjoyed that. At Lindt & Sprüngli, the banks do not play a major role in financing issues. The company has a lot of equity, reserves from decades and a strong cash flow. As a stock market investor, I like to look for that. The so-called »leverage effect« through the targeted use of debt capital on the one hand and a reduction in equity on the other hand is too dangerous.

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Only something for beautiful weather sailors

This is something for "SchönWetterSegler". I don't go on board with them. These companies do not get my capital on the stock exchange. As far as the investor is concerned, he should also rethink his position. Investments on the stock exchange are always associated with risks. And even the best stocks with so much equity and wonderful market shares in their industry can crash in price in a stock market panic. 50 or 70 percent and more in price losses, that has happened more often in the past - also for "blue chip" stocks. And it will always stay that way. Because the stock prices on the stock exchange are not based on objective evaluation criteria of what actually exists. No, theCourses are made purely by supply and demand. If nobody wants to buy but others have to sell, then share prices collapse to zero. As unpleasant as it is to finance my deposit with my savings, I can sit out a period of irrationality and madness. But with bank debt? How is it going to be nervous with me?

I therefore advise against lombard loans, ie the lending of a stock portfolio, in order to be able to buy more shares. Even if the lending rate is so low, the equity investor is playing with fire. We had such cases in the big Internet and TelekomCrash of the years 2002 and 2003. I know of investors who have 25 percent loaned their custody accounts at lofty exchange rates, with good encouragement and applause from the bank. At the low of the March 2003 courses, they had lost all of their assets. The bank forcibly sold its shares. That is just the effect with Lombard loans: the debts remain, or they continue to grow due to the interest charges, while, for example, Telekom shares fell from 80 euros to ten euros at the time.

Regardless of Lombard loans, I say that those who have bank debts should generally not acquire a stock portfolio. First pay off your debts, save real equity and only then venture onto the trading floor. This is old fashioned and may take a few years of patience. In the next financial crisis you will (hopefully) think of me.

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