Warren Buffett believes investors should avoid using borrowed money to outperform.
The Oracle of Omaha explained the perils of using debt and leverage in his 2017 annual letter to Berkshire Hathaway shareholders released on Saturday.
"Berkshire, itself, provides some vivid examples of how price randomness in the short term can obscure long-term growth in value. For the last 53 years, the company has built value by reinvesting its earnings and letting compound interest work its magic. Year by year, we have moved forward. Yet Berkshire shares have suffered four truly major dips," he wrote.
The investor shared the data which revealed Berkshire Hathaway's stock declined by a range of 37 percent to 59 percent multiple times over the last five decades.
"This table offers the strongest argument I can muster against ever using borrowed money to own stocks. There is simply no telling how far stocks can fall in a short period," he wrote. "Even if your borrowings are small and your positions aren't immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions."
Buffett predicted the company's stock will fall again by similar large declines in the next 53 years.
"No one can tell you when these will happen. The light can at any time go from green to red without pausing at yellow," he wrote. "When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt."
Buffett blasted the belief that bonds were a lower risk investment over the long-term. He recommended investors stay in equities due to negative impact from inflation on the purchasing power of fixed income holdings.
Source: Bloomberg Pro Terminal
Jr Trader Alexander Kumanov
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