Warns For Investors Given By Warren Buffet
Warren Buffet, a famous entrepreneur and investor, prevents other investors from borrowing money
in order to buy shares of stock. He addresses to Berkshire Hathaway, to his main investment trust
company and broaches the problems of loans and margin debt which are used for buying stocks.
Investors collected a huge margin debt (about $643 billion), that can influence on future sales badly.
The process will be the following: the pledge cost looks down, and because every share is planned
to have collateral not to face loans, loanees start to sell the stocks. Such actions make prices much
less and as a result, there are more and more selling. All these things happened when the market
was changing last, a lot of investors were embarrassed.
In the letter, Warren is talking about his own experience with stocks, which can be counted as the
main argument against margin debts. When he took the power in Berkshire in his hands, the stock’s
price was about $19. It was 1964 and the opening price was more than $311, which means every
invested dollar now is valued at $16. However, W. Buffet is paying our attention to that it wasn’t an
obvious upward ride and investors who borrowed money for buying stocks finally lost everything.
They were to pay off much and as a result, lost out pleasant future opportunities. He also explains
that it’s impossible to predict the falling of stocks in a near-term outlook. Let’s look at the statistics
which Buffet is giving about Berkshire shares. There were four periods of price falling: down 59%
in 1973-1975, down 37% in 1987, down 49% in 1998-2000 and down 51% in 2008-2009.
Last half of the century Berkshire Hathaway was building the costs reinvesting its incomes and
allowed the compound rates of return to do their work. Nevertheless, Warren predicts the same big
falling of share value as aforementioned in the next 50 years. He compares these processes with a
traffic light: “The light at any time can go from green to red without passing the yellow”.