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As
always, Jeremy Grantham’s quarterly investment letter(.pdf) is well worth reading,
a good portion of it taking up the issue of how capitalism has failed us and
another recounting GMO’s surprisingly good market calls over the years,
but item number two in the section on investment advice was what grabbed my attention:
“Neither
a lender nor a borrower be.” If you borrow to invest, it will interfere
with your survivability. Unleveraged portfolios cannot be stopped out,
leveraged portfolios can. Leverage reduces the investor’s critical
asset: patience. (To digress, excessive borrowing has turned out to be an
even bigger curse than Polonius could have known. It encourages financial
aggressiveness, recklessness, and greed. It increases your returns over
and over until, suddenly, it ruins you. For individuals, it allows you to
have today what you really can’t afford until tomorrow. It has proven
to be so seductive that individuals en masse have shown themselves incapable
of resisting it, as if it were a drug. Governments also, from the Middle
Ages onwards and especially now, it seems, have proven themselves equally
incapable of resistance. Any sane society must recognize the lure of debt and
pass laws accordingly. Interest payments must absolutely not be tax
deductible or preferred in any way. Governments must apparently be treated
like Polonius’s children and given limits. By law, cumulative
government debt should be given a sensible limit of, say, 50% of GDP, with
current transgressions given 10 or 20 years to be corrected.)
In
Shakespeare’s Hamlet, it was Polonius who said, “Neither a
borrower nor a lender be”, words of wisdom that seem to have gone out
of fashion over the last thirty years or so but that now seem to be making a
strong comeback.
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