Warren Buffet Advises Listeners Not To Borrow Money To Buy Stocks


There is almost nothing that Warren Buffet would tell a person to allow to get in their way of buying stocks. However, if you do not currently have the money to make those purchases, then Buffet does not want you to be buying stocks.

In his annual letter, Buffet says that people should not borrow money in order to purchase stock. It does not matter how appealing the stock may be or what the interest rate would be on the loan. If you do not have the money to make the purchase, you simply do not have the money to make the purchase.

CNBC.com details how the Oracle of Omaha has warned those who read his annual letter to shareholders of Berkshire Hathaway that there is a lot of danger in borrowing money to buy stocks.

The main issue with doing this is that it amounts to market timing. Buying stocks with borrowed money is assuming that you can outpace the interest rate that you pay on the borrowing in the first place. That is a dangerous assumption to make. Even if the interest rate appears low on the loan, there is no way to know for sure what kind of return to expect from the market. It could be a worse than usual year and throw your entire strategy off. If that does happen, then watch out because you are bound to be in some serious trouble at that point.

The market is near all-time highs at the moment. To borrow money to purchase stocks at this point would be the height of risk taking. Markets tend to have periods of correction after they have been riding high. Someone who gets caught up in a market correction could end up losing out all of the money they put into stocks. Then they would have to pay back the loan that they took out to purchase the stocks in the first place as well.

All in all, this is never a place that you want to be a prudent investor. If possible, avoid this like the plague. Focus on saving up your own money to make investments. You will likely pick your stocks more diligently and carefully if it is your own money at stake in the first place. When you look at it this way, it makes a lot of sense to be patient and wait for the money you want to invest to actually be in your own bank account.


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