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20 September 2008

THE CHICKEN HAVE COME HOME TO ROOST

Like all good sons, me and my brother used to have our regular disagreements with Father about how he never understood the 'new ways' of investing, how leveraging was the way to go and leveraging to pay for the new car was a done thing - he freshly armed with an MBA from the US and me with the street saviness of a financial rookie. We gave examples of how the US economy was the richest country in the world and was fully leveraged - from credit card debt to mortgage backed securities. Father patiently explained the concept of-'jitni chadar utne pare' - spread your legs according to the size of the covers.He also stuck to his guns and we bought the new car cash down.

Dad how true it was! Wish Alan Greenspan had listened to my Dad. Then we wouldnt have the spectacle of the richest country in the world scrounging around for money to keep its decades old institutions afloat.

This is also a lesson our own stock markets and individual investors would do well to understand - leveraging by itself is bad. Leveraging to buy an asset is good. And an asset by definition is something that brings positive cash flows , not one that merely gives a tax break and a notional high.

Mr Greenspan, your chicken have come home to roost.

2 comments:

LAL said...

Not really. If you have the cash and can finance something why not? I'd finance a car again if I got 0% interest like my DH did with his first and only car. Here 10 years later, are new cars bad? Yes, but if I had to buy one I'd try to pay cash or finance at a low enough rate to beat.

Puneet said...

0% interest? Thats interesting. Try working out the real cost of the loan. Nobody gives you a free lunch - not in business atleast. But if you got one - well enjoy it.

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