The Risk of Leverage

🧠 Core Philosophy

Leverage—the use of borrowed money to finance purchases—is viewed by Warren Buffett as a deadly financial weapon. Even if the amount borrowed is small, the unpredictable nature of market drawdowns can force rational people to make irrational decisions, turning temporary market panics into permanent capital losses.

📅 Evolutionary Timeline

The General Warning

• Throughout Berkshire's history, Buffett has consistently warned against using debt to buy stocks, noting that the mathematics of compounding do not work when interrupted by a margin call. "It is insane to risk what you have and need in order to obtain what you don't need."

2017: The Four Major Dips

• In the 2017 Letter, Buffett presented a table demonstrating the extreme volatility inherent even in a fundamentally sound business like Berkshire Hathaway. Over 53 years, Berkshire's stock experienced four major drawdowns:
  • 1973-1975: -59.1%
  • 1987 (Oct): -37.1%
  • 1998-2000: -48.9%
  • 2008-2009: -50.7%
• Buffett used this data to offer 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.
• For investors without debt, these plunges are opportunities. For leveraged investors, they are a path to ruin.

🔗 Connections

• Sources: 2017 Letter
• Entities: Warren Buffett
• Related Concepts: Margin of Safety, Inactivity as an Advantage, Mr. Market