Other People’s Money
Use It Wisely
The leverage of other people’s money (OPM) can make you a fortune. It can also destroy your wealth just as fast if your investment goes south. The trick is to invest this money in things that increase in value.
You are “renting” money when you use OPM. That rent has to be paid in addition to other expenses before you can create a profit for yourself.
Credit card debt that remains for last month’s meal or last year’s vacation is debt that continues to burden your forward progress financially. A formerly successful business is now in trouble if they still have outstanding debt to repay when trends change or fickle consumers want a new fad.
A home that may be worth a lot more today than when you bought it was a wise use of other people’s money and helps you build your wealth. But there are times when houses go down in value (remember the 80’s?) No one knows when these “cycles” will abruptly change. Not even the “experts.”
Debt that remains for an asset appreciating faster than that debt and expenses is actually making you money. The trouble is, assets seem to fluctuate in value, making it difficult to determine whether you are investing in an asset or a liability.
Many people borrow against the equity in their home to start a business. This strategy puts your home at risk if things don’t go as planned. Some people used this strategy to buy stocks in the late 90’s on margin (more OPM) and lost their homes as well as their stock investments.
“Diversifying” is a favorite word among Brokers. This technique guarantees that you will be a non-expert in many of your “investments.” Be careful with your and other people’s money. Get to be an expert in one area, then focus your resources in this area. Add new territory as your time and expertise permits.
Whether building a business or investing, be extremely conservative about the use of other people’s money. Build up your own stash of cash reserves to manage cash flow requirements and weather the inevitable downturns.
Apply This Concept
We know an investor who had a sizeable real estate portfolio. When the "crash" hit, he was in position to take apartment buildings off the banks' hands for pennies on the dollar, and the banks gave him all the pennies he needed to buy these properties! As the real estate values slowly but steadily increased, he had his net worth double and quadruple seemingly overnight. Because he was not over-leveraged when the crash hit, had some cash, great credit, he was buying at the right time in the business cycle, and mostly because he was sophisticated about managing these properties, he was able to use OPM to make millions. His discipline allowed him to be "in the right place at the right time." What can you do to be in the right place at the right time? Your opportunity may be just around the corner, are you ready for it?Further Reading
Credit Counselling SocietyLaws of Wealth
