📖Warren Buffett

Never Use Leverage

🌱 Beginner★★★★★

Borrowed money amplifies both gains and losses — and the losses can be fatal.

💬

I've seen more people fail because of liquor and leverage — leverage being borrowed money — than any other reason.

— 2010 Berkshire Hathaway Annual Shareholders Meeting，2010

🏠 Everyday Analogy

Using leverage in investing is like driving an overloaded vehicle up a mountain road. While it may seem to get you there faster under normal conditions, when you encounter a sharp turn, the vehicle can easily lose control and overturn. Your own capital is your seatbelt, while borrowed money is a ticking time bomb.

📖 Core Interpretation

Why is leverage dangerous? 1. It amplifies mistakes. 2. Time becomes the enemy (potentially forcing liquidation at the lowest point). 3. It undermines psychological stability. 4. It interrupts the power of compounding.
💎 Key Insight：Leverage turns temporary declines into permanent losses. If you buy a stock with 50% borrowed money and it drops 50%, you're wiped out — even if the stock eventually recovers. Buffett has never used margin. His patience and cash reserves have allowed him to buy during crises when leveraged investors were forced to sell.

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❓ Why It Matters

"The market can remain irrational longer than you can remain solvent."

🎯 How to Practice

Advice for ordinary investors: Never invest with borrowed money, and avoid using futures or options for speculative purposes.

🎙️ Master's Voice

We don't like leverage. There's no reason to. If you're smart, you're going to make a lot of money without borrowing.
Buffett has seen leveraged investors destroyed repeatedly. During 2008, leveraged hedge funds collapsed. In 2020, leveraged investors got margin calls at the bottom. Berkshire has never used significant leverage in investments. This conservatism allows aggressive buying when others are forced to sell.

⚔️ Practical Guide

✅ Decision Checklist

  • Am I using borrowed money to invest?
  • Could I survive a margin call?
  • Is my leverage appropriate for volatility?
  • What happens if my investments drop 50%?

📋 Action Steps

  1. Avoid margin in personal investments
  2. Never borrow money you can't repay
  3. If using leverage, stress-test extreme scenarios
  4. Keep dry powder for opportunities

🚨 Warning Signs

  • Using margin for speculative investments
  • Leverage without stress testing
  • Borrowed money for risky investments
  • No plan for margin calls

⚠️ Common Pitfalls

✕Leverage is beneficial because it amplifies gains—but it also magnifies losses, creating an asymmetric risk profile.
✕As long as the leverage ratio is properly managed, there should be no issue—however, black swan events are unpredictable, and any leverage carries the risk of being wiped out.

📚 Case Studies

1
LTCM Collapse (1998)
25x Leverage, Nobel Laureate Team
✨ Outcome：Nearly triggered a financial crisis, leading to bankruptcy.
2
Archegos Capital Management's Margin Call Crisis (2021)
Bill Hwang used derivatives to add leverage.
✨ Outcome：Loss of $20 Billion in One Week

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