Friday, December 3, 2010

Debt Issues

For personal investment, some like to use debt, some avoid using debt. There are no right or wrong on this matter. To me, is all depend on which asset class you invest. Using debt in stock investing is very risky, but in property investment it is a leverage game. Give an example below, see which camp you prefer.

Case 1:
Cash = 30K
Debt = Nil

Case 2:
Cash = 30K
Asset = 100K
Debt = 100K

Case 3:
Cash + asset = 130K
Debt = 100K

Case 4:
Cash + Asset = 530K
Debt = 500K


All the 4 cases above, you net worth are the same, 30K only.

The tricky issue here is if your able to turn debt to "self financing" with surplus; then how we going to treat or classify this debt?

Are Case 1 is wealthier than Case 4??
Sure Case 4 is richer, althought the net worth is still the same.


In stock market, some of the listed companies like IOI and QL, are using debt to grow their business. So are this type of stock worth investing?

Personally I dont like this group of stocks as investing in stock market is already high risk investment. Better not to compound your risk.


In property investing, is also dont compound your leverage by buying cash depleting "asset".


  1. "Personally I dont like this group of stocks"

    cost of debt = 6%+ (blr)
    return on debt = 15%+

    debt is good for a high roc/roe/roa company, as long as it's not too high

  2. Pikachu, all these roc/roe/roa is not very useful to reduce your risk in stock investing. Based on theory, it is correct, but in actual it is not. Sometimes you vested company may end up has bigger "shaky" profit but rock solid debt.

  3. if our annual earning/profit is more that the debt's interest. Why not invest with debt/borrowing? that's money makes money.

  4. Angel Stone, i agreed that most of the companies using debt to expand or doing business. Actually nothing wrong with that. It is only my personal preference to avoid these groups. Like i mentioned earlier, i just dont want to compound my risk exporure. The acceptable level of debt to me is that able to be repaid from maximum 3 years cash flow generated.