Fundamental Rich Guy Tactic: Borrowing Against Assets

I saw a spark of brilliance the other day in Wall Street Bets of all places. Before you judge, just understand I read 1000 things to bring you what I believe are the best couple every week.

Someone posted this meme:

via Reddit

And in the comments, some genius posted this response:

There’s such a simple brilliance to this. If you get it, you can close this post now.

If not, no worries, let me break it down.

It’s All About Rates of Return

Background: a single class-A share of Berkshire Hathaway runs about $453,840 these days. Because these are so expensive, they are much less liquid, out of reach of most retail traders, and aren’t day-traded like meme stocks or the latest sh*tcoin.

Not too volatile.

Meanwhile, a new Lambo starts around $200,000–500,000. A quick perusal of Kelley Blue Book told me the cheapest, used Lambo is just over $96,000. There was only one model under 100k.

The difference between them: BRK-A will get more valuable, while Lambos will depreciate.

On the pure economic calculation of this, you should forgo the Lambo and get the share. But you’re a human, and a stock share can’t lick the win through your hair.

The Simple Brilliance of Collateralization

Learn that word. It’s real, I’m not making it up.

Berkshire’s growth this past year, in an inflationary environment, has been 24%, but the actual 5-year return is closer to 5.5%.

Still, assuming that trend continues, your $453,840 share today will be worth $593,150 in another five years.

In those same years, a $200,000 car depreciating 4% a year will be worth $163,074.

The calculus is pretty simple. One rate of return is significantly better than the other. The real magic is the fact that you can do both. You just have to secure the better one first.

What are the risks?

  • Your Berkshire stock won’t be liquid in case you decide to sell it
  • Berkshire could tank (unlikely, but possible, maybe when Buffett passes on)
  • When you decide to be rid of your car, you will have to liquidate your share to pay off the remaining balance (BRK-A does not pay dividends)

If you wanted to eventually get rid of your car and keep your Berkshire share, then you’d need to use other cash to pay off the difference between what you bought the car for and what you’re selling it for (ranging from $50,000–150,000 in depreciation, depending on where you started).

Maybe you assume you’ll earn more cash in the years you have the car? Maybe the car is your “ticket” to high-net-worth circles. Maybe. Don’t buy for that reason alone, though.

If you were really keen on a Lambo, I would not recommend buying one, but leasing (at least at first). For those with a middle-class background, leasing a car sounds like a terrible idea (and it is for people who should just be living cheaper). But once you actually have the cash to sit on, it’s a different story.

That deserves its own post. So for now, don’t buy depreciating assets without first imagining how you might collateralize.

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