I absolutely despise debt. It drains the joy out of life. But it wasn’t always this way for me. In business school, I learned the benefits of using other people’s money. Even Warren Buffett has billions in bonds, essentially a form of debt with a nice label. But debt can be destructive. I know this firsthand.
Back in the early 90s, I had a good job and decent income. Real estate was booming in Southern California, but we didn’t have enough saved for a down payment. An ex-friend suggested equity sharing: someone provides the down payment, and we take on the mortgage. When we sell, we split the profit evenly. It sounded like a win-win, especially since the real estate market was only going up.
Then, the mid-90s hit and California’s economy took a sharp downturn with the end of significant military spending. I lost my job and finding a new one wasn’t as easy as I thought it would be. During a recession, you can lose your job, your house, everything. That’s what happened to me. I was arrogant, thinking it would never happen to me. But it did.
We lost our house to a short sale. The person who bought it got an amazing deal because they had cash, paying $70,000 less than we did. I was devastated because if I had been a bit more patient, I could have bought the house at that price, too. Instead, impatience and debt had cost us everything. We had to start over from scratch.
I made a vow then: Next time, I’d be on the winning side of such deals. Recessions, I realized, are the best times for prime opportunities, and I promised to be ready, even if it meant living frugally in the meantime.
Failure on that scale teaches you a lot. I discovered a determination in myself that I never knew was there. My wife was incredibly supportive, and we began saving aggressively. At first, saving seemed futile, but our determination to be on the right side of “The Deal” kept us going. We even bought a business hoping to flip it for profit before the next recession and kept maxing out our 401(k) contributions.
Then came the economic downturn of 2008. Our business didn’t survive, but fortunately, we had started shifting our 401(k) money into safer investments before the crash. We did take some losses, but emerged relatively intact. As the stock market crumbled, I remembered Warren Buffett’s advice to be greedy when others are fearful.
By the end of 2008, I was looking for companies with little debt whose stock prices had fallen dramatically. I found many such companies and wanted to invest, but our funds were tied up. So, I did the unthinkable: I borrowed every penny I could from our 401(k) plans to buy these stocks.
I wasn’t trying to time the market perfectly. I knew that over three to five years, these stocks would recover. When we rolled our 401(k) plans into IRAs after wrapping up our failed business, our investments had quadrupled in value over just two years. Without the loans, we’d have missed out on two-thirds of those gains.
Was I tempted to borrow again? Absolutely. But I knew the saying: Bulls and bears make money, but pigs get slaughtered. So, I resisted. Today, I’m glad I did because the prime recovery period of the stock market is behind us.
Sometimes, exceptions to the rule can work in your favor. I had been burned by debt before but managed to use it to claw back some of those losses later on. Now, I feel it’s a good time to stop playing with fire and enjoy the recovery.
