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LIQUOR AND LEVERAGE
“I’ve seen more people fail because of liquor and leverage – leverage being borrowed money. You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing.” — Warren Buffett
I wanted to share a brief article on Carl Icahn and how he's lost $17 Billion, yes with a "B" dollar in roughly 3 months. For a brief backdrop, you need to understand the players:
Carl Icahn is an investor who is known as a Corporate Raider. I'm not sure if that term is completely fair because there is a common term used in the investment community which is used to describe the INTENT of investment firms who accumulate a large amount of shares in a company. You must formally file a document that indicates if you plan to be a "PASSIVE" investor or an "ACTIVITST " investor. Icahn is the typically an activist investor. I guess activist investors also have an offshoot branch of their party called Corporate Raiders. Change can be positive and of course it can be negative. The Corporate Raider typically forces change in a company that some may see as a negative force. An example may be buying up large shares in a company, then firing a majority of the staff to quickly reap the profits and then leaving. The character most often associated with this label is Gordon Gekko from my favorite movie Wall Street.
I wanted to share an article and a link on the negative impacts of leverage. That means borrowing money to invest in something. Over the years, I written about the perils of borrowing money. It can be a very dangerous tool to use. But it is so commonplace we forget that many of us use credit cards, mortgages, payday loans, buy now pay later schemes to fund our lifestyles. I call these items instant gratification. I believe there are rules to leverage and for example, I use mortgages to purchase my homes/investment properties. But I am also aware of my sources of income that would be used to buy said properties and homes. If those sources dried up...I'm sorry to say it's time to sell or give that home back to the bank. I would do it in a heartbeat. As for other types of credit or leverage, I stay clear of them. Here are a few examples:
Credit Cards - Yes, I use them, but I pay the balance in full each month. A future post on why then I even use credit cards at all coming soon.
Borrowing from Friends - I don't do it because it could end a great friendship.
Borrowing Against a Home - I don't do it because now, if I took out a loan against my home, now I've leverage my home as collateral. This is a possible way to lose my home and I definitely wouldn't do this against my primary home.
Now these are just my personal thoughts and yes, they are strict, but like Buffett I'm just not a fan of leverage and for the past five years liquor either (except Tequila or Cognac on special occasions).
It turns out Icahn has been using leverage as he runs his investment firm as a public company trading on the US stock exchange. Please read the first article which exposes his leverage:
1) Hindenburg Research Work on Carl Icahn's Company: Hindenburg Research - ICAHN
Key Takeaways that risks of Debt, Leverage, and Conflicts of Interest:
a) Debt: Hindenburg alleged that Icahn's firm has sell new shares (called units) to distribute new dividend payouts, which they called an unsustainable economic structure. Why might this be unsustainable?? Well Icahn's firm has not performed well dating back to 2014, losing 53% during this time.
Don't Believe me Just Watch: Since 2014 Icahn lost $4.9 billion in free cash flow BUT the firm continued to pay cash dividends of almost $1.5 billion during this period. And these types of results or returns have continued since then.
Urbanomics Lesson: Do get into too deep to debt, it only leads to hard times. Balance in life and balance in your finances
b) Stop Playing Game 'Hoe': Hindenburg then noted that Icahn's portfolio valuations are inflated. This might be considered financial shenanigans and using these valuations to pay dividends or get other loans could come back to haunt you.
Don't Believe me Just Watch: Hindenburg found a few situations where Icahn's firm valued companies they invested in on their books MORE than than the entire worth of the company itself.
Urbanomics Lesson: Don't fake the funk. Stop claiming your car is worth $XX when you've had it for 5 years. It loses value, you can't sell it for what you bought it (usually). Next using these false valuations to get more leverage could squeeze you.
a) Leverage: Hindenburg also alleged that Icahn's firm obtained credit debt between the years 2017 and 2021. Debt was super cheap during this time. Well like interest only loans, these debs will need to be refinanced and now rates are much higher. Nothing is wrong with refinancing again if you use my motto of knowing your sources of income. But it was alleged that Icahn is using his own shares in the company as collateral to obtain loans.
Don't Believe me Just Watch: 60% of his Icahn's shared are being used to support the loans. This type of leverage is a risky because if the price of the stock declines, the banks can ask for him to fork over those shares AND even come up with more money. I assume the banks would want to sell those shares right away to recoup their loan investments. Icahn has not disclosed his collateral agreements used for these loans and quite SIMPLY that could be risky for people owning the stick.
Urbanomics Lesson: While Icahn may understand the risk, using leverage and not knowing the details could bring pain to investors in this stock.
Since this article came out in MAY, the stock in Icahn's firm as plummeted and he personally has lost over $17 Billion dollars. Don't cry for him as he is still worth over $7 Billion, but its a great case study on how to be careful and why I'm not a fan of debt and leverage.
#liquorandleverage
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