By
Borsgade
In his latest memo, Howard Marks explains that debt is used to increase capital efficiency because debt is generally cheaper than equity, allowing greater asset ownership and potential profits when conditions are favorable.
However, he warns that leverage also amplifies losses similarly when conditions are unfavorable. Leverage introduces risks such as the risk of ruin, particularly during market downturns, where volatility can exacerbate the impact.
The right way to think about debt may be best captured by one of the oldest maxims: “There are old investors, and there are bold investors, but there aren’t many old bold investors.”
Using a moderate amount of borrowed capital balances the desire for enhanced gains against the awareness of the potential negative consequences.
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