When a billionaire investor hands out financial advice, there’s usually something to it.
90-year-old Berkshire Hathaway CEO Warren Buffett is no exception. He’s on record as saying it’s a good time to take on debt given today’s historically low interest rates. At Berkshire’s 2020 annual shareholder meeting, he opined:
“This is a very good time to borrow money, which means it may not be such a great time to lend money … but it’s good for the country that it’s a good time to borrow money.”
Buffett’s words ring true at a time when:
- record-low borrowing costs are helping keep our frail economy afloat, and
- rates look to be making some sort of bottom, potentially a long-term bottom for all anyone knows.
Mind you, his is not a call for borrowers to over-indulge in debt to buy over-valued real estate. Leverage can be a wicked master of those who don't buy smart and live within their means.
But back to Buffett. His very own company followed his advice in 2020 and levered up. Filings with U.S. regulators show Berkshire has taken on over $1.8 billion in debt through bonds ranging from 2.00% to just 0.67%. And with rates near zero, no one can blame any financially stable prudent investor from doing the same.
More Buffettisms
What else has the Oracle of Omaha said about interest rates? Here are some of his more prominent quotes on the subject:
- “My circle of competence doesn’t include the ability to predict interest rates a day from now or a year from now or five years from now.” (Src)
- “I have never been able to predict interest rates. I’ve never tried…[Future] interest rates are important, but we don’t think they’re knowable…” (Src)
- “[Negative interest rates] puzzle me, but they don’t scare me.” (Src)
- “If you get a 30-year mortgage, it’s the best instrument in the world, because if you’re wrong and rates go [down significantly]…you pay it off. It’s a one-way renegotiation. I mean, it is an incredibly attractive instrument for the homeowner and you’ve got a one-way bet.” (Src)
- Note: Buffett’s comment was made in the U.S. market where most mortgages don’t have prepayment penalties. That’s not the case in Canada. Here, penalties drastically change the math and often make refinancing uneconomical.
- “…Banking is a very good business…You get your money extraordinarily cheap…You don't have to be a rocket scientist when your raw material cost is less than 1.5%.” (Src)
- On why Buffett got a mortgage: “I thought I could probably do better with [my] money than have it be an all-equity purchase of [a] house.” (Src)
And $85+ billion dollars later, it appears he was right.