Better investing through leverage.
In the years before 2007, there were two common attitudes toward fast-rising debt levels: complacency or greed. Many central bankers mistook what was really a symptom of illness as a sign of innovative fever, a new-era financial system that could slice, dice, and disperse risk to those who could best bear it. Banks, hedge funds, and households were borrowing oodles of money to bet that housing prices nationwide would never fall much. Lenders tried to eke out extra yield by investing in complex mortgage-related securities, and in doing implicitly made the same bet. Perhaps you remember what happened when house prices did fall. Unsurprisingly, many investors, brutalized by the financial crisis, see debt as an unmitigated bad thing.
It is not, and it never was. Investors are acting like a hungover frat boy who swears off alcohol forever after binge-drinking the night before. Like alcohol, leverage, in moderation, can make life a lot more pleasant, with few ill effects.
Samuel Lee does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.