 Good day fellow investors. Today we are going to discuss investing and debt. Should you take a loan and invest it? Investing is much more than just picking the right stocks. It's at first proper capital allocation in your portfolio. And one of the main things, the opportunities that we have in life is to use other people's money. If you take a loan and buy a luxury car, that's bad debt, because the value of the car will depreciate over time, your cost will be very high and that's both a liability, both the loan, both the car. However, if you take a loan and you invest in something that creates value, then it could turn out very very well for you. Let me start by showing you an example of loan investing versus no loan investing. Then we'll discuss what's the most important thing when taking a loan and investing in something. Four things to be careful about. And at the end we'll discuss what Buffett says and I'll show you a personal example of how a loan really positively affected my and my parents life. So the example, let's say we invest in a rental house. Let's say the price is $200,000, the rental income is $12,000, so the return on investment is 6%. Easy, rental income, no problems. Let's do it with leverage rental house. Down payment in the US is 20%, so we need $40,000 to buy the house. The price of the house is $200,000, the rental income is then again $12,000, the interest rate on the debt is 4%, 4% on the $160,000 loan that we have to take to buy the home. Interest yearly costs on the whole loan $160,000 would be $6,400, rental income was $12,000 minus the $6,400, the profit from the rental income is $5,600. We invested in this case $40,000 and the profit is $5,600 per year. The return on investment is 14%, much higher than the 6% in the investment without a loan. So using leverage can of course increase your investment returns. However, you have to be smart about it. It's not just, okay, I'll take a loan and invest it wherever. The first rule is that the return on your investment has to be higher than the cost of your loan. That's essential. So taking personal loans. In Europe, I have seen also interest rates of 4%, 4.5% on personal loans. So that's very interesting. Mortgages are very attractive because you can refinance your home, take out the equity of your home to invest. So you should really analyze what is the cost of something like that and then compare it to the investments out there. Be careful, stocks are not the place to just invest now or refinance mortgage. However, if you keep that option open, for example, you're thinking of buying a new car and you say, no, I will not take a loan for a new car. I will keep the opportunity to take a loan to invest in stocks when the next recession comes. Then you really, really can hit the jackpot. But always look at the psychically adjusted price earnings ratio. There is a video link is in the description where the earnings hit at least 10%. And if you can take a loan of 5% on that, then in the next 10, 20, 15 years, your returns will be much, much higher than if you haven't invested anything. So also if you're fully invested now, you won't have the money to invest in the next downturn. So having the opportunity to take a loan is an excellent, excellent idea. The four things to be very careful about is take a fixed interest rate. Everything can change. There can be inflation, there can be whatever. If you have a fixed interest rate, you do risk a lot of the things that can happen. Be sure to take the loan in the same currency as the investment is. Some people were very attracted by the 8% return on Russian bonds two years ago. However, the return is now 4% and the capital invested is 50% of what was invested two years ago because the rubble depreciated. So that's something very, very important to watch. Number three, look at the risk of the assets you're investing in. What can happen in the worst case scenario in a recession in, I don't know, the end of the world, will the assets still be yielding a yield higher than your interest cost? If that is the case, then and only then you invest. Back to the SAP 500, the current cyclically adjusted price earnings ratio is 30.83. That implies a 3.24% return in the long term. It's very difficult to find a loan at below 3%. So it's really not smart to invest in stocks now. However, if you look at the red line, that is when the cape was below 15, that implies a return of 6.6%. 2009, 1991 and if then you could have taken a loan at 4% that we are now 3%, then it would be smart. In 2009 it was possible, 2019 is not so much, but nevertheless in the 1980s stocks were yielding 15, 16, 17%. The fourth thing and something absolutely to avoid is margin investments. If you take a mortgage, you have 30 years to pay it back. If you take a margin, you have 12 months and if the stocks you bought fall, you will be getting a margin call and you will be forced to sell those stocks at the lowest point. And that's something terrible. Therefore avoid margins at all costs. The historical perspective, the current interest rates are at absolute historical lows. So if you take a loan with a fixed interest rate now, you practically cannot go wrong. What can happen is that interest rates go higher with inflation with something happening and then your loan, your interest rate is fixed and then you can really profit. Now, what does Buffett think of this? Buffett's famous quote is, if you are smart, you don't need debt. If you are not smart, you better stay far from debt. However, this is another half truth of his. If we look at Berkshire's balance sheet, we can see that total liabilities amount to $344 billion, which is 55% of total assets and is higher than the equity. This means that Buffett's returns are leveraged. So he is borrowing money to finance 55% of the assets he uses to make the money. So even Buffett is using debt. So if Buffett is using debt, we should too be thinking about debt. To end on a personal example, I was born in the Socialistic Federative Republic of Yugoslavia, which wasn't in a great place in the 1980s and they started printing money, similarly to what's going on now in the US, Europe and Japan. So my parents built this house in 1985 and my father signed a contract where he was supposed to pay half of his salary for the next 40 years, 1985 up to 2015. However, as the country was printing money, there was huge inflation and in 1989 the bank called my father and asked them, can you pay the whole mortgage off in one go? Remember, it was half of his salary when he took the loan. Four years later he asked, okay, how much is it in Swiss francs? So to pay off 25 years, 26 years for the mortgage of this house was 135 Swiss francs, thanks to the fixed interest rate and tax thanks to the depreciating currency. So with all the monetary things that's going on, perhaps if there will be inflation, if there will be higher interest rates, which is highly likely in the next 10-20 years, if you take a 30-year mortgage with a fixed interest rate and there are currency evaluations, there are financial thermals, financial stocks, you might really find yourself paying a small, small mortgage monthly payment for an asset that's highly valuable, highly appreciating your value, bringing you a high yield and then you won't even feel it. So it's a risk reward situation. If you're smart about it, I think we should think about taking a loan once a decade, there is opportunity when loans are cheap and returns are high. If you're ready to take a loan, then you have to prepare your credit score or everything. Now already, if you're ready to take advantage of that, then you can really, really create yourself a nice retirement by using other people's money. So speed up everything. Thank you for watching. This is a very delicate topic, so I expect a lot of comments from you and I'm looking forward to reading them. I'll see you in the next video.