Beg, Borrow Or Steal. Did Seth Get It Wrong?

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I love Seth Godin, he always challenges my assumptions.

But, in yesterday’s post, I wonder if he got it wrong when he shared:

Only borrow money to pay for things that increase in value. It’s a short list: your business, your house and your education, mostly. Stocks if you’re smarter than me. That’s pretty much it.

I agree in theory, but not so much in practice.

The problem is, this advice works far better in hindsight than in real time.

What does that mean? That you often don’t know what will increase in value at the time you want to borrow the money to fund it. And, this is equally true for business, housing, education…and stocks:

  • Business: Depending on who you ask, between 75 and 95% of all businesses fail within 5 years. So, if you’re playing the odds, the far more likely assumption is that a new business not only won’t increase in value, but it will likely end in failure (yes, I still am a staunch entrepreneur).
  • House: Over a period of decades, housing almost always appreciates, but for many with a shorter term horizon, there is a lot of risk in real estate. The millions of people who bought homes in the last 5 years and are losing their shirts are testament to that.
  • Education: Seth’s own post in October 2007 revealed the insanity of paying top dollar for an education that was far less determinative of success than intelligence and drive. And, how many of you have been really annoyed after dropping a nice chunk of change on some kind of career educational program, book or dvd only to find them sorely lacking in value?
  • Stocks: Two words, En-Ron. Two more, Bear Stearns. Again, over a period of many decades, as a whole, the market appreciates, but individual stocks often don’t follow suit and the broader market may go through swings of many years without appreciation or in decline.

It’s easy, in hindsight, to say it was a good idea to borrow money for these and other things…when they end up being huge successes in hindsight.

But, what about all the money borrowed for these very adventures that goes up in smoke?

I agree completely with Seth’s broader message…be really, really careful what you choose as the justification for indebtedness. Try like crazy to only borrow against assets and adventures that are most likely to appreciate in value or yield increased opportunity.

But, in the end, it’s all still all a big, old guess.

Even the examples given as the sole areas that justify indebtedness don’t pass the real-time sniff test. And, one other thing…

What about passion?

What about impact? What about service? What about the completely irrational, seemingly unjustifiable, odds-defying desire to borrow to set in motion a professional quest you believe in every fiber of your being will solve a pervasive problem or profoundly improve the human condition…and make millions?

How do these figure into the decision to incur debt?

Let’s discuss…

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14 responses

14 responses to “Beg, Borrow Or Steal. Did Seth Get It Wrong?”

  1. […] Go to the author’s original blog: Beg, Borrow Or Steal. Did Seth Get It Wrong? […]

  2. Neil Simpson says:

    The way I see it is that he is suggesting to only borrow money to invest in your capacity to earn more money (I think Steve Pavlina mentioned something about this a couple of years back), rather than purchasing “things”, which naturally depreciate.

    Good advice in general I thought 🙂

  3. Mark says:

    I absolutely agree with Seth Godin. I don’t think he is suggesting that your business, your house, your education, and your stocks will *necessarily* increase in value. The point is to not borrow to purchase things that you *know* will decline in value, such as cars, vacations, clothes, etc. However, this doesn’t mean that we shouldn’t borrow *intelligently* on things that have a good chance of appreciating.

    I discussed this very topic in one of my blog posts:
    Increase Your Wealth and Happiness by Using Debt Wisely

  4. Jonathan Fields says:

    @ Neil & Mark – Yes, we can all agree with the notion of NOT borrowing to invest in things that are almost entirely likely to only decline in value quickly. And, we can all agree that it’s a good idea to only borrow to invest in things that appreciate in value “in principle.”

    We’re all on the same page there.

    My question goes, however, to the difficulty of identifying those things “in practice.”

    This is the far greater challenge.

    If you were going to take the rational approach, and choose things with the greatest “likelihood” of success, then many highly worthwhile pursuits (including the better part of entrepreneurship), one’s with the potential to be extraordinarily rewarding, both economically and psychologically, would come off the table.

    It’s easy in hindsight to look back at a successful business and say, “that was a great investment.” It’s far harder to do this looking forward…and be right.

    This is where my question lies. Let’s keep the discussion going, I am all ears…

  5. Borrowing money to invest in stocks is a terrible idea. Hell, investing in stocks in general is a terrible idea. I’m talking about *picking* stocks here. Investing in no load index funds is a *good* idea because the economy grows over time. Picking stocks is dumb because you’re only human. You’re likely to get caught up in emotion, chasing losses, etc… and it only takes one bad mistake to wipe out your gains.

    Check out this podcast by John Bogle, inventor of index funds at Vanguard:

  6. I think what’s missing in Seth’s statement, and what you’re alluding to in your post, Jonathan, is role that risk assessment plays in determining whether or not to assume debt. Seth’s statement doesn’t work because he’s made a blanket assumption that doesn’t account for risk. And what you’re saying is that it’s easy to assess historical risk, much more difficult to assess future risk.

    Nearly all entrepreneurs decide that passion is worth taking a risk. But most successful entrepreneurs believe in taking measured risks, with a pre-defined limit (however high) on upside exposure.

    Great topic!

    P.S. Seth’s advice to eat brown rice and beans and send every extra dollar to the credit card companies until you’re out of debt is truly grim. Better to cut back and send an equal amount to the CC firms and to your own bank account. By saving, you’ll have a fund to turn to if there’s an emergency. Otherwise, you could be forced to run up the card again, making debt repayment a Sisyphean task….

  7. Lisa says:

    I’m with you, Jonathan. I read Seth’s post yesterday and thought, “Great advice – unless you want to do something no one else has ever done.” Don’t we all know someone who has run up personal credit card debt to make a go of a new business –and succeeded? Or bought a house in a lousy neighborhood, invested sweat equity and sold it for a tighty profit during a gentrification period? Or taken a job on the promise of stock options and cashed out big at the age of 29?

    A lot of life’s most valuable investments start with faith. Some people have gone bankrupt that way, others have made millions. While the list of success factors in these cases is long and varied, I suspect it does NOT include “being debt-free.”

  8. Lane Lester says:

    Sometimes there are intangibles that will influence a decision. It might make financial sense to rent, rather than buy, a house. But for me, house ownership is more than an investment. It’s a place to call “my home” (even if the bank is the majority shareholder). It’s a place I can improve according to my tastes and know someone else isn’t going to chase me off at his whim (something I had a landlord do to me).

  9. Mark says:

    I think that many of you are missing Seth’s point, and I think it is because of the way he worded the advice.

    He said, “Only borrow money to pay for things that increase in value.”

    He would have been better off saying, “Don’t borrow for things that don’t increase in value.” This was the point that he was trying to get at.

  10. Shama Hyder says:

    Enron is one word silly. = )

    On a more serious note, I think you are right on. Hindsight is always 20-20, however, there is a pinch of truth to Seth’s comment.

    One word (since we are playing that game! = ): Prudence.

    Don’t use your credit card to buy clothes you can’t afford. That only goes DOWN in value.

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  12. nordsieck says:

    Two words: Expected Value.

    All of the examples you give are risky (have high variance), but have positive expected value. Needlessly conflating the issues makes understanding the core issues more difficult.

  13. J David says:

    Unless you are a professional day trader, you should never just buy individual stocks. Big funds (like Vanguard) are run by serious pros who diversify and protect your investment. Hell, you could even buy funds that mirror the major indexes and still do well. I am sure that Seth meant things more like funds, rather than buying individual stocks.

  14. Wtblogger says:

    Borrowing money, that’s a dangerous thing that we should avoid.Today we borrow from here, tomorrow we borrow from there to pay back here and soo on. I dont’ know, maybe it’s better to beg, because no one will ask you to give money back…