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Insurance float may be leverge. It may not. It may be a different type of leverage.<p>

Just because Buffett says, "Insurance float had produced a "fountain of funds" that he used to buy other businesses.", does not mean it is leverage. And I never said he didn't make a ton of money with it. But the float is a tiny portion of Brk's market cap. Brk is not leveraged. Using Buffett as an example of someone who became wealthy largely because of the use of leverage is a denial of facts.<p>

And what was the first action Buffett took when he purchased General Re?
 
OK...Buffett and Gates are the exception. Looking at the list of Forbes 400, how many used leverage to get fabulously wealthy? Most of them.



http://tinyurl.com/2mruka



Many of the Forbes 400 have been willing to take gargantuan risks, sometimes a number of times, in order to realize their dreams. Toy salesman Ty Warner mortgaged his home and invested his life savings to launch Beanie Babies. Paul Fireman put his home in hock for the U.S. distribution rights to a small British shoe company called Reebok. And even when they make it to the top, many of the 400 do not stop gambling. Donald Trump borrowed hundreds of millions of dollars to build on his father's substantial real-estate empire. And oilman and corporate raider T. Boone Pickens bet his entire company, Mesa Petroleum, which he had spent most of his life building, on his instinct that the falling price of natural gas would eventually go up. With the benefit of hindsight, it's easy to see how these men succeeded. But at the time their gambles appeared to be edge-of-the-seat risks, if not to the headstrong individuals themselves, then at least to outsiders.



In many cases, Forbes 400 types seem to have a different perception of risk than the average person. Risk-takers have to be able to think big, and they have to be able to leverage those big ideas with whatever assets they have at hand: homes, real estate, the shirt off their back. To succeed, they also have to be 100% focused on winning and have the confidence to go against the conventional wisdom. Conversely, and this may be the key point for many who have made it onto the Forbes list, they have to know how to avoid disaster, evaluating the risks well enough to ensure that failure doesn't wipe them out.
 
<em>The writer is confusing risk with leverage.





</em>A simple thanks would not do that comment justice. They are two completely different things. I take risks trading almost everyday, but I never use the margin account for that risk. I could, but that is a risk I am not willing to take. That, and RIMM is pissing me off.
 
SoCalGal,





I'm really glad you have kept your cool so far. You have provided information to back your points. I call that discussion. We can all learn from an opposing viewpoint.





That said, please keep in mind as somebody mentioned earlier, it is not wise to look at the subset of those who risked it all and won, without considering the subset of those who risked it all and lost.
 
It's sometimes difficult NOT to lose one's cool when statements like "the writer is confusing risk with leverage" are made (and seconded)--as if I don't understand that leverage is risky. They're practically synonymous.



My initial statement was, if I recall correctly, "It's difficult to become FABULOUSLY wealthy without leverage," due to the sheer power of leverage. Then others mentioned their clients or neighbors who are wealthy and allegedly achieved their wealthy status without leverage. Unless their neighbors and clients are also on the Forbes 400 list, that level of wealth was not what I was talking about at all. I used the term "fabulously" a couple of times to underscore my point--to no avail, apparently.



Among the highly risk averse, the mere mention of leverage strikes fear, yet that's how nearly all of us acquire real estate. I doubt that anyone here purchased a home at today's prices using all cash on the barrelhead. Is 20% down a conservative approach? Not in a declining market, where one's down payment can evaporate FIRST. Why, then, aren't the risk averse paying all cash? You'd have to ask them why they continue to accept the bank's offer to engage in leverage.



If graphrix, for example, did use margin, his returns, when they occurred, would be EXTRAORDINARY, not merely acceptable or gratifying. OF COURSE there's a downside to leverage--who said there wasn't?--but leverage is nearly always present when, as the article says, riskers risk it all.



Which was my ONLY point.
 
IR and Awgee,



Float is the best form of leverage for the exact reason you mentioned, you might not have to pay it back. There are two ways to define leverage, accounting and economic. The accounting version states that leverage is any time you take control of an asset that has value in excess of the cash you invest. The economic definition of leverage is when leverage is used to amplify risk. From the accounting perspective Buffet is certainly using leverage. He is investing money that he is effectively borrowing (float) into a portfolio of investments. From an economic standpoint, he may not be considered to be leverage because the actuarial risk are relatively certain over longer periods of time, and he effectively becomes a conduit for the allocation of float into a portfolio.



He is running a mutual fund.
 
Interesting that all these cross threads have broken down into semantics. If everyone carefully defines their terms, we could probably all communicate more clearly...





No matter how much money you have made on any investment, you could have made more if you levered the investment and bought more of it. Many people who got very rich in their lives made huge bets with insane amounts of leverage and it paid off. Of course, many went the other way. Real estate, particularly in California where the price volatility is so extreme, is a very risky asset class to gamble using large amounts of leverage -- that is of course if you are going to make good on the debt. I trade stocks on margin, options and futures. In particular the futures are extremely levered securities, however, they are also extremely liquid, and if a position is moving against me, I can be out in a nanosecond. Real estate does not give you that luxury. The illiquidity of real estate combined with the extreme leverage offered (100% at times) makes it an extraordinarily risky asset class in which to speculate. Many people who bought at the bottom and sold at the top made huge windfalls. Many were no so lucky, and most of those passed those losses on to the lenders.
 
The leverage of real estate does indeed amplify risk. However, Real Estate is quite different than other major asset classes, because it is tangible. The very nature of land is that it has value unto itself (intrinsic value). This cannot be said for equities or bonds, and many commodities (gold for example). It is this notion that allows lenders to offer a greater amount of leverage on home purchases than any other type of financing activity.
 
<p><em>"as if I don't understand that leverage is risky. They're practically synonymous."</em></p>

<p>When I read this, it stopped me. I have no response. We have such a different understanding of what risk and leverage are, that there is probably no point in further discussion. Good luck.





</p>
 
<p>Please keep the ball. I will just go home with my head down, defeated. </p>

<p>Just something to think about; all my investments are at risk and none of my investments are leveraged. </p>
 
<p>Why are the rates down despite the credit crunch? Is it the increasing likelyhood that Fannie & Freddie will be bailed out by govt? Is it that people are less likely to refi as Fed doesn't have much more room to cut? Or what?</p>

<p><a href="http://mortgage.freedomblogging.com/2008/03/20/oc-mortgage-rates-fall-spread-narrows/">http://mortgage.freedomblogging.com/2008/03/20/oc-mortgage-rates-fall-spread-narrows/</a></p>

<p><a title="Permanent Link: O.C. mortgage rates fall, spread narrows" rel="bookmark" href="http://mortgage.freedomblogging.com/2008/03/20/oc-mortgage-rates-fall-spread-narrows/">O.C. mortgage rates fall, spread narrows</a></p>
 
<p>Help, I've used search to no avail. Someone, somewhere on the blog on another thread posted a link to a Fannie, Freddie, type site with something like a source mortgage rate underlying the conforming rates and hence essentially the lowest you'd possibly get. Anybody recall seeing it? I seem to remember it was in response to someone asking about was a rate good. But, too many things come back on the search combos and I can't find it.</p>

<p>Anyway, I thought of it while ready FairEco's question in today's post about rates being 5.66% according to bloomberg. Well, they were, according to bloomberg, which in turn just pulls them from Bankrate, which in turn just pulls the teaser information from the banks. I also recall the gang pointing to Mortgagecapital for low rates. I checked them too. and had the shock of the year so far.</p>

<p>Yep, rates for conforming are basically 5.75% on a 30year fixed, no points. 7.0% on an over $417K loan still. On bank rate, 30 year fixed for $400K loan balance had... only 5 quotes. Tonight only Quicken loans shows up. Remember last year, too many advertisers to count showed up.</p>

<p>Supposedly OC's conforming limit is $700K+ but, you can't get quotes. Looks like competition is drying up for mortgages too. </p>
 
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