"Good" Debt Versus "Bad" Debt

[swakoo]

3 years ago, Teh Hooi Ling's anecdotes were on "bad" debt.

Tales of fortunes made and lost in recessions

Mon, Nov 24, 2008
The Business Times
By TEH HOOI LING

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Riches gone in a flash

A friend shared with me some of the horrendous stories of how an enormous amount of wealth was destroyed in the last few months.

Up till last year, one man had $100 million of his worth in only one stock. Towards the end of last year, that stock started to decline. By early this year, the stock was down more than 50 per cent from its peak just a few months before. The man picked up quite a few additional shares - on margin - thinking that the stock had bottomed and would eventually rebound. Since then, the stock has plunged by another 80 per cent. The $100 million is more than wiped out! The stock is Cosco Corp, which went from 10 cents in March 2003 to $8.20 in October last year - an 82 times jump. It is now trading at less than 70 cents.

Another guy had relatively much more modest means. His net worth was estimated at $2-3 million. He heard from 'reliable' sources that a particular company would be taken over by another at a significantly higher price than the stock's then market price. He bet all he had and, if I remember correctly, also took margin financing to buy that stock. The stock was FerroChina, which has since been suspended because it had run out of money to pay its suppliers and debtors.

One value investor thought Thailand was cheap a few years back. One particular company, a very big one, was trading at 1.2 baht - significantly below its book value. The investor concentrated his bet on that company. And, indeed, the market began to recognise the value of the company and the stock tripled to over 3 baht. The value investor's portfolio grew to $26 million. In the last year or so, the stock has plunged to below 0.7 baht. The investor is now down some 50 per cent on his original capital.

Another man was shrewd enough to think that the market was overvalued towards the end of 2007. So he got out of the market, and even shorted it. He was happy that the market went the way he predicted. He was the smartest guy in town.

By June or July, thinking that the market had fallen enough, he loaded up on shares. Like the guys above, he too used margin financing to pick up the shares. As we know, the market took an even more severe turn in September and October. He too was dealt a severe blow.

A friend was also bearish about the market towards the end of last year. He had put in some shorts. Then last October, the market went on to hit record highs. He lost his resolve, and reversed his trades and got hit as well.

Another made quite a bit of money in the Singapore market. His confidence grew. He wanted a bigger stage. He bought US shares on margin. US stocks took a precipitous plunge a few months back. He has had a few rounds of margin calls.

A young banker in his late 20s made $2-3 million from the property market in the last few years. He ploughed all the profits into a $10 million property, and took loans of some $7 million. He's now saddled with a mortgage payment of some $30,000 a month.

Many of the real-life examples above show just how lethal leverage can be. In a rising market, leverage is your friend; in a down market, the blow dealt by leverage can knock one out for good.
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http://www.asiaone.com/print/Business/Ne...02998.html

Perhaps, she should revisit Mr. B 3 years from now to tell us how well he has done with his leverage on property to invest in stocks?

[Contrarian]

> Up till last year, one man had $100 million of his worth in only one stock. Towards the end of last
> year, that stock started to decline. By early this year, the stock was down more than 50 per cent
> from its peak just a few months before. The man picked up quite a few additional shares - on margin
> - thinking that the stock had bottomed and would eventually rebound. The stock is Cosco Corp

Dumb to place so much faith on a ship builder.

Safer to go for a few king pins which are tried and tested. Lower return but this $ definitely can get 50% - 100% when good times return...

[greypiggi]

well.. he somehow managed to accumulate 100M... so unless he inherited it... there must be some skill or ability there. It is always easy to say others are dumb when mistakes occur and i think the germans have a word for it --- that sense of happiness one gets at others misfortune. Schadenfreude. I personally think it is better to just learn from their mistakes and pray we do not make similar ones. Judge not lest we too be judged.

[kazukirai]

well.. he somehow managed to accumulate 100M... so unless he inherited it... there must be some skill or ability there.

Or dumb luck?

The stock is Cosco Corp, which went from 10 cents in March 2003 to $8.20 in October last year - an 82 times jump. It is now trading at less than 70 cents.

Maybe that's how he got his $100M? Riding it all the way up would 'only' require $1.2195M to begin with; and then now all the way back down...still 7x more than cost (IF he got it at 10cents) when the article was written.

I guess the truth probably lies somewhere in between.

[greypiggi]

yah i have learned that usually the answer is somewhere in between..... To put in 1M in a 10 cent stock.... Either u are worth 20-30M and have inside info, or are worth 50M and this is speculative change.... either way, the guy has to have made or inherited large sum prior to costco investment....

[Jared Seah]

Another word for debt and leverage is credit.

And access to credit can help people move out of poverty and for a person with a great idea to secure funding to fulfil his dreams...

Usury is "bad" and outlawed in most countries. But there is a huge demand for their services - even if its done under the cloak of night.

The "same" service, if it's called micro-financing, has helped many disadvantaged people to get themselves out of the poverty trap. Of course there will be defaults - there are no sure win ventures or projects. The small farmer who borrowed to buy seeds to plant may have his harvest destroyed by flood or drought. Is debt good or bad?

Today, there is this interesting Crowd Funding platforms to tap the power of the internet. Entrepreneurs who need funding in their startups can tap small loans from many individuals than relying on angel or venture investors. Of course the risks are high for these individuals who lend to these small startups (the risk is minimised by the small loan amount).

I just can't imagine a world without credit/debt/leverage. Good or bad can only be deduced on hindsight after the fact.

[weijian]

yah i have learned that usually the answer is somewhere in between..... To put in 1M in a 10 cent stock.... Either u are worth 20-30M and have inside info, or are worth 50M and this is speculative change.... either way, the guy has to have made or inherited large sum prior to costco investment....

i agree we shdnt judge but just aim to learn from it. Because of hindsight bias, we are calling him dumb now. Back in 2007, he was calling us dumb. Fast fwd 2 years from now, he might be calling us dumb again (if COSCO chiong to 7bucks again)...

[Jared Seah]

Just blogged about my practical application when it comes to Good and Bad debts:

http://singaporemanofleisure.blogspot.co...tical.html

To each his own

[cookieguy]

someone wrote something interesting on his blog as he says we should not differentiate bad debt and good debt because it's subjective to an individual. For example, buying a car is considered bad debt but to a salesperson or an individual whom needs the car to meet important people and close the deal, is it considered good debt to him? After all, the car serve a purpose for him to yield a great return based on the size of the deals closed.

Therefore, a debt be considered a debt and should be well managed.

[Temperament]

The truth is actually money is not the problem. The problem is actually i don't have a "service" or invention where people will beat a path to my doorstep. So i have to go out and look for money lol.