There are a few authors who regularly post articles on practical and investment philosophy that I really enjoy. I often find myself saying, “that’s right in line with what I think.” And at other times, I say, as is the intention of these newsletters “I never thought of it that way.”
One of these authors is Morgan Housel, the author of The Psychology of Money (highly recommended if you haven’t read it) who is a regular contributor to the Collaborative Fund.
Recently, I stumbled upon a fascinating article of his titled “How I Think About Debt.” The article considers the surprising (but not unexpected) connection between debt and longevity.
Housel begins with a discussion on the 140 businesses in Japan that are still in operation more than 500 years after they were founded and the few that are purportedly more than 1,000 years old.
It’s astounding to think what these businesses have endured – dozens of wars, emperors, catastrophic earthquakes, tsunamis, depressions, on and on, endlessly. And yet they keep selling, generation after generation.
These ultra-durable businesses are called “shinise,” and studies of them show they tend to share a common characteristic: they hold tons of cash, and no debt. That’s part of how they endure centuries of constant calamities.
It seems straight forward that people and companies that are indebted are more likely to run into trouble than those that aren’t. For example, a home or car that hasn’t been used as collateral for a loan can’t be repossessed. Higher interest rates are of little importance to an individual with little or no debt.
This is not to say that the use of debt or debt in itself is a bad thing. Rather, it’s a matter of whether the quantum of debt is appropriate relative to the size of the balance sheet and income statement (that of an individual or company), and then the potential for volatility in that balance sheet and income statement.
Imagine a company or an individual drowning in debt. Unexpected events – a recession, a car accident, a hospital stay, a divorce, a personal setback – can easily trigger financial ruin. Conversely, debt-free entities, like our “shinise” friends, possess a remarkable resilience. They can weather storms because they lack the vulnerability that debt creates – the threat of default, foreclosure, or bankruptcy.
Housel introduces the idea of “life volatility” – the unexpected events that can rock your financial stability. Without debt, you’re more likely to weather most storms. However, as debt increases, your tolerance for volatility (financial and life) shrinks. Highly indebted individuals or businesses can only survive in the most stable environments. As Housel aptly states, “debt narrows the range of outcomes you can endure in life.”
With this in mind – Consider how you connect with the people closest to you. How strong are your relationships with your immediate and extended family, your friends, and your community? Do you feel supported by these people? Can they be counted on during challenging times? Additionally, reflect on your overall health and well-being, both physical and mental. These factors, along with others, contribute to your overall “life volatility.”
I can tell you from my experience in unsecured lending at Nedbank, our models only considered financial factors like salary and account history. But these don’t tell the whole story. If we could have factored in these ‘life’ factors, like the strength of your support network and overall well-being, our assessments would have been much more accurate.
Ultimately, you’re the only one who truly understands the ups and downs of your own life. The next time you’re considering taking on debt, remember to factor in your life volatility alongside the numbers.