Post by oldman on Oct 19, 2013 8:35:57 GMT 7
You may find this strange but if I were a substantial shareholder of a listed company, I would like the listed company to have the ability to leverage. After all, this is one of the key benefits of owning a listed company. Leveraging at the right time would allow the company to grow much faster.... especially a property related company. As it is listed, it should also be easier to get loans.
Personally however, I don't leverage. The difference is that when you leverage on your own account and you get it wrong, you are liable for the entire shortfall. If you are a major shareholder in a listed company and use the company to leverage (at the right time, of course), even if you get it entirely wrong, the most you could lose is your investment in the company. The company may then collapse and owe the bank money but from a personal standpoint, you are not liable for the shortfall.
This is why a lot of wealthy individuals take majority stakes in listed companies. This is how wealthy people use other people's money to grow richer. I think most wealthy people are smart enough not to leverage on their own personal account as they know that they are fully liable for the risks that comes with personal leveraging.
Sadly, the man in the street is advised to leverage to build up their wealth as they are told that this is how the rich makes their money. They are advised to take up loans not realising that leveraging as an individual is very different from leveraging as a company, especially a listed company.
When a company is unlisted, the banks usually want the owners to also guarantee the loans. The downside then goes back to the owners and you are back to square one. However, if the company is listed, the banks usually look more favourably towards the company. This is especially so after an initial listing as many companies then use the listing proceeds to then guarantee whatever loans they have taken the in the past and the substantial shareholder is then free from the obligations of the company loan.
As a minority shareholder in a listed company, I know that I do not have any say in the way loans are taken and used. This is why I usually do not invest in any company that leverages. But, if one day I decide to take a majority stake in a listed company, I am likely to think differently about leveraging the company as I will then be in control of when and how loans are taken and deployed.
In the meantime however, I am very happy just focusing on cash rich listed companies with zero or minimum leverage.
Personally however, I don't leverage. The difference is that when you leverage on your own account and you get it wrong, you are liable for the entire shortfall. If you are a major shareholder in a listed company and use the company to leverage (at the right time, of course), even if you get it entirely wrong, the most you could lose is your investment in the company. The company may then collapse and owe the bank money but from a personal standpoint, you are not liable for the shortfall.
This is why a lot of wealthy individuals take majority stakes in listed companies. This is how wealthy people use other people's money to grow richer. I think most wealthy people are smart enough not to leverage on their own personal account as they know that they are fully liable for the risks that comes with personal leveraging.
Sadly, the man in the street is advised to leverage to build up their wealth as they are told that this is how the rich makes their money. They are advised to take up loans not realising that leveraging as an individual is very different from leveraging as a company, especially a listed company.
When a company is unlisted, the banks usually want the owners to also guarantee the loans. The downside then goes back to the owners and you are back to square one. However, if the company is listed, the banks usually look more favourably towards the company. This is especially so after an initial listing as many companies then use the listing proceeds to then guarantee whatever loans they have taken the in the past and the substantial shareholder is then free from the obligations of the company loan.
As a minority shareholder in a listed company, I know that I do not have any say in the way loans are taken and used. This is why I usually do not invest in any company that leverages. But, if one day I decide to take a majority stake in a listed company, I am likely to think differently about leveraging the company as I will then be in control of when and how loans are taken and deployed.
In the meantime however, I am very happy just focusing on cash rich listed companies with zero or minimum leverage.