Saturday, April 15, 2023

Buy Borrow Die

Buy Borrow Die

On this solemn day it is important to recognize that indeed only death and taxes are certain. To help assuage this bitter reality, let us focus our efforts today on one of the most effective investing strategies of all time termed "Buy Borrow Die." 

The fundamental premise behind the BBD strategy is that investors should purchase or create assets that will act as functional ATMs for life. An asset is defined as something that pays YOU to own IT. Assets can come in many shapes and sizes, the most common are real estate, companies, commodities, stocks & bonds, and intellectual property. There are others as well, some ingenious like a music catalog for example.

Regardless of the asset type, BBD's major function is to amass a significant portion(s) of said asset(s) that you own or control. The ideal holding period is forever because realizing a gain triggers taxation and also loss of that asset. And it also prevents the next, and crucial step, in the BBD approach: Borrow.

Once an asset is secured, then the investor can borrow against it. Typically the borrowing is accomplished via a loan against the underlying value of the asset; for example suppose an investor buys $100,000 worth of stock, typically the brokerage company will allow said investor to borrow up to 50% of that amount on margin. The margin interest, as of now at least, is considered an investment expense and can be "written off" by the investor.
The more an asset is worth, the more an investor can draw on it over time. The entire real estate industry is built on this premise, but in reverse; mortgage ("mort" from the French for "death") companies profit handsomely from lending large amounts of money secured by real estate. The BBD strategy works in the opposite, where the investor is his own bank borrowing against his own assets and paying interest to himself. 

The asset(s) might start out small initially, but over time they can grow like mighty redwood trees. Investing, like most of life, is built around a "surviorship bias," ie if you survive past a certain point then you have a good chance of reaching the next point, and so on until what was once a fragile sapling is now a towering, nearly impervious behemoth. If an investor is prudent in his borrowing, the asset(s) can long outlive him.

The final genius of the BBD plan is the "step-up" basis recorded upon the investor's death. Suppose that $100,000 worth of stock was purchased in say 1950 for example. Assuming an annual rate of return of say 8%, upon death that $27,000,000 in stock would have its cost basis "stepped-up" to a cool $27,000,000 for the heirs. And for them, the real gravy train begins because they can now utilize the BBD strategy all over again!

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