Quote:
Originally Posted by SaintessHeart
I'd say those investors should just go turn themselves into soylent green - TRADERS can do that, but not INVESTORS.
Debt is something one should not hold for long, as simple logic dictates. An EMD is still a debt, and as much interest as one can collect from buying the bond, there isn't any point in holding it for too long because your capital is at stake there.
And your capital is always larger than the total interest earned in the bond. It is compounding that makes big money, but the longer a debt is owed, the more likely it is going to be a bad debt; there isn't any time for the compounding to churn out a 500% profit.
While one may argue that this isn't a problem because the investors are pooling in their money, they forget that most, if not all investors, use something called leverage. And where does the proportionate money from the leverage come from? Central banks. And where does the money from the central banks (as of 2009) come from? The government.
And where does the money from the government come from? *sarcastic*
I wonder if this is the cause of math being taught in school around the world - the East teaches drilling, while the West simply skim over it. Nobody is teaching the application of critical thinking and case studies to it - just formulae and concepts.
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Actually there are situations where holding long term debt is acceptable, and even desirable. If you have low enough interest rates, and you know any excess capital you have will accumulate more income if you invest it, then there's no point in paying off your debt. The only point when you should start paying off your debt is when you make more income by paying it off then by investing your profit elsewhere.
If you ever play a game like Railroad Tycoon 3 this is quite apparent. I often max out my loans when the interest rate gets low enough.
In this way it's very easy for a company to accumalate large amounts of debt.
Of course you shouldn't be taking out debt to cover actual regular expenditure, and you should be careful with the type of debt you take out (fixed rate is likely a much better choice).
I recall a guy who built himself a "buy to let" empire during the boom, whereby he'd buy properties, charge rent on them, and use that income from previous properties to secure against 100% loans to get even more properties. In all cases his income from rent was always greater then his expense in interest, so he just kept on buying more properties with money he essentially didn't have. A clevel scheme, but unfortunately he used variable loans and when interest rates went up....