The millionaires and billionaires of the world are borrowing money at an accelerated rate. An article from the Wall Street Journal revealed that Morgan Stanley’s wealth-management clients have about $68 billion worth of securities-based loans (more than double what it was 5 years ago). Bank of America also reported their clients to have 62.4 billion dollars in securities-based loans. Which makes us wonder, why would do the rich need to borrow money if they already make and have a lot of money? This is how the rich control all the world's wealth with this investing strategy - buy, borrow, die. At its core. Here's how it works.
WHAT IS BUY, BORROW, DIE?
It's a three steps strategy that's the core of how wealth is kept inside of small circles of the elite. They do this without ever selling their investments and the way it’s done is they borrow against an asset without selling the asset itself. DO WE HAVE TO BE RICH TO DO THIS? No, it applies to everyone across all income levels which is that much more unfortunate that we aren't taught how to do this in school.
STEP 1: BUY
In traditional finance speak, this phase is also sometimes called the "accumulation phase" of investing - this is where, when we’re younger, the goal is to go to school, get a degree, get a high paying career, save our money, and buy assets. This is where most of us will spend a majority of our lives - in the accumulation phase. Now let’s get a little more specific about the different assets we can and what they do.
THE BIG 3 - REAL ESTATE, STOCKS, CRYPTO
Each of these 3 assets represents a different benefit in relation to the buy, borrow, die strategy. Real estate is arguably the best in this strategy because it's incredibly stable, it preserves value, we can use it as a write-off, but most importantly - we can borrow against it. The rich buy real estate and never sell. The rich also buy and invest in the stock market the exact same way - they invest and buy cash-flowing stocks (or growth stocks) and allow them to grow to millions of dollars throughout their lifetime. Instead of selling those stocks, they will take out a loan against their portfolio. Crypto works the exact same way. Buy stable bluechip cryptocurrencies like Bitcoin and Ethereum - and let the growth take over leaving you with a multi-million dollar portfolio to borrow against.
STEP 2: BORROW
The goal is to use "interest rate arbitrage" to our advantage by borrowing at a lower interest rate than the interest rate that our assets will grow by - allowing us to pocket the difference. GIVE AN EXAMPLE! Let’s say you have $100,000 invested and it’s making 10%, you could borrow another $100,000 at 2% - you could also invest that money so now you’re investing $200,000. Since it only costs you 2% (or $2,000 a year) - you can make a profit because you’re making $10,000 a year extra with the borrowed money. After interest, it means you’re getting $8,000 for free. Take that strategy and scale it to millions of dollars to see the potential.
HOW DO I DO THIS WITH STOCKS? There are 2 ways to do it with your stock portfolio. Either an SBLOC (securities-based loan of credit) or a margin loan.
HOW DO I DO THIS WITH REAL ESTATE? HELOC. Home equity line of credit. If you have equity in your house, you can use it to take out a low-interest rate loan.
HOW DO I DO THIS WITH CRYPTO? Many crypto brokers offer some sort of "crypto borrow" product that allows you to use your Bitcoin, ETH, etc. to borrow against itself.
WHAT'S THE DOWNSIDE? You can get margin called if there are margin minimums. If your portfolio falls 50%, you could be forced to sell all your investments to cover the loss of the loan and lose all your money (Archegos is the most recent example of a billionaire family that over-leveraged).
STEP 3: DIE
The rich will put all their assets inside of trust and their family will inherit their assets at a "stepped-up cost basis" which allows them to sell those assets without incurring taxes. They don't sell though - they continue buying, borrowing, and passing it on.
CREDIT TO: Andrei Jikh (https://www.youtube.com/watch?v=-hqEIseS_e0)