"The danger today is that future generations of Americans will be unwilling to continue paying for today's spending and force political action with potentially negative consequences."
This was Buffett's response to a question on what he thought about leveraging the economy; borrowing against the future.
His response to the question is telling as it relates to business: People will be unwilling to continue paying for today's spending.
While most of us know leverage is taught as a way to get a lot of things done quickly. What very few of these same people talk about is the consequences of being highly leveraged. Of course I'm simply talking about taking on too much debt.
The assumption on taking on huge debt is our customers will be willing and able to pay that debt down. That's not a healthy assumption.
The danger, as Buffett relates it to national debt and Americans being eventually unwilling to pay for past generations' spending, needs to be translated to business also. We can never assume because we financed something to attempt to improve our businesses, that people will be appreciative and pay down what it cost you to do.
All I'm saying is the current climate in American and in some other places in the world needs to be a wakeup call to how we finance our businesses. I believe we should always leverage things in a way that leaves us some healthy breathing room in case things don't perform like expected.
This is a simple concept, but difficult to execute when we throw away all caution and blindly speed ahead. Growth needs to be managed, and a big part of management needs to be based on how much debt we take on and having some worse-case-scenarios worked out on how we'll respond if things go bad.
The best thing to do is take on debt in a way that current earnings could handle it even if the growth we expected from it doesn't emerge.
What we need to do is leverage things from a defensive position, even if we're flush with earnings and believe we have a large safety net underneath us. If we do make mistakes, we don't want it to destroy the company. Managing growth shouldn't be throwing the dice and hoping the right numbers come up, and should be done with the safest strategies in mind.
This doesn't mean we don't take some risks with growth, we just take managed risks, not putting everything on the line to get a high or hit the big one.
There is probably no one better at managing debt and risk than Warren Buffett does for Berkshire Hathaway (BRK-A). He's shown it can be done and still get fantastic returns.
Other Buffett Resources:
Warren Buffett: The trouble with being a legend
Warren Buffett: 'I told you so'
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