Why Do Billionaires Have So Much Debt? - YouTube

INTRO: Usually, one of the top financial  

priorities for us average people is to get out of  debt. Whether that be student loans, car loans,  

or a mortgage, we want to pay them off as soon  as possible to minimize the interest we pay.  

If we had the money, most of us would avoid  debt altogether, but ironically, some of the  

richest people in the world also have the most  debt in the world. By now, I’m sure all of you  

guys have heard about Elon’s plans to takeover  twitter for $44 billion. And given that Elon’s  

net worth is currently hovering at about a quarter  trillion dollars, it’s not impossible for him to  

just pay cash. Yet, he’s planning on taking out  quite a bit of debt. The current plan is to take  

out $13 billion in debt against Twitter, and  $12.5 billion in debt against his Tesla stake.  

This means that he’s taking out a total of  $25.5 billion in debt. Now, Elon may choose  

to pay more cash by the time the deal closes  in order to minimize the risk of a margin call,  

but the root question still stands. Why even deal  with debt and banks and interest payments when you  

don’t have to? This doesn’t just apply to large  purchases Twitter either. Many billionaires will  

take out debt to buy homes, yachts, and private  jets even though these purchases are a miniscule  

portion of their net worths. Elon himself had 5  mortgages totaling $61 million before he decided  

to sell all his houses and move to Texas. So, why  do billionaire voluntarily take out so much debt?

MAXIMIZING RETURNS: 

One of the main reasons rich individuals prefer  to take out debt instead of just paying cash  

is to maximize their returns. Given that they’re  already rich, they’re well aware of how to produce  

significant returns on their money. Whether  that be investing in commercial real estate,  

investing in stocks, or putting it all towards  another business, these guys are experts at  

consistently beating the market. Take Tesla  for example. Since they went public in 2010,  

the stock has grown from $4.15 to $870 today.  This comes out to an impressive 200x in 12 years  

or an annual rate of return of 54.585%. And  that’s just the returns that Tesla has produced  

as a public company. Usually, the majority of the  gains are made before companies go public. So,  

for it to make financial sense for Elon to  sell his Tesla stock and let’s say buy Twitter,  

Twitter would have to reliably produce more than  54.585% per year. Now of course, Tesla isn’t going  

to grow at this rate forever, but I think you  get the point. Twitter would have to consistently  

beat the Tesla’s annual return for it to be a  worthwhile investment. And the truth is, this  

is not very likely. First of all, it doesn’t seem  like Elon is even buying Twitter to make money.  

It looks like he’s buying it for social  reasons and to hopefully create change.  

So, while Twitter may naturally grow to $100  billion or something under Elon’s leadership,  

it’s not likely that it becomes like Facebook and  reaches a trillion dollar market cap or anything.  

So, from Elon’s perspective, it makes sense to  minimize the capital that he does tie up with  

Twitter given that it’s just a side project. This  same principle applies to much smaller purchases  

as well. For example, let’s go back to Elon’s $61  million mortgage, this took place in early 2019.  

At the time Tesla was just starting to recover  from production hell and nearly going bankrupt.  

Shortly after Elon took out these mortgages, Tesla  stock actually plummeted to just $36 per share in  

June of 2019. Now, imagine if Elon decided to sell  $61 million worth of Tesla stock to pay for his  

properties instead of taking out a mortgage. Since  this low in 2019, Tesla stock has grown nearly 23x  

meaning that the $61 million that he sold to  buy his properties would now be worth $1.403  

billion. Even if we assume that the properties  appreciated to $100 million, Elon would have left  

$1.3 billion on the table and that’s not even  including future growth. This argument becomes  

even more relevant when you’re talking about  depreciating assets like a private jet or a yacht.  

Such purchases are basically guaranteed  to lose 70 to 80% of their value if you  

own them for a long period of time, so it makes  no sense to pay for these purchases up front.  

The only reason you would pay for them  upfront is for some sort of peace of mind,  

but in terms of returns, taking out  debt is absolutely the way to go.

ILLIQUID: 

Aside from trying to maximize returns, one of the  key reasons billionaires take out debt is because  

they have no choice. While they may have tens  of billions or hundreds of billions on paper,  

the vast majority of this is simply paper  wealth and completely illiquid. For example,  

over the past week, Elon sold $8.4 billion  worth of Tesla stock to raise the cash that he  

committed to put up for Twitter. This sale itself  caused Tesla stock to fall 12% in a single day.  

Imagine if Elon had to sell 5 times that amount  to raise the full cash required to buy Tesla.  

By the time he was done selling,  Tesla would likely be down 60 to 70%  

if not more. Aside from plummeting the shares of  his own company, he would have to deal with so  

much backlash from Tesla shareholders. Many Tesla  shareholders are already pissed off that Elon  

sold Tesla stock to buy Twitter. To many of them,  Twitter not only seems like unfavorable exchange,  

but it also seems like a unnecessary distraction.  And they haven’t been scared to hold back their  

thoughts either. This one Twitter user posted “I  don’t like that you sold shares, Elon. Your money  

is not the last one out. I know people who got  margin called today. Not cool.” This other user  

tweeted “I'm more disappointed he used it to buy  Twitter. Genuine question, how many more years  

does Twitter have?” And all of this is just for a  12% sell off. Elon would literally be burned alive  

if he caused the stock to sell off 60 or 70%. And  this is the same case with other founders as well.  

Bill Gates for example had to spend 25 years to  cash out his Microsoft position. At least, these  

guys have the option to sell if they really want  to. Many smaller billionaires don’t have a choice  

due to stock vesting. Company owners usually  don’t want high level executives or employees  

to sell off a bunch of stock if the company is  going through a rough spot. These guys selling  

would just cause the stock to dip even further  and leave the company off in a worse position.  

So, most companies implement a policy called stock  vesting that prevents employees from selling their  

stock for a set period of time. Google and Apple,  for instance, follow a 4 year vesting schedule.  

So, when we see headlines like  Sundar Pichai made $281 million  

last year or Tim Cook made $265 million last year,  just know that while this is technically true,  

they won’t actually have access to this money for  years to come. The only money they have access to  

instantly is their cash compensation which for  Sundar Pichai is quote on quote only $650,000.  

So, while someone like Sundar or Tim can  comfortably afford a $20 or $30 million  

mansion on paper, they don’t actually have the  cash upfront which forces them to take a mortgage.

MINIMIZING TAXES: 

While maximizing returns and liquidity are  significant considerations, something that  

we haven’t even talked about is taxes. Now, a lot  of people think that billionaires should be taxed  

way more, but really this wouldn’t even make a  difference because these guys implement several  

clever strategies to minimize taxes, one of them  being taking out debt. While they'll have to pay 3  

or 5% interest on their loans, they can avoid much  more significantly more in taxes. Currently, the  

highest tax bracket for long term capital gains  is 20%. And if you live in California like many  

of these billionaires do, you’ll also have to deal  with state income taxes. And to make things worse,  

California doesn’t discern between capital  gains and regular income, so you’ll have to  

pay the full 13.3% to California. This means  that your total tax load comes out to 33.3%.  

Now, I’m not looking to argue whether this is a  fair amount or not, but this strongly discourages  

billionaires from selling their stock. Going  back to Elon’s $61 million mortgage, we already  

calculated that Elon would’ve left $1.3 billion on  the table if he paid for these properties in cash,  

but this doesn’t include taxes. If we tack on  a 33.3% tax, we’ll see that Elon would’ve had  

to sell $91.5 million worth of stock to  pay for these properties in cash. Again,  

given that Tesla stock has grown 23x since Elon  bought these properties, that $91.5 million  

is worth $2.1 billion today meaning that Elon  would’ve straight up left $2 billion on the table.  

And looking forward, if Tesla grows  another 5x within the next 10 to 20 years,  

that $91.5 million purchase which was a  miniscule portion of Elon’s wealth even in 2019  

would be worth $10 billion. So, when you have  exponential growth working in your favor, you want  

to be as invested as possible and you definitely  don’t want to bleed any money to the IRS.

INFLATE AWAY DEBT: 

While everything we’ve covered so far are great  reasons to take out debt, even if none of those  

reasons applied, the rich will still take out  debt for one reason and that reason is inflation.  

Over the past year, for everyday Americans  inflation has been devastating given rapidly  

rising everyday expenses. But, for people who are  holding debt, it’s actually rather beneficial.  

Here’s the thing, the amount of money you owe  is not going to go up because of inflation.  

But, the amount of money you earn will go up. Now,  unfortunately, wages don’t always keep up with  

inflation especially in times of high inflation.  And while this strategy works best if your  

income scales perfectly with inflation, it’s also  applicable even if your income doesn’t quite keep  

up especially over the long term. For example,  a dollar today is only worth half as much as a  

dollar from 1992. Now, let’s assume that you got a  30 year fixed rate mortgage in 1992, for $200,000.  

At first, maybe half of your net income goes  towards your mortgage payment. After 30 years  

though, let’s say your income doubles thanks  to inflation and promotions. At this point,  

the same mortgage payment only accounts for  a quarter of your net income. And that’s with  

relatively conservative growth numbers. What if  your income actually grows 5 or 10x in those 30  

years? That mortgage would become a miniscule  expense by the time you pay it off. And this  

is especially applicable if you have a business  in a high growth area like many billionaires.  

It’s not just billionaires using this strategy  either. This is one of the key strategies  

governments rely on to reduce their debt load  over the long term. They just inflate it away.  

Now, I would argue that governments have taken  this to an unacceptable extreme but that’s a  

wholenother conversation. All you need to know is  that making a debt payment in the future should be  

easier than it is right now, so rich individuals  prefer to leverage this to their advantage.

TIME TO GO IN DEBT?: 

Hearing all of these advantages, it’s likely that  many of you guys are wondering if this strategy  

would work for you. And, unfortunately, if you  have to ask that question, the answer is probably  

no. The best course of action for the average  person is to pay off student loans, car loans,  

and credit card loans as fast as possible or not  take take out these loans in the first place.  

There is one area in which the average person  could leverage this strategy, but it requires  

that they’re disciplined and willing to invest  regularly. Instead of taking out a 10 or 15 year  

mortgage, it would be smarter to take out a 30  year mortgage, and invest the monthly savings  

into the S&P 500. But, if you know that you won’t  be that disciplined at that you’ll end up spending  

this money instead investing it, it’s better to  just get the shorter mortgage and pay off the  

debt. And given that the average person falls  into this category, sticking to Dave Ramsey’s  

advice is likely the best course of action. But  that why it makes sense for many billionaires  

to take out debt instead of paying cash. If  you were a billionaire, would you still take  

out debt? Comment that down below. Also, drop  a like if this video gave you a new perspective  

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