[hunson_abadeer]

I mean no disrespect, but this reads a bit like an over-confident take of a person who never went through a financial calamity. A bit like leveraged house-flippers of 2006. The value of your margin loan collateral can plunge suddenly. The rates and the terms of your credit card debt can change overnight. You can get hit by unexpected and urgent expenses - adverse judgments, emergency home repairs, etc - and that's bad news when you're already maxing out your credit lines.

Debt is a useful tool, but it's also dangerous. It's one thing if you're using it to advance some important cause... you know, making a big bet on a business idea, making your dreams come true. But if you're taking risks for, as the author puts it, "consumption smoothing"... there's a good chance of ending in trouble for no good reason.

Plus, we're not hyper-rational robots. Spending money is habit-forming. It's often about gratification, about social standing, about competing with peers. Especially for younger folks, and especially for people in the Bay Area, where we often look up to people who essentially won the startup lottery or ended up getting lucky in some other way. Instead of "consumption smoothing", it's often better to ask if that consumption is useful to begin with.

[nocoiner]

I 100% agree with this take, and I say this as someone who has great respect for the use of debt (and, full disclosure, has a pretty fair bit of it to my name). It seems completely obvious that this strategy is predicated on never having lived through a fully seized-up financial system for longer than 72 hours in March 2020 or the Weekend of SVB in March of ‘23. The use of leverage probably feels pretty great right now, but what happens when there’s another Great Financial Crisis and every credit card issuer cancels accounts or cuts credit limits all at once? Sure, there’s plenty on the asset side of the ledger, but how good is it going to feel liquidating those stocks that were worth $75k a few weeks ago for $35k? It’s gonna hurt, and all those people who were eager to provide cheap liquidity will have turned off the taps.

Even big corporations that have contractually committed credit facilities have had banks shut those down during times of crisis (basically saying “sue us” to the borrower) so no matter how solid the ability to borrow may appear, that kind of thing has a tendency to evaporate in a moment, just when it’s needed most.

I have credit cards with a ridiculous aggregate credit limit, but in another 2008 scenario, anyone want to take bets on how long those credit limits stay high while unemployment is on its way to 14%? I would prefer not to.

And regardless of earning potential or useful skills, the owners and managers of for-profit enterprises are going to be belt-tightening at the same time (out of necessity or caution or simply by never letting a crisis go to waste) and their appetite for bringing on a new entry level employee will be limited - just at the time the rest of the system is grinding to a halt.

Someone in their 20s without significant financial or familial obligations is generally going to be well situated to make it through one of those crunches, but it doesn’t take a whole lot to bring the edifice crashing down.

[mlinhares]

It’s really hard to continue reading it after “a lot saved in stocks” as if that value is fixed and won’t just disappear completely in a market crash or downturn.

This text is a pretty good example of the “smooth seas don’t make skillful sailors”.

[nocoiner]

It’s like how there’s literally a whole generation of financial professionals who had never been through a rate hike. Gather round, VPs, time to learn about the real world.

[ghaff]

At various times I’ve seen a whole lot of people arguing for taking out HELOCs and buying stock with it. Which works sometimes until it doesn’t.

[mlinhares]

I've a friend that did that and got completely fucked because he was stock picking on Robinhood with the HELOC money. It worked for 2020 and 2021, once 2022 rolled around he learned he wasn't smart, just lucky.

[dmoy]

> I have credit cards with a ridiculous aggregate credit limit, but in another 2008 scenario, anyone want to take bets on how long those credit limits stay high while unemployment is on its way to 14%? I would prefer not to.

My credit card limits were reduced like 90% during the 2008 crash.

[bombcar]

The thing to always remember about debt - is that someone who is much more financially astute than you (the bank) would much rather loan you the money to do whatever it is you're going to do with it than do that thing themselves.

[adwn]

That's not a good argument, because it proves too much [1]. You could use the same reasoning to argue against pretty much any transaction:

* Don't buy bread, because someone who knows much more about bread (the baker) would much rather sell you the bread than eat it themselves.

* Don't buy a car, because someone who's much more familiar with the car's design (the manufacturer) would much rather sell you the car than drive it themselves.

* Don't buy the book, because someone who knows its content (the author) would much rather sell you the book than put it into their own shelf.

Specialization exists in all but the most primitive of economies, so while not every loan is a good idea (obviously), many loans benefit both sides. A bank doesn't make a profit from money just sitting in accounts, that's why they loan it out to someone who can use it to make profit – like a company that wants to buy a new machine to work more efficiently. The bank could buy such a machine as well, but it wouldn't be able to use it in a profitable way.

[1] https://en.wikipedia.org/wiki/Proving_too_much

[bombcar]

It's a rule of thumb and I should have specified that it most particularly applies to borrowing to invest - you should be able to identify the secret sauce that you have (and others do NOT) that allows you to make money where others can't.

A bank won't use a machine to manufacture something, and perhaps you have the skills needed to do so.

But deceiving yourself that you can "borrow cheap, invest it in the stock market, and always come out ahead" - if it was always or even for the most part, why would anyone lend money and not do it themselves?

Because you're missing risk.

[jallen_dot_dev]

> why would anyone lend money and not do it themselves?

Because there are regulations that limit how banks can invest deposits.

[beakerbreaker]

We can read a thread of an econ grad student who decided to implement similar ideas in late 2007 and provides several years of updates.

A different approach to asset allocation https://www.bogleheads.org/forum/viewtopic.php?f=10&t=5934

[xorbax]

> a person who never experienced an unexpected financial calamity.

That's what his parents are for

[c22]

It all makes sense because he's going to make a lot more money later with his math degree. Very logical.

[s1artibartfast]

Counterpoint - I wish someone had explained consumption smoothing to me when I was younger. One of my greatest regrets in life (literally) is not taking on more debt in college for exactly that reason.

People do it all the time and to far greater extremes. A mortgage to buy a house to raise a family at 30 instead of waiting until 60 is also a form of consumption smoothing.

It doesn't seem like they are being particularly risky. They have a large buffer, and a solid like of credit for more student debt. Who knows, maybe their student debt will even get forgiven.

[bruce511]

This is all about risk, and the value of risk (which we seldom see or recognize, much less quantify.

In one sense there's risk in taking on debt. Risk of job loss etc. In another the lender is taking on risk - they're hoping you can repay. Part of interest is to cover inflation, part is to hedge the risk.

Many comments in this thread start with the writers attitude to risk. What if....

And there are definitely places where the strategy can turn bad. Holding stocks can be valuable (they're growing faster than the cost of money) but they can also lose value (sometimes quickly).

Real value in shares is in long-term positions (just ride out the dips) but margin borrowing can force sales inside a dip if you are over-leveraged. How much you lever depends on your appetite for risk.

In a recent exchange with a potential client I explained that I get paid up front. He normally pays 90 days. He complained that my approach meant he'd "take all the risk".

"Exactly."

I offered to requote, where I take the risk, but I warned him it would be substantially more -because I put a high value on risk-. He trusted me enough to pay up front, and his risk paid off.

It's hard to quantify risk, but it really helps to at least understand it exists, and what the risks are. "Seeing" risk takes some practice.

[s1artibartfast]

I think you have an excellent analogy. The thing I like about it is it includes the fact that there is often a large cost for not taking risk. I feel like a lot of otherwise smart people get caught up in avoiding risk buy overlooking the cost to do so.

In my opinion there's a hierarchy of understanding but I've gone through. The first is not understanding risk, followed by understanding risk and avoiding it, followed by understanding the cost of avoiding risk and trying to find the right level.

Like you point out, the cost of avoidance can be quite substantial.

[bruce511]

Yes, because risk has value, there are substantial gains yo be made taking on risk (and it working out), not to mention substantial losses by both avoiding risk or taking the risk on and it not working out.

From a purely business perspective its ideal to make the other guy take the risk, without financial penalty. More often both parties understand risk and can figure out who wants the value/risk and who prefers the less value/less risk.

[s1artibartfast]

I dont disagree. My point is mainly that if you are always avoiding risk and incurring the cost, you probably aren't doing it right, and probably don't understand the costs you are paying.

Not all losses are substantial, and not all substantial losses are greater the cost to avoid it. don't pay $20 for insurance on a $1 package.

[hunson_abadeer]

> People do it all the time and to far greater extremes. A mortgage to buy a house to raise a family at 30 instead of waiting until 60 is also a form of consumption smoothing.

I wasn't advocating against risk-taking. I was advocating for doing it purposefully. Homeownership offers compelling and long-lasting quality-of-life benefits, and it's arguably not even pure "consumption" due to the acquisition of home equity.

Borrowing to buy a "status" car in your 20s, on the other hand, is probably a bad plan. Fleeting gratification and most of the money goes down the drain within 2-3 years. And if you get in the mode of living on credit day-to-day, you're probably gonna be making a lot of purchases of that sort.

[s1artibartfast]

In my reading the author has a pretty good head on their shoulder and an understanding of risk. They aren't going on buying a status car. It sounds like maybe you have a good understanding too if you're not doing the same. So why the concerned reaction to the post? Do you think they're actually making a mistake or are you more worried that someone might read it and get the wrong idea?

[hnfong]

> A mortgage to buy a house to raise a family at 30 instead of waiting until 60 is also a form of consumption smoothing.

FWIW I think that's nuts too. Maybe it makes sense for people with a well defined, stable, secure career track (eg. civil servants, academics with tenure, etc.), but for those whose job could be severely disrupted by various shocks (which IMHO should include the majority of people), this taking out a mortgage under the assumption that your earnings would rise as your career progresses is really nuts.

Of course, the idea that a person takes out a mortgage at 30 is baked into modern society, so there are massive social structures to ensure that the average person is actually able to pay off their debt eventually. This includes shaming corporations for firing people or reducing wages for underperforming employees, government subsidies for business that should have just failed, underpaying juniors because otherwise who got money to raise your wages when you have 10 years of experience, etc. etc...

[s1artibartfast]

I don't think it's nuts. I think there are huge costs to not taking risk that are often greater than the actual risk people take on. And it's a balance and you're not going to get it right by avoiding risk entirely.

[morpheuskafka]

> The rates and the terms of your credit card debt can change overnight.

That's not true for the promotional APRs he is relying on, they are fixed for a certain term and can't just be cancelled by the company.