WHY DEBT IS NO LONGER A DIRTY WORD

Debt is one of those dirty words that people don’t seem to like to talk about, especially in my household when I was growing up. That’s because being part of that first generation of children that were born in this great country to migrants from Panjab (India) in search of a better life, I have had instilled in me from a very young age that debt equates to the devil. Even when people struggled to feed their families taking out debt was the last thing on their minds. If we had no food, my parents would find another way. Debt was that bad that we could go without clothes, books or food if necessary but we would never borrow. That was just the way it was. It was how everybody was in my family and how my relatives were. It sounds very odd to write these words today as I sit in my office in the heart of the City in one of the wealthiest districts in the world. It is a million miles away from my humble background in Coventry but the lessons still remain with me today. Of course, growing up ‘poor’ in Coventry was still the equivalent of being rich compared to that of the even greater poverty that was being witnessed in India every day. Back then in India parents would kill their children for fear of not being able to feed them, it was that bad. Now debt has become a part of Panjab with devastating consequences. Farmers in Panjab are being forced to take out debt to pay for vital machinery to sow the fields and when they are unable to keep up with their payments rather than the farms be taken away from them they are driven to committing suicide so that their children can continue to live. It saddens me to think that my beloved homeland now has the highest suicide rate amongst farmers anywhere in the world. And all because of debt. You can see why debt means much more to me than just another number on a company’s balance sheet. My loving grandmother (on my mother’s side), before she passed away, used to tell me stories of how when she was a little girl. Sometimes things were so bad she had to feed her two younger brothers with any food that she could find. Allowing her brothers to share a single, small onion between them while she went to sleep hungry was a way of life back then. I could tell you many stories like these but I will refrain, and perhaps we can revisit it another time. The reason that I share this with you is because it is this education, experience, and no doubt thousands of years of in-built DNA which meant that for the first 25 years of my life I have regarded debt as evil. Even as an economics graduate and business post-graduate one would expect that I understood debt and the power of leverage. But I genuinely don’t remember learning a thing. I think I must have either missed those classes on debt or my brain switched off intentionally at that time. Either way I never understood, let alone used debt for the first 25 years of my life. The one time that I did use debt it was very destructive because it was for entirely the wrong purpose – that was because I was on a very misguided path, but I won’t dwell on that today. What I will dwell on however is that debt is actually a good thing, or at least it can be when used correctly. Debt allows magnification or leverage so if you have a good business idea that you believe can make money then debt allows you to magnify the profits that you would otherwise have made. It also allows you to complete that journey more quickly and time is money. However, if your business idea loses money then leverage can also be a disaster as it will multiply your losses. When it comes to property and if you want to scale up then leverage is absolutely paramount and it’s a mistake that I didn’t do use debt when I had the opportunity to do so, when taxes were more favourable and house prices more reasonable. However even though I know it was a mistake not to use debt, it’s still hard to shake off the lessons that I learned from my family, as well intentioned as they may have been. It’s no coincidence that the richest country in the world also happens to the one riddled with the most debt, a staggering $20 billion. They also have a high level of debt to GDP which sits at a pretty tasty 75%. In many ways people and countries are the same – the only difference is that countries can print money, individuals can’t. It’s the same also with business. If you want to be successful then taking out debt to scale up quickly is usually a sensible thing to do. Of course, not all businesses either use or need debt. As a business we (London Stone) don’t have debt for example so I know that I am still partially wired into thinking that debt is bad and that I am still not fully cured of this illness. I guess deep down I still don’t use debt because I am still fearful. But there are plenty of businesses that don’t use debt because they don’t need to. Apple for example has such a great product and has such a successful business model that it is sitting on $300billion of cash but unfortunately for them (or fortunately because they avoided paying tax) it’s sitting overseas which means that in order to repatriate it back to the US it will cost them around 35% in tax. The Trump Government has said that they will reduce this down to 12%, but in the meantime the firm is now raising debt by issuing bonds to help them expand their empire even further. Issuing debt to raise finance is actually a relatively cheep way to finance investment and can help a business really take off and expand. You just need to be sure to invest the money wisely and make a profit. The point is that as with life, anything in moderation, is good and debt is no different to this. For me personally I still feel that I will never be 100% comfortable with debt but at least I have got past my demons and no longer is ‘debt’ the dirty word that it once was.