Book Review: “The Value of Debt” by Thomas Anderson

To be fair, no one asked me to review this book. I picked it up off the bookshelf at my local Keller Williams real estate office a few days ago when I was in. They had about 10 copies dropped off and it caught my eye.

First off, the book is horribly written. The author spends way too much time to get his point across, it is difficult to follow, and he doesn’t elaborate enough on things that could be very interesting. He puts checklists in each chapter for you to complete after reading, which are often follow up questions to the concepts he presented, such as “Are you clear about this concept?” It’s as if he tried to write a workbook and novel at the same time and tried to stay away from the narrative style of other financial books. The book was also written specifically for high net worth individuals with large amounts of after tax investments, specifically stocks, bonds, and securities. There was almost no mention of investment real estate or businesses.

That said, there were two main ideas that I found interesting:

  1. Personal financial situations should be viewed with similar views as a CFO views his corporations financial situation, holistically and rationally.
  2. Maintaining a constant personal debt ratio, much like a corporation, can help an individual grow his net worth.

The first point warranted more discussion in the book than was there. He did mention that the prevailing theory for personal financial success is to get out of debt and stay out of debt and that corporations think differently. Does Wal-Mart have debt? Of course they do; billions even. Could they pay off their debt any time they wanted to? Of course. But they maintain debt to free up cash for other things. Mr. Anderson states that strategic debt use provides four key qualities: increased liquidity, increased flexibility, increased leverage, and increased survivability. He spent considerable time discussing using debt to recover from a natural disaster, using the example of a flood and being able to use a credit line to pay for rebuilding a home or business and not having to sell securities or other assets or having to wait for insurance checks to kick in. He also presented the idea that debt could be used to “capture the spread”. Capturing the spread isn’t a new idea, and it’s one that I think you have to be very careful about implementing.

He also focused on a particular product called an Asset Based Loan Facility (ABLF), which is a credit line offered by investment banks using the value of your securities as collateral. I had actually never heard of this product until a very short time ago and the concept is very intriguing. An ABLF is offered through an investment bank or brokerage house. I listened to a gal from Morgan Stanley talk about one recently. The bank will give you a line of credit at a very low interest rate and with little or no fees based on the value of your portfolio held with them. So if you have $1 million in investments at Morgan Stanley in various stocks, bonds, mutual funds and money market accounts, they will give you a credit line of $500,000. You can then draw on it at any time and in many scenarios you don’t have to make payments unless you want to.

While I am interested in this type of an account and structure, the book almost became a commercial for this type of credit line. He used the example over and over again to show how having access to funds could help someone recover quickly from a natural disaster or buy a new car at a discount because funds are available immediately.

So, don’t waste your money on this book. If you find it laying around, feel free to skim it a little, but it’s definitely not worth a read.

There were to ideas from the book that I do think warrants more thought. The idea that individuals have a debt ratio that they can manage to is intriguing to me. I had never really thought about monitoring and maintaining a ratio. I have used debt to purchase investment real estate and having a little bit of other debt hasn’t ever bothered me, but I had never thought about it in that context. Here are two actual examples:

This past year, my credit card has crept up to close to the limit. We bought another investment property last summer and some of those expenses (the annual payment on the homeowners insurance, materials, etc.) went onto there. My wife also had emergency dental surgery, so I put $2,000 from that onto the card. Add in college tuition for my son and during the year I spent more money than I had planned on and put it on the credit card. Now I know a lot of people that think this is really bad. I’m carrying credit card debt! That’s bad! And yes, I recognize that consumer debt is bad debt, and I do intend to pay down my card to zero within the next couple of months. But during the year I continued to contribute the maximum to my 401k and I bought a townhouse as investment property. Last year, my net worth increased by over $100,000. So even though I increased my personal debt by about $6,000, my net worth rose considerably. I use the credit card to even things out so that when there is an opportunity to invest in something, I have the cash available. And over the past few months I’ve been paying down the debt on my credit card and credit lines.

I do believe that having access to money is important. I don’t keep six months of living expenses in a savings account. I would earn .025% interest on that money and it’s better off being used to purchase investments or to pay down a credit line at 4% interest. And if I need it for something, like a house or business, then it’s available. I hadn’t ever thought about maintaining a debt ratio and what that would like look. Do I include investment property in my debt ratio? Do I treat them differently? Owing $200,000 on a property worth $400,000 and generating income of $30,000 a year is completely different than owing $200,000 for a boat or car (depreciating assets). My debt ratio is probably around 80%, but it’s possible that I’m in better financial position than someone with a 5% debt ratio, with $100,000 in savings and $5,000 in debt. So it can get complicated and interesting. And like many financial measurements, there isn’t a right answer or ideal rate. It will depend on the type of debt you have, the type of assets you have, and what your income looks like.