When you think about the most successful companies in the world, Apple is likely one of the first to come to mind. After all, Apple was the first public company to reach a $1 trillion and then eventually a $3 trillion valuation.
Apple also maintains massive cash reserves. So I was confused to learn that in 2021, Apple borrowed $14 billion to buy back stock, even though they already had about $200 billion in cash and marketable securities.
Reading this information and thinking about the logic behind it taught me an important lesson that has changed the way I approach my own financial decisions.
Are Loans Only a Last Resort?
I used to think the only reason to get a loan was if you didn’t have the money yourself. What’s the point of going into debt if you don’t need to? Plus, taking out a loan is riskier than using your own money, because it requires you to take on the responsibility of repayment.
But learning that hugely successful companies like Apple were getting loans made me reexamine this belief and start thinking about debt differently.
In the article I read about Apple, they explained that the interest rate on the $2.5 billion, five-year notes Apple took out was lower than the after-tax cost of paying out dividends to shareholders. This is because interest is tax deductible for Apple, whereas dividends are not, bringing the interest rate to 0.55%, compared to around .65% yield on Apple stock.
By borrowing money to buy back shares, Apple would actually save money for the long term, without sacrificing its cash reserves. And those benefits will only increase over time if Apple’s valuation continues to grow. Pretty cool for Apple, right?
Consider How Leverage Can Help You Reach Your Goals
So how does this insight translate to the average Accredited Investor?
Even when interest rates are high, the rate of borrowing money is relatively low compared to the returns you can generate from many investments.
So when you want your money to be working for you as effectively as possible, sometimes it makes sense to maintain a cash reserve while strategically using leverage to accomplish your investing goals.
As long as your expected returns are higher than the interest rate on your debt, and you’re comfortable with the level of risk you’ll take on, borrowing money can be a valuable way to increase your wealth over the long term.
Invest Like a Contrarian
This specific example of learning from Apple’s financial decisions also reinforced a larger investment principle for me: If you want to experience the best results, you need to invest like a contrarian.
It’s natural to focus on popular or “traditional” investments, especially when you are new to investing, or you didn’t grow up in a family that talked openly about wealth. But the most effective investment strategies are usually not the most well-known.
This is why the rich continue to get richer, because they have access to certain strategies and investment opportunities that the general public may not ever find out about. So if you want to grow your wealth, you need to steal a page from the ultra wealthy playbook and start investing like a contrarian.
This could look like prioritizing tax efficiency in your investments, or divesting some of your wealth from the stock market to focus on alternative assets instead.
If you’re ready to stop doing things the same way you’ve always done them and start trying something new, our team at First Generation Capital Partners can help you get there. Simply fill out this form to get in touch.