As far as I understand it, a billionaire’s wealth is wrapped up in stock, which is used as collateral to borrow money to actually spend. So how do they pay off those loans? With other loans? Loans all the way down?
In: Economics
Recently, the guy who started Dell computers cashed-in $10 Billion in Dell stock. For the last 20 years, his stock has been on a steady rise, and if he could get a huge loan against his stock holdings for 5% a year, but Dell stock can average 15% a year, it is better for him to live off a loan for 20 years, and then cash-in and pay off the loan + interest.
He is supposedly worth over $40B, so the strategy of holding onto his stock has worked out for him.
If he used a lot of that loan to buy high-end real estate, the properties went up in value too, so he was practically “double-dipping” which is risky. The stock and the real estate can both go down in value, SO…you need to maintain enough liquidity (financial resources) to ride out any temporary dip in values.
If you are ever forced to sell in a down market, the losses will become exponential.
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