The Golden Rule: Don't have Debt

In the personal finance world we all know that debt is the sure fire way to live moneyless and is the reason why people cannot create wealth. You know how I feel about debt and that we as a nation have to stop carrying debt from individuals, corporations, and mostly our government. If you don't care about those things I would highly suggest watching I.O.U.S.A. I believe for the most part, that a large majority of US consumers have figure this out and are working to cut down their debt. I am pretty sure that our government is doing the exact opposite as running up massive debt—which we will talk about later.

I came across an article yesterday on cnnmoney by Paul La Monica that talks about how companies with low debt loads are out performing stocks of firms that are in massive amounts of debt. Here are some interesting stats from the article:

According to figures from Thomson Baseline, shares of S&P 500 companies with a long-term debt to capital ratio below 34% -- the S&P 500 average -- are up an average of 10.3% this year. The S&P 500 stocks with debt loads above 34% are up only 1.2%.

This holds true for smaller companies too. Firms in the S&P SmallCap 600 with a below-average debt load are up 7.2% this year while those with higher debt loads are down 1.6%.

Shares of S&P 500 firms that are debt-free are up an average of 15.6% this year. Debt-free tech giants Apple and Google have both surged more than 30%.

So we can see here as well, that for companies and personal investors, that debt is not the way to go. If you were to invest your hard earned money in a company, would you invest in a company whose balance sheet is pristine or in one that is carrying a load of debt?

Craig Callahan, founder of ICON Advisers, an investment firm with $3.5 billion in assets tells us why companies that have low debt have an advantage.

"In times like this, companies with high cash and low debt levels are in a better position to survive and take advantage of opportunities to grow through acquisitions,"

"Any type of financing is tough to come by. And in cyclical businesses, firms with no or little debt have a competitive advantage,"

Paul La Monica even names our good government handout buddies Lehman Brothers and General Motors along with General Growth Properties as example of companies that carried around to much debt. (note: why wouldn't they take on risk if they are going to get bailed out? General Growth Properties filed for bankruptcy) Callahan makes a great point when he says that companies with high cash and low debt levels are able to grow through acquisitions. Only if the government would allow companies to fail so other companies could buy up there assets and expand.

The golden rule here is pretty simple: don't have debt. Don't carry around personal debt, don't invest in companies that have debt, don't be a business that carries debt, and don't allow our government to spend us into nonsustaining debt. Why can everyone see this except our government?

Related Post

I.O.U.S.A - One Nation. Under Stress. In Debt 

GM - Government Motors

Peter Schiff: Daily Show

Cartoon by Marshall Gamsey from the Clarion Ledger

Would you invest in a company that was high in debt? Is debt ok for some individuals, businesses, or our government? Leave a comment!