Using Other People's Money. Mentor Series No. 1

This posting is one of three postings I will do on mentors who helped me become a successful trader, business person, and investor. Today mentor series no. 1. Maybe they can help you too.

Back when I was a young man and wanting to succeed in this world one thing I learned early on was to listen, and listen carefully, to those who had been successful. In 1979, still in my twenties, I picked up some advice from someone who ran a business at the time I never forgot. The business was a auto dealer owned by two friends who I was selling advertising to at the time. Over the years I had done business with many auto dealers who had done well, but only a few who had done well by starting their business from scratch. I wondered at the time how did these young entrepreneurs get started and what was their secret. The vast majority of us are not born with wealth so how you are to gain wealth if you are not born that way? So being inquisitive I walked into my auto friend's office one day and asked him that very question. His advice was not only given in a what is now called a sound bite that I could keep over the years, but he went on to explain in about 10 minutes his reasoning. His wise counsel at that time has helped me many times the last three plus decades.

His advice was "use other people's money". More precisely when you do not have enough capital to do what you want to do in business you use other people's money by borrowing it, making your profit, and paying it back. I know the first thing you ask is just how do you get someone to let you borrow their money? Well you earn that right, by convincing the people you are borrowing from you are good for re-payment of principal and payment of interest on the capital. You can do that either by having an excellent idea that other people believe will make money or having a consistent record of having used other people's money and repaying with interest.

Now I have never been one for original ideas, so no one will likely ever let me borrow from them on that approach. However I have been an excellent risk and proven many times that I can borrow, pay interest, and pay back other people's money. Over time I have expanded that trust to the point I can borrow seven figure amounts now with just my signature. Using other people's money and paying interest for that use means you must not only make enough profit to pay the interest, but also enough to retire the debt and make yourself some money on the borrowed money as well. Today my main lenders allow me to borrow at 3.75% and 4.75% interest rates. So if I borrow money for my hedge fund, and make my lowest profit during the last three years of 15% or so, I am making 10% plus on the borrowed money. That is enough to pay back the principal, pay the interest, and still have a tidy profit.

The decision now is no longer how much can I borrow, but how much risk do I want to take to make more profit. Like an other entrepreneur I make decisions based on market situation, competitive advantage, and unfortunately political considerations. So the lesson here is if you do not have capital to pursue your business and dreams find a way to use other people's money. My mentor, Tommy Baker, many years ago gave me that nugget of wisdom that allowed me the opportunity to pursue my dreams.

Tommy Baker is today a successful luxury auto dealer in the southeast. I expect still using other people's money.