The Value of Debt: How to Manage Both Sides of a Balance Sheet to Maximize Wealth

Chapter 5

Long-Term Wealth Amplification through Capturing the Spread

The Basic Concept: Inherent Risks with Great Potential Rewards

Capturing the spread is a pivotal concept in Strategic Debt Practice and Philosophy. Capturing the spread refers to targeting and then capturing a return on investment that is higher than the cost of the debt—after taking into account all tax implications and transactions costs—that you take on to make that investment.1 Put differently: Remember that Increased Leverage is one of the four Indebted Strengths that becomes available to you as part of Strategic Debt Practice. When you endeavor to capture the spread, then, you are using that Increased Leverage to attempt to make money on the money that you borrow.

But isn’t this a risky practice? Borrowing money to make more money may seem foolhardy, and indeed, there are certain risks attached to it. There are no guarantees—and there can be no guarantees—that there will be a positive spread that can be captured. Any investment can go south, even those that seem rock bottom safe and secure. Things can always go terribly wrong.

For example, even if you are investing in apparently low-risk fixed-income instruments, the corporations, municipalities, or other governmental entities (domestic or foreign) whose bonds you hold could go bankrupt. If this happens, and you have borrowed against your ABLF, there might be a forced margin call on the account. In this way, you might end up increasing your risk of financial ...