The only exception that comes to mind is when a company is unprofitable but also needs a war chest of cash to weather tough times.
In Feb 2000 (right before the dotcom crash), Amazon raised almost $700m in convertible debt from European investors, which ended up saving the company and allowing it to become the 4th most valuable company in the world today. https://www.vox.com/new-money/2017/4/5/15190650/amazon-jeff-bezos-richest
Easy to say it was the right move in hindsight, right? But ex-ante, we’d have to be in Bezos’s shoes to fully understand the menu of options he had at the time. From the outside, it’s clear he increased the company’s risk level and arguably threatened its survival—but what were the alternatives? Why didn’t he raise equity when valuations were supposedly sky-high? Was the raise even necessary? Was there pressure from other investors? Amazon wasn’t profitable in February 2000, so it may have had no choice.
However, the counter argument is the position adopted by John Malone during his remarkable tenure at Tele-Communications Inc.
Malone was not afraid to utilize relatively large amounts of debt to grow the business. He knew that interest payments are a tax deductible and that mitigating tax liabilities by increasing debt meant that he could apply more of the cash generated by his business in a manner that would compound for the benefit of shareholders rather than simply handing it over to the tax man. Said differently, he believed financial leverage had two important attributes: it magnified financial returns and it helped shelter pre-tax cash flows from the tax man.
During Malone’s term as CEO from 1973 to 1998 he generated a compound annual return for his shareholders of 30.3%. In other words, each dollar invested in TCI over that 25 year period would have grown to $900
I think the conclusion is that leverage can be dangerous when used to excess, but in moderation its benefits outweigh the risk. The danger is not so much the debt, but the incompetence of the management using it. In the right hands, it is a powerful growth tool.
The curious cases are those where companies are sitting on huge piles of cash for which they have no immediate need, and yet they also carry significant long-term debt on the balance sheet (think Apple and Berkshire Hathaway).
I agree with you. In fact, I was debating whether to include Malone as a counterexample. If I recall correctly from William Thorndike’s The Outsiders, one of the defining traits of those exceptional CEOs was their use of debt.
Of course, the main spirit of the article isn’t to be dogmatic, but to offer a counter-narrative. Even the best CEOs profiled in The Outsiders used debt selectively and cautiously—only when the returns were compelling and the risks manageable. They consistently avoided leverage levels that could threaten financial stability. In short, their approach to debt was disciplined and opportunistic.
I’ll definitely keep this line: “The danger is not so much the debt, but the incompetence of the management using it. In the right hands, it is a powerful growth tool.”
Hi, thanks for sharing your perspective. I see your point—capital structure should reflect an industry’s volatility and a company’s risk tolerance. Different businesses do have different leverage profiles. But I’d argue “minimize debt” is not lazy—it’s a deliberate choice for resilience over optimization in an (increasingly) unpredictable world, as I outlined in the article.
For many companies I look, especially smaller or less predictable ones, sizing debt to “n-sigma” volatility assumes you can accurately model risks that often are impossible to quantify. as i mentioned in the piece, I prioritize survival and optionality. Stable large caps might handle more debt, but for most of my investable universe, staying unburdened is a sensible strategic choice, not a shortcut.
“Minimize debt” to avoid all risk of blow up is similar to “never get in a car” so you can’t die in a car crash
Yes, you will live longer but you won’t get very far
And the “n”-sigma is meant to be colloquial not quantitative…the point is that you can set your risk tolerance according to some observable volatility plus or minus risk tolerance
Most companies have fairly paltry ROAs and refusing to use any leverage to juice that up is just a bit silly
Number 38 is the one where people die.
The best companies are anal retentive, floors are too clean, too much attention is devoted to reliability and maintenance.
When equipment is purchased and the purchasing department is more involved than the reliability engineers, be warned.
Good point.
The only exception that comes to mind is when a company is unprofitable but also needs a war chest of cash to weather tough times.
In Feb 2000 (right before the dotcom crash), Amazon raised almost $700m in convertible debt from European investors, which ended up saving the company and allowing it to become the 4th most valuable company in the world today. https://www.vox.com/new-money/2017/4/5/15190650/amazon-jeff-bezos-richest
Interesting — I wasn't familiar with that raise. I suppose for companies at that stage, the math works a bit differently.
What would we say if the move ended up bankrupting the company? Ex-ante Vs Ex-post.
Easy to say it was the right move in hindsight, right? But ex-ante, we’d have to be in Bezos’s shoes to fully understand the menu of options he had at the time. From the outside, it’s clear he increased the company’s risk level and arguably threatened its survival—but what were the alternatives? Why didn’t he raise equity when valuations were supposedly sky-high? Was the raise even necessary? Was there pressure from other investors? Amazon wasn’t profitable in February 2000, so it may have had no choice.
Absolutely.
Another great post.
Generally I agree with its sentiment.
However, the counter argument is the position adopted by John Malone during his remarkable tenure at Tele-Communications Inc.
Malone was not afraid to utilize relatively large amounts of debt to grow the business. He knew that interest payments are a tax deductible and that mitigating tax liabilities by increasing debt meant that he could apply more of the cash generated by his business in a manner that would compound for the benefit of shareholders rather than simply handing it over to the tax man. Said differently, he believed financial leverage had two important attributes: it magnified financial returns and it helped shelter pre-tax cash flows from the tax man.
During Malone’s term as CEO from 1973 to 1998 he generated a compound annual return for his shareholders of 30.3%. In other words, each dollar invested in TCI over that 25 year period would have grown to $900
Source: https://rockandturner.substack.com/p/john-malone-learn-from-the-best
I think the conclusion is that leverage can be dangerous when used to excess, but in moderation its benefits outweigh the risk. The danger is not so much the debt, but the incompetence of the management using it. In the right hands, it is a powerful growth tool.
The curious cases are those where companies are sitting on huge piles of cash for which they have no immediate need, and yet they also carry significant long-term debt on the balance sheet (think Apple and Berkshire Hathaway).
Hi James, thank you for your thoughtful comment.
I agree with you. In fact, I was debating whether to include Malone as a counterexample. If I recall correctly from William Thorndike’s The Outsiders, one of the defining traits of those exceptional CEOs was their use of debt.
You’ve got a great video on that topic here: https://rockandturner.substack.com/p/rolling-the-dice-the-leadership-gamble?utm_source=publication-search
Of course, the main spirit of the article isn’t to be dogmatic, but to offer a counter-narrative. Even the best CEOs profiled in The Outsiders used debt selectively and cautiously—only when the returns were compelling and the risks manageable. They consistently avoided leverage levels that could threaten financial stability. In short, their approach to debt was disciplined and opportunistic.
I’ll definitely keep this line: “The danger is not so much the debt, but the incompetence of the management using it. In the right hands, it is a powerful growth tool.”
No, your capital structure should be sized relative to your industries “n”-sigma volatility, depending on your risk tolerances
“Minimize debt” is a lazy optimization
“Minimize debt subject to some risk tolerance/balanced system” is how the world generally works
That’s why you naturally see different industries with different leverage profiles, some businesses truly can handle more debt.
Hi, thanks for sharing your perspective. I see your point—capital structure should reflect an industry’s volatility and a company’s risk tolerance. Different businesses do have different leverage profiles. But I’d argue “minimize debt” is not lazy—it’s a deliberate choice for resilience over optimization in an (increasingly) unpredictable world, as I outlined in the article.
For many companies I look, especially smaller or less predictable ones, sizing debt to “n-sigma” volatility assumes you can accurately model risks that often are impossible to quantify. as i mentioned in the piece, I prioritize survival and optionality. Stable large caps might handle more debt, but for most of my investable universe, staying unburdened is a sensible strategic choice, not a shortcut.
“Minimize debt” to avoid all risk of blow up is similar to “never get in a car” so you can’t die in a car crash
Yes, you will live longer but you won’t get very far
And the “n”-sigma is meant to be colloquial not quantitative…the point is that you can set your risk tolerance according to some observable volatility plus or minus risk tolerance
Most companies have fairly paltry ROAs and refusing to use any leverage to juice that up is just a bit silly