Compassion, Credit, Credibility and Context

The other day I have heard Warren Buffet speak on one of the financial news channel. He was asked to give advice to people in this difficult time and one of the things he advised was to get rid of and avoid credit card debt, and laughingly he joked that even he can’t afford such expensive debt. That might seem funny but the more I reflected on it the more I thought that it reflects a fundamental lack of compassion and understanding for the circumstances and context that force people to resort to such high cost financing.

Intellectually for a value investor without any cash flow problems, who is following the teachings of Benjamin Graham the idea of paying interest that is many multiples higher than US treasury yields is naturally preposterous. For a company not to use high debt to finance ongoing operations is a sound advice.  However invoking that frame of reference is grossly irresponsible when talking about the cash strapped individual who is reaching for credit card debt. The idea of a distress entity is more relevant than a blue chip going concern. Thus Michael Milken and not Benjamin Graham should be the conceptual reference. Yes, junk bonds.

Now such distress individual will have totally different risk profile than a value investor. Most obvious difference is that from capital preservation versus self preservation. Again the difference is profound, as somebody who is aiming for market returns while balancing the risk of a downside will not take same risks as somebody trying to hold on to his place in life, trying to feed his kids and keep his apartment. To me the psychological risk profile of the credit card balance holder is very similar to the bank CEO who stretches the balance sheet to leverage the returns and maximize his upside with disregard for the downside.  Although the latter does it out of pure greed where as the former does it out of survival instinct. Results are the same, resulting with putting someone else’s capital at risk, but contexts are different.

However irresponsible it is to criticize someone’s survival instinct mistaking it for stupidity, it does not change the result of increased capital at risk. That is partially why I have difficulty with the credit card reforms. Although I fully grasp the need to protect the consumer from the tricks and traps of the credit card companies, I can’t help but see the line of credit as a corporate revolver type loan that is only drown in full in time of a distress!!!  Yes, it turns to junk at that point. So for cash rich Buffet to give a blanket advice against such instrument is plain silly!!!

What’s the point of all this? I believe even celebrated oracles like Warren Buffet, or perhaps particularly such celebrities, should try to refrain from giving blanket advice at risk of sounding really silly and out of context!