The Leaderonomics Show: ‘Don’t Lend Money To Friends,’ Says Marc Faber

Editor’s note: This interview was originally recorded in 2011.

Marc Faber is a world-renowned investor, known as “Dr Doom” in reference to his consistent – yet often accurate – negative outlook on equities.

The Swiss economist earned his PhD in Economics at the age of 24, graduating magna cum laude. He moved to Hong Kong in 1973, where he was the managing director of Drexel Burnham Lambert Ltd from 1978 until the company collapsed in 1990. Following the collapse, Faber set up his own business, Marc Faber Ltd, and still maintains a small office in Hong Kong, while residing in Chiang Mai, Thailand.

As a respected commentator on investments and global trends, Faber has written several books and publishes the monthly investment newsletter The Gloom, Boom & Doom Report.

An eye for economic foresight

In his appearance on The Leaderonomics Show, hosted by Leaderonomics chief executive officer Roshan Thiran, Faber gives fascinating insights into his decades-long career, sharing his expertise collected over the years through his sharp analysis of trends and shifts in the markets over time.

Elaborating on his Dr Doom moniker, Faber cites the huge economic boom between 1982–1987 and his prediction that the markets would crash – a prediction made just one week prior to when they did so.

“A journalist in Hong Kong started calling me Dr Doom,” he explains. “I started to predict that the Japanese stock market would be cut by 50% – in the end, it actually came down by over 70%. And then, in the 1990s, I felt that technology stocks in America would collapse, and so many times I’ve identified markets that have been overvalued.”

Far from being a merchant of doom, Faber had also discovered a number of emerging markets, including South Korea, Taiwan, and countries within Latin America, marking a period that inspired his book, Tomorrow’s Gold: Asia’s Age of Discovery.

Good investment? Bad investment?

“There’s no such thing as a good investment or a bad investment,” he insists. “Every asset class – whether it’s real estate, or stocks or bonds or commodities, diamonds or precious metals – there’s a price at which it is a good investment, and there’s a price at which it is a bad investment. One has to always relate everything to what the price of an asset is at that particular time, relative to other prices.”

Despite his expertise and almost clairvoyant ability in predicting trends, Faber insists that it’s impossible to predict what’s going to come in the future, and credits his success to his ability to observe and analyse patterns over long periods of time.

He says, “I started to work in 1970 and if I look back from 1970 up until today, because I’ve been writing every week and every month and giving speeches, it’s easy for me to see the whole investment environment going by like a movie in front of my eyes.

“I’ve also travelled a lot and seen a lot, and so I’m able to get the full picture of where a country has been, where it is now, and where it might be headed. It all adds up to a very interesting experience.”

Faber’s 4 top tips on investing

1. “If you cannot tolerate 30% downside volatility when you buy something, don’t even get out of bed in the morning.”

If we buy a house in Kuala Lumpur today, it can easily depreciate in value by 30% before it rises five times – this is the kind of volatility we have to live with.

2. “As an investor, what you think is irrelevant.”

Investors operate in a market – each investor is just one person among a huge number of participants. Faber warns that, “What you believe is not relevant to what will happen in the market.” To avoid the pitfall of relying on our own judgments, he advises that the best approach for investors is to diversify their assets.

3. “Live – and invest – with low leverage.”

Low leverage refers to not borrowing money – or borrowing minimally when necessary (e.g. when buying a house). According to Faber, living in this way means that we will live a happier life because “you’ll never be pushed to the wall when markets go down.”

4. “The worst investment you can ever make is to lend money to friends.”

Lending substantial amounts of money to friends, whether it be for starting a business or buying property, is a potential recipe for disaster, given the familiarity and bonds that exist between friends. If there are difficulties with repayments, one could end up losing the money loaned, as well as the friendship.

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