Living Tax-Free off Magical Internet Money - DeFriday #14

Larry Ellison is one of the richest, and the most indebted, people alive.

The term “debt” often sounds negative, but when used strategically, it can be a powerful tool for long term wealth creation or preservation.

Home mortgages are a classic example. A mortgage allows you to pay for your house over 30 years instead of having to pay for 100% its value in cash at closing. Right now, for this privilege, you’d be asked to pay only 4-20% down and a 3% interest rate which, when you factor in inflation, means you’re paying almost nothing for getting to spread out your payments over three decades.

Aside from buying a house, debt can also be helpful in other ways: like when it saves you from paying extra taxes, or from missing out on future asset appreciation.

So back to Larry Ellison. Why is he one of the most indebted people alive? He owns 22% of Oracle, and he's pledged 250 million of his shares (about $22.5b worth right now) as collateral to borrow against.

That essentially creates a credit card with a $22b spending limit that he can use for anything he wants, as long as the Oracle price share doesn't crash enough for him to get margin called.

$22b is an insane amount of credit to tap into, and it’s hard to imagine coming close to using it, so why does he have this massive credit line instead of just selling some Oracle shares?

There are two big benefits: