Doug Kinney. A normal guy, striving to be great at his job, striving to be a great husband, striving to be a great dad, and always trying to find more hours in the day – but there is just never enough time, never enough Doug to go around.
Doug Kinney is the main character in the comedy Multiplicity. Michael Keaton plays Doug, and the film was released in 1996. I happened to re-watch Multiplicity this week.
(I am a glutton for 90’s comedies. Anything Billy Crystal, sign me up.)
I am sure many of us could relate to Doug. That feeling of being maxed out or stretched. The anxiety of starring down a pile of projects that are yet to be started and deadlines coming due, all alongside one’s normal family commitments and responsibilities, can build to a frightening height. Life can be stressful.
I Create Time…
In Multiplicity, Doug reached his breaking point when he had this serendipitous encounter with a stranger – Dr. Leeds. Doug finds himself venting about how overwhelmed he is to this stranger who offered a willing ear to listen. At one point in the conversation, Doug stops his rant and inquires, “What do you do?” and Dr. Leeds replies, “I make miracles… l create time… l make clones.”
And so the comedy begins, as Dr. Leeds clones Doug. From here, Doug and “Clone Doug” go on to live Doug’s life, splitting up the duties of work, family, and leisure. With the intent of making life easier, two people (“The Doug’s”) set out to tackle all the responsibilities of one person, and you can imagine the antics and humorous mishaps that happen along the way.
Clones Are Like Debt
Dr. Leed’s description of his trade stuck with me, “I create time.” This was his self-proclaimed slogan. Essentially, making a carbon copy of someone allowed them to be in two places at once, which created more time. Being a finance guy, I actually thought this was a perfect way to describe borrowing. Debt (borrowing) allows your money to be two places at one time. Debt is a way of cloning your money; debt creates time.
Growing up, I adopted a negative view of borrowing. I saw many family members get in over their heads in debt, which eventually led to horrible things like divorce and bankruptcy. I looked up to many people in my community and at my church who talked about debt as something dangerous or evil. I always thought it was best to avoid debt like the plague with these exposures and perceptions.
When I went to college, I worked full-time and paid for all my classes as I went. I never took out one student loan for undergraduate or graduate school. I was afraid of borrowing because of the damage that I had seen it cause.
In my first Corporate Finance course in grad school, I started to really comprehend the math behind leverage (borrowing) and the potentially positive outcomes it could create for a company. By looking at the interest expense associated with the debt concerning the potential return on capital, one could decipher if it was prudent to borrow.
Prudence was the key.
This new lesson on prudent borrowing shifted my paradigm of how I viewed debt, and my long-held negative associations of debt were being challenged.
Debt Is Neutral
Here’s the question, is debt a good thing or a bad thing? Neither. Debt itself is neither good nor bad inherently. How debt is used and in what manner is what one should judge its appropriateness by.
Maybe the neutrality of debt is already obvious to you, but it wasn’t for me. I’ve found myself in many financial planning conversations where I can see other folks have grown up with that same sour taste towards borrowing. So much of financial maturity comes from one’s ability to challenge their own preconceived notations around money beliefs and one’s ability to weigh all financial options and decisions logically and practically.
Thank You, Future Self
Here’s an easy practical example of how debt is used… Most people – not everyone, but most – can’t afford to buy a house cash outright. So, what do they do? They finance the purchase. This allows you to teleport your future self’s money to today so that you can enjoy this new home now. Again, debt creates time, allowing you to spend future money today.
Now, let’s say that you could afford to pay for a new home with cash. Is it prudent to pay cash or to finance the home? It depends. Remember, just like Doug and “Clone Doug” were able to be in two places at once, financing this home purchase could allow your money to be two places at once. Financing the home could allow you to embrace other investment opportunities with those cash resources. This could present other financial planning benefits around liquidity, tax benefits, accelerated wealth accumulation, etc.
Never Clone a Clone
Here’s the reality though, debt does get a lot of people in trouble. People are not always prudent with how they manage their debt.
Let’s go back to Multiplicity to provide a simple example. Doug was cloned, and then he benefited from tackling his life with four hands rather than two. This convenience was so addicting that Doug would eventually go back to Dr. Leeds and get another clone. Doug’s justification was that Clone #1 would take care of everything at work. Clone #2 would take care of the family and household responsibilities, allowing the real Doug to have more leisure time (golfing, sailing, etc.). As comedy goes, eventually, the two clones would secretly go back to Dr. Leeds and have themselves cloned – creating a clone of a clone. This fourth Doug, the clone of a clone, didn’t quite have all his mental faculties and became the comedic relief for much of the film.
Doug liked the ability to be two places at once, so much so that he wanted to be three places at once. Doug got more time, yet he still wanted even more. One clone led to more clones. This is how people get in trouble with debt, and people enjoy the extended pleasures of having more money to spend today, so they continue to clone their dollars with more debt. This cloning process eventually becomes unmanageable and harmful. Just like four Doug’s would eventually lead to Doug’s downfall, losing his job and his family.
(Although there is a happy ending, so you should watch the movie)
This addiction and mismanagement of leverage are not unique to just imprudent individuals. Institutions and industries are just as susceptible. In Roger Lowenstein’s book, “When Genius Failed: The Rise and Fall of Long-Term Capital Management,” he retells the story of how this behemoth hedge fund (Long Term Capital Management) blew up and sent shockwaves across the financial system. What was the cause of Long Term Capital Management’s demise? Imprudent Leverage. A team of geniuses that believed they had accounted for every mathematical risk was unpleasantly surprised by a risk they did not compute or prepare for. Lowenstein noting that at the hedgefund’s implosion, its balance sheet reflected $400 million of assets with $10 billion of liabilities, representing a leverage ratio of 250:1.
At the epicenter of the Financial Crisis (2007-2008) was excessive leverage. Here is a clip from the movie The Big Short where University of Chicago Professor Richard Thaler and pop star Selena Gomez use a poker game to analogize the leverage and derivatives associated with the crash of the housing market:
Much of what we talk about here on TOM are lessons about how you think through your money decisions. One obstacle you will often face in your decision-making process is your own beliefs about money. These beliefs will not always be sound, and they won’t always be rooted in logic or reason. Sometimes you will have to do the unthinkable; you will have to challenge your own beliefs.
This means you will have to slow down. This means that you will have to loop in another individual to this conversation to ensure you are grounded in your thinking. Beliefs can feel concrete, but sometimes we can’t easily pinpoint where they come from or their reasoning. Experiences can be scarring. Today I shared some of my early exposures to debt and the resistance it built in me, not believing there could be such a thing as “prudent borrowing.” Eventually, I had to challenge my former beliefs.
Again, debt is neutral. In and of itself, it is not good or bad. The planning we do around debt, employing debt, and managing it will determine its goodness or suitability for our financial plan. The planning process is all about reviewing options and deciphering what options best meet our objectives. Often, financing options can expand your menu of potential solutions, allowing you to weigh these solutions against one another. This is financial planning.
If your answer to every financial obstacle is to use debt as a solution, that’s probably not good. If you refuse ever to consider financing options (debt) for some financial purchases, that’s probably not good. Sitting on either extreme of imprudence or stubbornness can be damaging or limiting for your financial plan. Be open to exploring the most appropriate solutions for every financial puzzle you are seeking to solve.
I hope that conversations like today help you to become a better financial thinker. Please email me at email@example.com with any questions or comments. And, of course, I will be back next week with more of my Thoughts On Money.