How to Dodge the Debt

We're constantly being bombarded with the possible economic ramifications of the level of our national debt. Even Warren Buffett, in his annual letter to Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) shareholders, has for years pondered the consequences of the nation's looming debt.

A million a minute
A quick look at some sobering numbers illustrates the potential ticking time bomb that is our national debt. Our total debt stands at $9.13 trillion and could top $10 trillion in 2009.

According to some estimates, that debt is growing by $1.4 billion a day. That's nearly a million dollars a minute! So by the time you finish reading this article, our national debt will have gone up by some $5 million to $7 million.

And although the size of the debt is of paramount concern, it's more frightening if we understand how this debt works. In a sense, the government is taking out a huge adjustable-rate mortgage from other countries around the world. As Buffett says, the U.S. continues "selling little pieces of itself" in the form of IOUs to foreign countries, such as China, which continues to buy our T-bills. If borrowing costs -- i.e. interest rates -- go up, then making the payments could become more painful.

What to do?
Does this mean it's time to stuff all your cash under the mattress? Absolutely not. Buffett has always said that he is "a better investor because he is a businessman, and a better businessman because he is an investor." So if you invest in businesses and not in stocks, per se, then you are more likely to take advantage of any curveball the economy throws at you.

Successfully managing investments requires investors to constantly be aware of any risks that might lead to permanent losses of capital. So, just as the growing national debt causes concern, you too should be concerned when your investments assume growing levels of debt. While the use of debt can certainly be a wise capital-allocation decision, most often you're better off sticking with companies that have low levels of debt or none at all.

The amazing performance of Berkshire shares this year is proof enough. Its Fort Knox-like balance sheet essentially makes the company a perfect hedge during the current credit turmoil. Other excellent choices include insurer Fairfax Financial (NYSE: FFH  ) , which, like Berkshire, has a strong balance sheet and is armed with a great capital allocator, Prem Watsa. Another good consideration is Alleghany (NYSE: Y  ) , which some people consider a miniature version of Berkshire. This specialty insurance underwriter has a history of being very conservative with its money. It sits on some $400 million in cash and has zero debt.

Expand your horizons
The U.S. is still the safest place for investing. No other country provides shareholders with the level of transparency that it does. But now that other parts of the world are becoming much more investor-friendly and adopting a more market-based economic system, this is a good time to consider investing beyond our borders.

You have options when you consider investing abroad. First, consider that thousands of U.S. firms derive significant levels of their revenue from outside our borders. Such investments -- as long as you make them only when the price is right -- provide a natural hedge from any sort of country risk.

Another excellent way to combine the safety of U.S. investments with global exposure is to invest in foreign companies listed on U.S. exchanges. U.S. stock exchanges have strict listing requirements that serve to protect the investor.

As Buffett said in his 2005 Berkshire letter, "The U.S. ... is extraordinarily rich and will get richer." Yet the rising debt level is a real issue that could one day affect the markets. My take is that any immediate economic ramifications are highly unlikely and that ultimately, the U.S. economy will remain sound. But whatever the future holds, investors can take comfort in knowing that they're in a better position than ever to shield their portfolios from any one particular exposure.

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