The Engineering of Growing Richer in Debt

Risk disclosure: The various banks’ public policies, recognition formulas, salary-amplification multiples, six mortgage types, personal-loan expansion paths, the Lifecycle Investing method, the Half Kelly 1.33× leverage, and other content described in this chapter are all a compilation of public information and a teaching-oriented discussion of the operating logic of capital markets, with data current as of Q4 2025. Each bank’s actual policies, interest rates, and credit-line conditions may be adjusted at any time; for current terms, please verify directly with each institution’s official website or customer service. The content of this chapter does not constitute any solicitation, referral, or specific borrowing-decision advice for loans; borrowing decisions should be evaluated according to your own financial situation or in consultation with a qualified professional.

In the traditional view, debt is often regarded as a heavy burden, and people are always taught to pay off their mortgage and various loans as quickly as possible in pursuit of the peace of mind that comes with being “debt-free and unencumbered.” Yet within the macro architecture of capitalism, the rich hold a completely different perspective: to them debt is no demon, but a powerful lever for accumulating wealth. This chapter explores in depth the underlying logic of growing richer in debt, dismantles the mechanism by which the banking system transfers the wealth of the poor to the rich, and reveals how to use the right borrowing tools to keep magnifying assets, achieving the ultimate goals of tax avoidance and wealth succession.

The Operating Foundations of Debt Under Capitalism

To understand why being in debt can make a person richer, one must first see through the operating foundations of capitalism. Under a modern fiat-currency system, governments and central banks stimulate the economy by printing money, which means the purchasing power of currency is continuously diluted by inflation. For the laborer who earns a salary purely through physical effort, holding cash is tantamount to letting wealth shrink; but for the capitalist, this is a once-in-a-lifetime opportunity.

Capitalists very much welcome the government printing money in large quantities. The more debt, the less worry — being richer in debt. (Video 00467)

This “the more debt, the less worry” is not blind indebtedness. Open up Berkshire Hathaway’s financial statements: even Warren Buffett, hailed as the god of stocks, has long kept his leverage ratio at 1.6×. He does not use securities margin that can be liquidated at any moment; instead he uses his insurance companies’ “float” — a form of premium debt whose cost is extremely low and which will not be called in by a bank during market volatility. The public works hard to pay premiums, and thereby becomes the tax-free leverage that magnifies Buffett’s assets.

This 1.6× leverage also conceals a margin-of-safety calculation that most people overlook, and the key lies in a single total-risk metric: “capital exposure × Beta.” Buffett uses float to magnify his capital exposure to between 1.4× and 1.7×, but the targets he picks are low-Beta names in consumer goods, insurance, and utilities, so his overall portfolio Beta is only about 0.58 to 0.71. Multiply the two: 1.4 × 0.71 ≈ 1, and 1.7 × 0.58 ≈ 1. On the books it looks as though he has added leverage, yet the total exposure he actually bears is on par with — or even lower than — that of an investor who is “fully invested in the broad market with a Beta equal to 1,” while his performance comes out ahead thanks to low-cost capital and high-quality stock selection. So the true meaning of that famous line “never borrow money to buy stocks” was never a ban on leverage, but a ban on the recklessness of “piling high-cost capital onto high-Beta targets without ever having calculated exposure × Beta.” (Estimates of capital exposure and Beta reference AQR’s “Buffett’s Alpha.”)

When the government prints money in large quantities, the shrewd capitalist borrows to obtain this depreciating currency and converts it into high-quality assets. It is like this: if you want to travel and need NT$10,000, spending it directly drops your cash to zero; but the capitalist’s way of thinking is to first buy NT$10,000 of 00662 (Fubon NASDAQ-100 ETF, Taiwan-listed), then pledge it to borrow NT$10,000 to go and play. In a scenario where the asset compounds at an annualized 12% and the debt rolls over at 3%, after 20 years this sum, net of debt, becomes about NT$78,000, and after 40 years it appreciates to nearly NT$900,000. You have enjoyed the trip, the money for it was fronted by the bank, and in the end you still come out ahead by nearly a million. (Note: this passage is illustrative of Taiwan’s financial and tax environment, with figures calculated at an asset annualized 12% and a debt interest rate of 3%; those with U.S. tax status should confirm the specifics separately.)

Breaking it down with arithmetic is more intuitive: borrow NT$1 million at a 4% interest rate, and estimating on a simple-interest basis, the total debt over 30 years is about NT$2.2 million; but if that same NT$1 million is put into an index asset compounding at a long-term annualized 12%, after 30 years it can grow to about NT$30 million. The crux for the two is not “whether there is interest,” but “whether the asset’s compound growth rate can, over the long run, stay above the cost of the debt.”

▲ Figure 14-1 The same NT$1 million loan after 30 years, where asset compounding pulls far ahead of the debt's principal and interest

There is, however, a common confusion that must be strictly distinguished: “borrowing to invest in an index” and “borrowing to start a business,” though both are called borrowing, are completely different in essence. Teacher James once emphasized this iron rule three times over in a video:

My advice is that people should not casually borrow money to start a business — do not borrow money to start a business, do not borrow money to start a business. If you borrow money to invest in an index fund, there may still be a day when it comes back; if you borrow money to start a business, what you lose is a day that never comes back. When you buy QQQ, that is starting a hundred businesses successfully, the most successful companies in America. I often say that if you want to create a phone brand, you would be better off with the Apple phone that is already inside QQQ, and you have started your business successfully in an instant; if you want to open a coffee shop, buy QQQ and Starbucks is already in there. So do not go start a business. (Video 00691)

The mathematical foundation of this rule is cold: borrowing to invest in QQQ (Invesco NASDAQ-100 ETF), even if it meets a crash on the scale of the 2000 dot-com bubble, has a chance of recovering its principal so long as you are not forced into liquidation and the market eventually repairs itself; but borrowing to start a real-world business (opening a coffee shop, building a brand, running a company) means, once it fails, a total wipeout to zero — the bank will not wait for you to get back on your feet, and the money it lent out has “no day when it comes back.” To buy QQQ is to take a direct equity stake in America’s hundred most elite enterprises — Apple, Microsoft, Google, Nvidia, Tesla, Starbucks — companies with professional management teams, global distribution, and unlimited capital, against which an individual’s own startup has no competitive advantage whatsoever. The “amplifying good debt” that the CLEC system emphasizes is always confined solely to “index-type assets,” this category of extremely high certainty, and absolutely excludes high-wipeout-rate inputs such as real-world entrepreneurship.

For young investors just entering society with limited capital, the market has in fact designed a dedicated advantage channel — the “credit premium.” A young person’s greatest disadvantage is a lack of capital, but this disadvantage is simultaneously an advantage: because most young people want to borrow yet cannot (lacking a credit history and stable income), while most older people who do qualify to borrow dare not, owing to the conservatism of a retirement mindset — so the people actually willing to deploy leverage become scarce in society.

The young person who is willing to “discount future income to the present and use it today” and to bear the risk will earn an extra compensation of return in the market, and this is the essence of the credit premium. The young people who dared, ten years ago, to buy an index with personal loans and mortgages shouldered enormous uncertainty that their peers were unwilling to bear, but they also enjoyed the asset appreciation their peers completely missed out on — this is not luck, but the market’s reasonable reward for the act of “being willing to bear the risk that others dare not bear.”

The rich person’s “Buy, Borrow, Die” (never sell — borrow against assets, pass on at stepped-up basis) is an advanced game built upon existing assets; the young person’s “credit premium,” meanwhile, is an entry-level game built upon “human capital,” the sole offensive weapon a person without assets can use to kick-start capital accumulation.

From the tax perspective of Taiwan’s high earners, this trade-off is even more brutal. For high earners whose salaried income falls into the marginal tax bracket of 30% and above, the individual income tax alone is enough to devour several months’ salary every year; accumulated over five consecutive years, the total tax paid can often reach more than NT$2 million — a pure loss, earned through hard work and never to be recovered. Over the same period, if this group uses the low-interest personal loan they can easily obtain (a 5-year term at roughly 3%) to borrow out NT$5 million, the total interest cost is under NT$400,000; putting that NT$5 million into 00662 compounding at an annualized 12% and enjoying the capital gains currently exempt from the securities-transaction income tax, the assets can balloon over 5 years to about NT$8.81 million, and after deducting the loan and interest the net gain still exceeds NT$3.4 million (this is a hypothetical scenario, calculated at an interest rate of roughly 3% and an asset annualized 12%, and does not represent a guaranteed outcome). The gap comes entirely from “whether or not low-interest leverage is activated.” For a high earner, failing to make reasonable use of a personal loan is equivalent to voluntarily working overtime for the national treasury every single day.

▲ Figure 14-2 The high earner's five years, where paying tax continuously is a pure loss while activating a low-interest personal loan to invest instead turns a net profit

The Academic Backing and Safe Implementation of Lifecycle Investing

Young people borrowing to buy stocks is not some proprietary CLEC folk remedy, but is backed by an academic theory out of Yale — “Lifecycle Investing,” proposed by Yale professors Ian Ayres and Barry Nalebuff. Its starting point is neither speculation nor a get-rich-quick scheme, but a rigorous risk-management framework, at whose core is a simple equation:

Total wealth = financial capital + the present value of human capital

A young person’s account holds almost no money (financial capital is small), but the discounted value of decades of future salary (human capital) is enormous. The blind spot of the traditional approach is this: when young, your principal is too small, so even a great bull market earns you little; and when you are old with vast financial assets, you instead concentrate the overwhelming majority of your risk exposure in the few years just before retirement — so if a large drop strikes then, all you can do is postpone retirement or slash your quality of life. Lifecycle Investing’s solution is “time diversification”: while young, use leverage to discount your future human capital to the present and put it into the market, so that the dollar amount of stock exposure is distributed as evenly as possible across a forty-year investing career, rather than crammed into the very years of old age where it should least be concentrated.

This theory is not solely about leverage; it provides a “de-leverage with age” glide path:

What is worth pondering is that the theory’s authors themselves did not use the full 200%; based on their capacity to absorb the roughly 60% drawdown of 2008, they only opened up to about 133% — a number that coincides exactly with the “Half Kelly 1.33×” that this book derives from the Kelly Criterion (133% is 1.33×), and is also extremely close to the limiting Beta of 1.2 that corresponds to the “442 aggressive allocation” the CLEC system gives to young working people. Three paths of entirely different origin — the risk-averaging of the lifecycle, the money management of casino Kelly, and the exposure control of the CLEC 442 formation — all converge in the end on the sweet spot of “1.2× to 1.4× exposure,” corroborating one another almost perfectly; and CLEC setting the ceiling at the most conservative of the three, Beta 1.2, is precisely an expression of the discipline of “rather go a little slower than ever let yourself be swept out of the game by a single market crash.” This method also has long-run data support in the academic literature: according to a U.S.-equity backtest in that theory’s book from 1871 to 2009, the retirement terminal value under Lifecycle Investing beat the traditional “age rule” allocation method by an average of about 89%, and even on the worst historical path still came out ahead by more than 20% (historical backtests do not represent a future guarantee; the figures are only for understanding the logic of the framework).

But “just crank the leverage up and you’re good” is the most dangerous misreading of this theory. Whether or not it is safe depends almost entirely on “what tool you use to open the leverage” — lay the various leverage tools side by side, and the differences are plain at a glance:

Lifecycle Investing’s most-criticized fatal defect hides precisely within that second category of tool: if what you use is margin-style leverage with a maintenance ratio, then when the stock market falls and the leverage ratio drifts away from target, the theory requires you to sell stock and repay to pull the ratio back — which amounts to being forced to sell at the market’s very lowest point, and even the subsequent rebound cannot bring it back. The most famous crash-and-burn case in history is “Long-Term Capital Management (LTCM),” led in the 1990s by two Nobel laureates in economics and opened to extremely high leverage: its models calculated a probability of bankruptcy of once in tens of thousands of years, yet under the black-swan event of Russia’s 1998 default, it lost US$4.6 billion within a few months and collapsed. Mathematical models do not lose sleep, but people do.

The design of the CLEC system amounts to a “safe implementation version of this academic framework, with the landmines picked out.” It preserves Lifecycle Investing’s core of “the young should use human-capital leverage, and de-leverage with age,” but reinforces all four of the places most prone to a crash-and-burn:

• Choose tools with no forced liquidation — offensive leverage uses only personal loans and mortgages (repaid monthly from salary, no maintenance ratio); in a market crash the bank will not force you to sell stock, fundamentally immunizing you against the fatal defect of “being forced to sell at the lows”
• Do not open the multiple to the theoretical ceiling — lock it at Half Kelly’s 1.33×, with Beta controlled between 1.0 and 1.2, rather than the theory’s 200%
• State the income premise clearly — the iron rule that “the source of repayment must be a stable working salary” corresponds precisely to the theory’s premise that “human capital must be as stable as a bond”; do the bad-debt consolidation first, corresponding to “there must be no other out-of-control loans”
• Always keep a cash defense line — the 433 allocation (40% underlying + 30% 2× leveraged + 30% short-term-bond cash) is in essence a lifecycle glide path that “always keeps 30% on defense, compressing volatility down to a level you can survive”

In other words, CLEC does not blindly apply Lifecycle Investing; it uses “no-forced-liquidation tools + a half-Kelly multiple + salary repayment + a cash defense line” to weld shut all four of the breaches through which this Yale theory most easily causes people to perish in reality.

The Recognition Formulas and Amplification Multiples That Pry Open a Bank’s Credit Line

The essence of a bank is to “take the low-interest deposits of the poor and lend them on to the rich who know how to put them to work.” Rather than being the depositor whose wealth is transferred away, it is better to reverse it and become the one who borrows from the bank to buy assets — running this exploitative logic in reverse for your own benefit.

A commercial bank simply lends the money of the poor on to the rich for their use. This revolving door happens right inside the bank, and this is the very principle of capitalism by which the poor grow poorer and the rich grow richer. (Video 00512)

In a bank’s eyes, an investor is not a customer but an asset that generates cash flow. To make the bank open the door for you, you must first read the “stocks-into-salary” recognition-policy comparison publicly disclosed by some Taiwanese banks at present (the table below is compiled from public data and community reports; it does not represent any bank’s fixed policy or approval commitment; the recognition formulas, ceilings, and conditions may be adjusted at any time; data is current as of Q4 2025, and for current terms please verify directly with each institution’s official website or customer service):

(The table above is a compilation of public policy; it does not represent the editor’s evaluation of superiority or inferiority, nor does it constitute a recommended ranking. Each bank’s policy may be adjusted at any time.)

Beyond direct formula recognition, some banks additionally offer different amplification-multiple schemes based on primary-occupation salary (data current as of Q4 2025; please defer to the latest announcements):

A more advanced “bank wealth revolving door” maneuver is to stack “stock market-value recognition” on top of your primary-occupation salary: for example, with a primary-occupation annual income of NT$1.17 million, stack on an additional NT$1.2 million of annual income converted from a NT$6 million market value (recognized under Yuanta’s market value ÷ 60 × 12), and the approved annual income can be lifted to NT$2.37 million, with the DBR 22× line accordingly amplified to about NT$4.35 million. (Note: CLEC’s main thrust is to hold non-dividend-paying growth assets and rely on capital gains rather than dividends, so the amplified line should be achieved through “market-value recognition.” Beautifying a bank’s recognition by pumping up dividend income (item 54C, “dividend or surplus income,” in the consolidated income-tax format) runs counter to this book’s anti-high-dividend stance and is not advised.)

Before dismantling the credit line further, let us first clarify two proper terms that run through the whole chapter:

Explanation of proper terms — DBR (Debt Burden Ratio): an individual’s total outstanding unsecured debt across “all financial institutions” (such as personal loans, credit-card revolving balances, and cash cards) as a multiple of average monthly income. The Financial Supervisory Commission (FSC) sets “DBR 22” as the ceiling, meaning unsecured debt may not exceed 22 times average monthly income; in practice a bank’s actual approval is usually only 16 to 18 times monthly salary. Secured debt such as mortgages and car loans is not counted toward this limit. DTI (Debt-to-Income): the ratio of each month’s total debt payments to monthly income. Banks often set 60% as the underwriting ceiling and, taking DBR and DTI together, apply “whichever is lower.”

The FSC’s stipulated “DBR 22×” is the regulatory ceiling, but in bank practice usually only 18 to 20× is approved. Moreover, the true substantive red line is the “debt-to-income ratio (DTI) of 60%” and the “whichever is lower” principle: if your monthly salary is NT$50,000 and you already have a NT$20,000 mortgage payment, then even with abundant assets you may in practice only be able to borrow about NT$550,000 — far below the theoretical ceiling of NT$1.1 million.

A bank being willing to lend up to 60% does not mean a household’s cash-flow constitution can steadily carry all the way to 60%. An investor should establish their own psychological safety margin of a “monthly debt ratio,” reading it in four graded tiers with salary as the denominator: monthly debt within 30% is a very relaxed state, with enough slack to advance an emergency fund and index investing at the same time; between 30% and 40% is the range most working people can accept, with life under pressure but not to the point of suffocation; climbing to 40%-50%, one must raise one’s guard, for half the salary is locked into debt repayment, and any slight instability in income or unexpected increase in spending will make the tension surge noticeably; and once it exceeds 50%, one is already standing at the edge of a cliff, where any small disturbance can push the household into the vicious cycle of “paying off old debt with new debt.” The regulatory ceilings (DBR 22×, DTI 60%) are the bank’s underwriting limits; “monthly debt at 40%” is the individual’s real-combat survival line — treating the bank’s maximum appetite as your own comfort zone is the textbook outcome of handing your financial lifeline to the bank.

Before filing an application, be sure to observe the “passbook concentration” unspoken rule: a bank usually recognizes funds in the passbooks of only two financial institutions. If funds are too fragmented, in the bank’s eyes this is equivalent to a lack of coordination ability, so be sure to consolidate funds into one or two main banks in the month before filing. For the landlord crowd, note the “rental income recognized at 57%” formula: the bank must review 6 months of rent passbook records and directly discount the rent to 57% when computing effective income, so its contribution to the recognition of financial capacity is far below expectations.

▲ Figure 14-3 The wealth revolving door of the capitalist bank, where the funds come from the same source yet the ultimate power of distribution undergoes a "class transfer"

The Cash-Truck Playbook and the Borrowing Sequence

This section’s three-way classification of cash flow, the order in which to fire up the “cash truck,” the recognition-expansion path, and the asset-allocation examples are compiled mainly from materials provided by community member Chris.

Expanding credit is a precise minesweeping game, and in order to obtain the maximum funds while maintaining defensive resilience, you must strictly follow the “from outside to inside” order of firing up the cash truck:

Before starting the cash truck, you must first upgrade the very concept of “cash flow” to the capitalist level. In most retail investors’ minds cash flow comes in only two kinds — “working-income cash flow” (salary) and “investment-income cash flow” (dividends); but open any listed company’s financial statements and the cash-flow statement actually has three major categories, the third of which is precisely the “financing (borrowing) cash flow” that the public completely overlooks. A property developer’s operating logic best illustrates this point: a developer needs to borrow to buy land, needs to borrow to build, and can even mortgage unsold surplus housing to the bank. Under Taiwan’s central bank’s latest rule of September 2024, a developer with unsold surplus housing may apply for a mortgage of up to 30% of it, thereby keeping the funding chain unbroken. What a developer truly fears is never that the houses will not sell, but that it “cannot borrow money and its liquidity snaps.” Transplant this perspective to the individual investing battlefield: when an investor learns to treat “borrowing cash flow” as a third liquidity engine ranking alongside salary and dividends, they have crossed the crucial watershed from retail investor to capitalist.

These three cash flows each have their own sources, and taking a full inventory of them shows clearly just which “faucets” you have available to open:

• Income cash flow: salary, side-hustle income, labor insurance, labor pension, allowances and subsidies, tax refunds, creative royalties, inheritance, gifts
• Investment cash flow: dividends, option-premium income, rent, bank interest, securities-lending income, selling stock yourself, bond coupons, insurance annuities, foreign-exchange spread profits
• Borrowing cash flow: stock pledging, personal loans, mortgages, policy loans, refinancing top-ups, credit-card lines, issuing bonds

Retail investors often see only the first two categories, and still treat “selling stock yourself” as the main way to withdraw money; the capitalist’s crucial breakthrough is to treat the third category, “borrowing cash flow,” as a regular water source ranking alongside salary and dividends — living on borrowed low-interest funds, so that the stock principal never leaves the field and keeps compounding.

• Mortgage top-up / Item-Four mortgage · lowest-interest, long-term base capital
• 7-year refinancing personal loan · flexible transfer, rolling the compounding position
• 10-year long personal loan · lengthen the term, reduce monthly-payment pressure
• Stock pledging · the last step, the trump card

Remember this “absolute order of precedence”:

Mortgage → personal loan → pledging

• A mortgage does not occupy DBR and has no maintenance-ratio risk; it is the foundation (it is a secured loan, not counted toward the DBR 22× unsecured line, but its monthly payment still affects the bank’s DTI and repayment-ability assessment)
• A personal loan uses asset recognition to expand the scale; it is the beam
• Pledging is then the last mobile force

If the order is inverted and pledging is used first, causing the asset market value to shrink, you will lose the “asset chip” needed to later negotiate a large personal loan with the bank.

(Note: this passage is written according to Taiwanese bank credit rules; readers with U.S. tax status or in other regions should evaluate according to their local system.)

The reason Item Four can keep moving money even in an environment where mortgage capacity is at full pool lies in a regulatory detail. Article 72-2 of the Banking Act stipulates that total lending may not exceed 30% of total deposits, but this 30% pool only counts lending for the purpose of “purchasing real estate”; a wealth-management mortgage (a Taiwan revolving/home-equity mortgage) or top-up funds coded in the Joint Credit Information Center as “Item Four (working capital)” are, because they do not fall under the purchase of real estate, not included in the calculation base of Article 72-2. This is also why, when a bank’s mortgage capacity is at full pool and approving new cases is difficult, Item Four can still keep firing — this is the legal basis on which the cash truck can keep running without stalling even under a lending-restriction order.

When executing the “personal-loan expansion path,” it is advisable to adopt a laddered order: first borrow to the DBR 22 cap from an internet bank (such as LINE Bank) using pure salary, then use stock to amplify your primary occupation at institutions such as KGI or Entie, and only lastly go to CTBC or Yuanta for the strongest market-value recognition. In real combat you can use the “double-filing in one day” negotiation tactic: file with two banks on the same day, exploiting the time lag before the Joint Credit Information Center updates, and use bank A’s low-interest quote as a chip to demand a rate cut from bank B. Also, do not be misled by the survivorship bias of the “2% floor rate” — Taiwan’s average personal-loan interest rate is roughly 5% to 8%, and getting 4% to 5% is already a good deal better than most people get, so never hesitate in pursuit of an extreme low rate.

Furthermore, when starting the fund rotation, you must absolutely steer clear of the financial-inspection red line of “laundering a purchase.” It is strictly forbidden to, within 3 years of paying off an old mortgage (purpose code 1), immediately use a refinancing top-up (purpose code 4) to borrow out funds as the down payment for a new home. This will be judged as circumventing the central bank’s housing-cooling rules, causing your Joint Credit Information Center record to be tagged as negative, and every bank in Taiwan will shut its door on the investor.

Pledging goes last because it is “money inside the arena,” directly linked to the stock price; the first three steps are “money outside the arena,” where the bank looks at credit and asset recognition and will not liquidate you because of a market crash. In real combat, however, the repayment order must be “run in reverse”: pay off pledging first. This is not only to lower volatility risk, but also to clear the “ZT” (a pledge-collateral control tag halting the securities firm’s fund financing) and similar pledge-collateral control marks on the holdings — once pledging is cleared, in the eyes of the bank and the securities firm you are once again a high-quality client with abundant net worth, able to fire up the next round of the personal-loan cycle at any time.

On the frequently misunderstood question of “whether pledged funds may be used to repay a personal loan,” you must first distinguish two completely different operating rhythms. The wrong approach is: after borrowing NT$1 million on a personal loan, rushing to pledge stock and borrow out NT$1 million in one large lump sum to settle the personal loan — this amounts to using a high-risk tool (pledging) to settle a low-risk tool (personal loan), which not only causes the maintenance ratio to deteriorate sharply in an instant but also pays a needless early-termination penalty; it is a serious case of reverse risk control. The correct approach is: borrow as much personal loan as possible, put the funds into the market at full speed to eat the entire stretch of compounding (because a personal loan will not demand immediate repayment on account of market volatility), and if a future month’s personal-loan principal and interest (say NT$13,000) temporarily meets a salary shortfall (such as a delayed salary or an unexpected expense), only then borrow out a small NT$13,000 from pledging that month as emergency top-up — this “small-flow, long-diversified” method has minimal impact on the maintenance ratio while keeping personal-loan repayment uninterrupted. But two red lines must be strictly observed: first, this can only be a short-term liquidity arrangement and must never become routine — the fundamental source of repayment for a personal loan’s principal and interest is always a stable salary, and if you need to rely on pledging to top up over the long term, that means the scale of the personal loan itself is too large, and the correct fix is to reduce leverage, not to patch the hole with pledging, still less to form a cycle of “servicing debt with debt”; second, the proceeds from pledging must never be turned back around to buy stock.

Connect the borrowing sequence above with the recognition logic, and a single complete numerical example makes clear how funds should be positioned after they are borrowed out. Suppose you hold NT$30 million in stock financial assets and apply to Yuanta for a “Yuan-Chi Loan,” a 10-year NT$10 million at a 3% interest rate (monthly payment about NT$97,000, annual payment about NT$1.164 million); after borrowing, total assets come to NT$40 million. Next, choose one allocation according to your risk tolerance:

• 442 (Beta 1.2): underlying NT$16 million / 2× leveraged NT$16 million / cash-like NT$8 million. The NT$8 million cash-like is further split into “short-term 2-year-repayment cash-like NT$2.33 million” + “long-term cash-like NT$5.67 million.”
• 433 (Beta 1.0): underlying NT$16 million / 2× leveraged NT$12 million / cash-like NT$12 million. The NT$12 million cash-like is split into “short-term 2-year-repayment cash-like NT$2.33 million” + “long-term cash-like NT$9.67 million.”

The common design of both allocations is to first carve out of the cash-like a “two years’ worth of total monthly loan payments” (NT$1.164 million × 2 ≒ NT$2.33 million) as a dedicated short-term repayment fund, ensuring that even if the market plunges and salary runs into trouble in the first two years, you can keep repaying the loan without the chain snapping; the short-term cash-like can go into a high-interest demand deposit or a bank time deposit, while the long-term cash-like goes into 00865B.

The rule for executing rebalancing at each year-end is: if the market rises, sell the leveraged fund’s gains and replenish the short-term cash-like level to keep it at two years’ worth; if the market falls, deploy four defense lines in order —

1. The cash-like stands pat and buys no stock (can withstand two years of decline)
2. Hold out until the third year before drawing on underlying-ETF pledging
3. Pledged funds first replenish 00865B
4. Only at the very last do you sell 00865B

This example also conceals a recognition-maximization technique: in the two years after borrowing, “do not activate pledging” as far as possible, keeping the book assets clean and the market-value recognition at its maximum, so that when the next bank comes to recognize, you can use the prettiest asset figure to hold up the largest possible next credit line — stacking each bank’s recognition ceiling on top of the others is the key to keeping the cash truck running round after round.

Borrowing Without Repaying Principal and Maximizing the Principal

Many people fear borrowing because they are always thinking about how to repay the principal in the future. Yet the core essence of how the rich borrow is this: so long as assets keep growing, a loan never needs to have its principal repaid.

But first you must thoroughly separate “good debt” from “bad debt.” If you already hold high-interest bad debt such as credit-card revolving balances, cash cards, or high-rate personal loans (annual rate of 12% and above), the first step is not to rush off and buy QQQ, but “bad-debt consolidation” — use a lower-interest, longer-term tool (such as a wealth-management mortgage at 1.9%-2.5%, or a low-interest personal loan at 3%-4%) to settle the high-rate old debt in one go, exchanging high-interest bad debt for low-interest “transitional debt.”

The consolidation has three core effects:

1. The interest rate is cut from 12%-and-above to below 3%, and the interest-rate spread saved each year is directly released as investable cash flow
2. The monthly repayment amount is stretched out over a longer term, immediately relieving monthly cash-flow pressure and avoiding a forced default within a vicious cycle
3. Negative credit tags such as “ZT” (the pledge-collateral control mark on holdings) and “card revolving” are gradually repaired and faded, paving the way for later obtaining larger good debt (mortgage top-ups, personal-loan expansion) (whether and when the relevant records improve still depends on the individual case and the financial institution’s review)

Only after completing bad-debt consolidation is your capital qualified to enter the next stage’s “amplifying good debt” game — otherwise, carrying 15%-rate card debt on one hand while buying 12%-annualized QQQ on the other is, mathematically, simply a negative-sum game.

The wealthy borrow and do not repay, the wealthy forever borrow and do not repay, forever paying no tax. (Video 00491)

Borrowing to invest will absolutely make a person richer! Many people cannot calculate clearly the true cost of “refinancing old with new,” so let us dismantle it with a “4-year long-term math model”: suppose you borrow a NT$1 million personal loan (3% interest, 7-year term), the total interest over 4 years is about NT$120,000. And if over the same period you put it into an asset compounding at an annualized 12%, this NT$1 million will balloon to about NT$1.57 million, a net profit of as much as NT$450,000, fully covering the interest cost and generating a vast increment in net worth.

This logic has an even more powerful “time-leverage” framework that can pierce the psychological barrier in an instant — a personal loan is in essence “bringing the money you had originally planned to set aside for investment from your salary in installments over the next seven years, and putting it into the market all at once today.”

For a person with stable income, taking out a personal loan is no problem, and it is a fine maneuver — bring the money you had originally planned to set aside for investment from your salary in installments over the next seven years, put it into the market as a single lump sum today to earn the full seven years’ return, and then use your salary to repay the loan; this is the correct approach. What you would have bought with your salary as regular fixed-amount purchases, you instead buy today as a single lump sum, and buying earlier is absolutely the key to winning at investing.

In other words, “borrowing on a personal loan to invest” is not “conjuring an extra sum of money out of thin air,” but “discounting the present value of the next seven years’ salary to the present and entering the market today.” In the historical statistics, lump-sum buying outperforms staggered investing — spreading the same cash flow month by month over seven years will miss the most important early-stage rise of the market; but if you invest it all at once and then repay monthly from salary, you can capture the full seven years of market compounding. This is the cleanest mathematical expression of “trading time leverage for compounding time.” The premise remains: you must have a stable working salary able to repay principal and interest on time, and this red line can never be loosened for a moment.

A more concrete local empirical comparison can be seen in the 20-year backtest of “paying off the mortgage early vs. investing in an index.” Take the same NT$10,000 a month of idle funds: over the past 20 years, if used to “pay off the mortgage early,” then because the interest rate is only 1.9%, the net worth of interest ultimately saved comes to only about NT$2.9 million; but if put into a market-cap-weighted broad-market index with dividends reinvested (annualized about 11%), over 20 years it rolls out to about NT$8.66 million. Back and forth, the net-worth gap is about NT$5.74 million. The math behind it is both brutal and simple: Taiwan’s average mortgage interest rate over the past 20 years was only 1.9%, while the market-cap-weighted broad-market index returned about 11% annualized. Every year, using 11% compound appreciation to fight a 1.9% interest cost, each year you postpone paying off early lets this 9.1% “compounding spread” roll for one more year. Accumulated over 20 years, the gap is this considerable NT$5.74 million.

The traditional belief in “debt-free and unencumbered” is, mathematically, “the most expensive peace of mind” — it makes the investor voluntarily forgo a steady 9% compounding arbitrage opportunity every year. This is the true financial cost of the CLEC system’s repeated emphasis on “do not rush to pay off the mortgage.”

This is the power of maximizing the principal. So long as the long-term asset growth rate is higher than the borrowing rate, the two lines will ultimately pull ever wider apart; but the real market carries path risk, and if a large drop, unemployment, or a failed refinancing strikes in the early stage, the asset line may still fall below the debt line in the short term — this is precisely why it must be paired at the same time with a cash defense line and salary repayment ability. In real combat you can use CTBC Bank’s “quasi-grace-period” mechanism: the first two years of its 7-year personal loan can be calculated as a 10-year monthly payment, greatly reducing early-stage cash-flow pressure; and so long as you refinance immediately upon the expiry of the lock-in period, you can effectively create a cycle of an unlimited grace period.

To prove the iron rule of “not repaying principal” thoroughly with the simplest arithmetic is to pierce in an instant the retail investor’s instinctive reflex to rush to repay debt. Teacher James once laid the gap bare directly with a pair of contrasting calculations:

If you go and pay off NT$1 million, then your funds are left with only NT$4 million, and with that NT$4 million you do a 433, then you can only use 2%, then you can only use NT$80,000. Do you see the difference? The one who goes and repays can only use NT$80,000 a year, the one who does not go and repay can use NT$100,000 a year. So if you do not repay, your assets will be NT$5 million, and your 2% is NT$100,000; if you go and repay, your assets become NT$4 million, and its 2%, then you use NT$80,000 a year. (Video 00556)

Lay the mathematical trajectory bare: an investor originally with NT$5 million in assets and NT$1 million in debt, at a 2% drawdown rate, has NT$5 million × 2% = NT$100,000 of safe cash flow available each year; but if in a moment of softheartedness they pay off that NT$1 million, the assets shrink to NT$4 million, and at the same 2% drawdown rate the annual cash flow drops to NT$4 million × 2% = NT$80,000. The same household, the same discipline, and merely a single “act of repaying debt” cuts their annual living expenses by NT$20,000 with their own hand; over 30 years, the cumulative gap in drawdown cash flow alone reaches NT$600,000 — to say nothing of the vast opportunity cost forgone had that NT$1 million of principal stayed in the index to keep compounding. In the face of this calculation, the traditional notion of “debt-free and unencumbered” is not merely wrong; it is the concrete act of “actively making your future self poorer.” The reason the capitalist never repays principal is that the very act of “not repaying” is itself the strongest discipline for maximizing household cash flow over the long run.

▲ Figure 14-4 A single "act of repaying debt" cuts cash flow, where paying off the principal shrinks the safe cash flow you can draw each year

The Applicable Boundary of Servicing Debt with Coupons

Before speaking of any “servicing debt with coupons,” there is first a premise that overrides everything: if you cannot confirm that you possess sustainable cash flow of fifteen years or more, then even if you can get the loan and the coupon income looks sufficient, it does not mean it is suitable to raise leverage. Whether you can borrow, the key was never the coupon rate or the interest rate, but “whether the fifteen-year cash flow holds up” — being able to survive is always the first principle.

Here a line that cannot be broken must first be drawn: the fundamental guarantee for repaying a personal loan’s principal and interest is always a “stable salary,” and it must never rely on dividends or QQQI coupons to be paid. There are two reasons.

• The first is a red line of discipline — a salary is a fixed cash flow that does not fluctuate with the stock market. Once you switch to servicing the loan with dividends, then in a dividend cut or a market crash the source of repayment and the assets shrink at the same time, and this double snapping of the chain is the textbook scenario for repayment delinquency and credit default.
• The second is a problem of efficiency — the nature of a personal loan is that “each month you repay both principal and interest at once,” making the monthly payment heavy; to try to cover the monthly payment with QQQI coupons often requires deploying even more capital to buy QQQI than the loan itself. Take a NT$1 million 7-year personal loan as an example: the monthly principal-and-interest payment is about NT$13,000 to NT$15,000, which works out to about NT$160,000 to NT$180,000 to repay in a year; if you want QQQI’s coupons to produce exactly this repayment, then working backward from a conservative yield of 10% (annual coupon ÷ 10%), you would have to put about NT$1.6 million to NT$1.8 million into QQQI, more than the NT$1 million you borrowed. This amounts to subsidizing principal out of your own pocket in exchange for a high-dividend tool with a lower total return and a 25% drag, and instead sacrifices the room to put personal-loan funds into 00662 / QQQ in pursuit of long-term capital growth. So whether personal-loan leverage holds up hinges not on the coupon rate but on whether you possess stable cash flow sufficient to support fifteen years or more. If the cash flow is stable, the borrowed funds may lean more toward growth assets such as 00662 / QQQ — the actual proportion still depends on the individual’s cash-flow stability, reserve fund, and risk tolerance (stable cash flow can go more aggressive, such as 433; insufficient means switching to conservative allocations such as 70/30 or 613); the loan’s principal and interest are, in all cases, repaid monthly out of stable income such as salary, and not by relying on coupons.

The kind truly suited to the automatic-repayment engine of “servicing debt with coupons” is a wealth-management mortgage or an ultra-long-term mortgage with an “extremely small monthly payment,” rather than a personal loan that repays principal month after month. A wealth-management mortgage mostly pays interest only, or stretches the term to 30 to 40 years, making the monthly-payment pressure extremely light — take borrowing NT$10 million with a monthly payment of only a little over NT$40,000 as an example: you can, according to cash-flow needs, allocate a portion of it (say about half, NT$5 million) to QQQI, and the coupons will be enough to offset most of the monthly interest and reduce cash-flow pressure, while the rest still keeps QQQ / 00662 as the core growth position. The actual proportion of QQQI to the underlying is not fixed but depends on age, job stability, whether there is other passive income, and the reserve fund — some people go 90% 00662 and 10% QQQI, and others need no QQQI at all; in any case, the safety of the loan is always built upon a stable salary and fifteen years of cash flow, with coupons merely an auxiliary pressure-reliever. Once the mortgage is paid off, this QQQI position can seamlessly convert from a “loan-repayment engine” into a “retirement cash-flow engine,” and this is the correct scenario in which it is worth borrowing and pairing with QQQI.

But the CLEC defense lines must still be strictly observed:

• QQQI is not the main course of this allocation; it occupies only a small stretch of the borrowed-investment proportion, and the rest must still be put into QQQ / 00662 to enjoy long-term compounding
• The fundamental guarantee of repayment is always a stable salary, and the QQQI coupons are merely a pressure-reliever for the mortgage’s monthly payment, never the sole source of repayment — when salary is interrupted, the QQQI coupons may also shrink due to stock-market volatility, and only a double snapping of the chain brews repayment delinquency and credit default

In real-estate operations, if conditions allow, a long-term mortgage is usually more favorable than a short-term one for maintaining cash-flow flexibility — CLEC’s ordering is “affordable > long term > low interest,” with the emphasis on lengthening the term in exchange for risk-management room, rather than a rigid requirement that it must be 40 years. Common tools are the “40-year mortgage” or the “reinstatement mortgage (Item-Four hook)”:

The “Item-Four hook,” the cash-home-purchase strict-review period, and the building-age and age-plus-term thresholds in the table above belong to each bank’s credit-underwriting practice and float with bank policy; they fall outside the scope of the CLEC system. Although their core philosophy of “lengthen the term, suppress principal outlay, and try not to repay principal when borrowing” is consistent with the capitalist’s borrowing logic, actual application must still be independently verified against the current rules with a financial institution.

A Real-Combat Dismantling of the Six Major Mortgage Types

To truly activate real estate as the capitalist’s leverage engine, you must understand the essential differences among the six types of mortgage on the market. Below, one by one, are their operating logic, strategic advantages, and hidden traps:

1. Ordinary mortgage (principal-and-interest amortization)

The most common mortgage type, characterized by forced principal-and-interest amortization and high monthly cash-flow pressure. Its advantages are the lowest interest rate and a long term, suitable for owner-occupation and value preservation; its fatal weakness is the worst asset liquidity, and unemployment cutting off your income immediately brings the risk of being unable to make payments. Among these, the 40-year mortgage is the capitalist’s preferred tool, its extremely long term suppressing principal outlay and manufacturing a “pseudo-grace-period” effect, preserving more cash flow for investing.

Pay special attention to the “New Youth Housing mortgage” (a government program): it can be borrowed for 40 years and enjoys a 5-year grace period at a 1.775% interest rate. But the rules are extremely strict, limited to owner-occupation only — if renting it out in violation is discovered, the subsidized interest will be clawed back, the grace period immediately canceled and switched to principal-and-interest amortization, and the interest rate will instantly jump to above 2.5%. A more proactive approach is: without violating the owner-occupation use, plan the cash flow saved during the grace period (such as NT$20,000 less principal a month) as an emergency fund or a long-term input into broad-market indices such as 00662 / QQQ, so that over 5 years you can accumulate an extra million in assets; the poor, by contrast, take the money saved during the grace period and squander it on a car, and after 5 years, when the monthly payment doubles, they face foreclosure. But a policy loan is in essence an owner-occupation benefit, and it must never be rented out in violation for investment purposes or applied for under a nominee, or the subsidized interest will be clawed back and the benefit canceled.

1. Wealth-management mortgage (7-year short-contract type)

Its greatest advantage is “borrow and repay at will, pay interest only,” where the monthly interest on a NT$5 million mortgage may be under NT$10,000, able to activate a dead asset into a cash reservoir. But its fatal trap is that “the contract is mostly one-year renewable over 7 years” (such as at SinoPac or Hua Nan), and the bank at any time holds the power of life and death to re-review and call in the loan. If in old age you lose proof of fixed salary, you may very likely be required to repay the principal in one lump sum — and if this happens to coincide with a market crash, you will be forced to cut and sell your holdings, the textbook case of “starving while holding a gold brick.”

1. Reinstatement mortgage (Item-Four hook, long-contract guaranteed type)

A common tool of choice for defensive leverage planning. Similar to a wealth-management mortgage (repaid principal can be re-borrowed at any time), but with a 20-30 year long-contract guarantee — certainty far outweighs the tiny difference in interest rate, avoiding the bank arbitrarily calling in the loan. Real-combat cooling-off-period caution: some banks have a 3-12 month “cooling-off period” after extension, during which principal-and-interest amortization is mandatory, so reserve cash flow to get through the gap (each bank’s policy differs; please defer to the latest announcements).

1. Reverse mortgage (home-equity-for-old-age)

A brutal death trap. The approved loan-to-value is usually only 60%-70%, and the monthly interest is deducted internally like a rolling snowball, so if you live long enough, the monthly cash you can collect grows ever smaller, and after your passing the residual value of the property goes almost entirely to the bank. The CLEC system’s corresponding solution is “home-equity-for-stocks” — do not give the house to the bank for old-age support, but through a top-up draw out funds and put them into growth assets such as 00662 / QQQ. The greatest strategic advantage: a home-equity top-up has no maintenance-ratio forced-liquidation mechanism whatsoever, so even if home prices are cut in half, as long as you pay the interest on time the bank can never force a call — an extremely safe leverage moat.

1. Life-insurance mortgage (the back door for the unemployed high-net-worth)

A hidden path offered by some life insurers (Fubon Life, Cathay Life). The recognition of financial capacity is extremely lax — it can directly count “deposit amount × 4.75%” as annual income, and so long as the debt-to-income ratio (DTI) is below 60%, the loan can still be approved even in an unemployed state. It suits high-net-worth or retired people who cannot smoothly borrow at a traditional bank, using silent assets such as stock to transform into proof of financial capacity and bypass the bank’s red line.

1. Second-lien mortgage (second mortgage, strongly not recommended)

When the first-lien line is fully borrowed, applying for a second lien to forcibly pull leverage up to 90% of the home’s value (such as at Entie). This is an extremely foolish financial suicide — not only must you carry high interest of nearly 4% or even higher, but the most fatal thing is that once the first-lien bank discovers on the Joint Credit Information Center that you have borrowed a second lien, it will directly cancel your original reinstatement-mortgage qualification. To borrow an extra 10% of funds and lose the original 80% of long-term stable credit line is a total loss, and the CLEC system strictly forbids it.

Overall order of priority: reinstatement mortgage (Item-Four hook) > 40-year ordinary mortgage > life-insurance mortgage (the back door for the unemployed) > wealth-management mortgage (mind the 7-year clause); strictly forbidden are the reverse mortgage and the second-lien mortgage.

The FSC’s Classification of Item One and Item Four (Advanced)

Viewed through the FSC’s regulatory classification, mortgages can be further divided into two key items:

• Item One (purchase-type mortgage): an ordinary mortgage applied for to buy a home at the moment of purchase. It is subject to the central bank’s credit controls and to the “full pool” limit of Article 72-2 of the Banking Act — when a bank’s total purchase-type mortgage lending approaches the 30% ceiling of its total deposits, approval of new cases gets stuck.
• Item Four (working-capital mortgage): can only be applied for after you have bought the home outright with all cash, or after the original “Item One” loan has been completely settled and its lien discharged. Because it belongs to working capital and is not subject to the Article 72-2 pool limit, disbursement is extremely fast (usually within 1 month).

The advanced maneuver of “converting Item One to Item Four” can break through the central bank’s loan-to-value limit: after completely settling and discharging the lien on the Item-One loan on a property in your name, apply for Item Four to borrow the funds back out. Because the mortgage has been discharged, if in the future you want to buy a third home, then in the eyes of the bank and the central bank there is no “Item One” loan, which is equivalent to restoring “first-purchase” status and being able to smoothly borrow 80%. But a warning — the use, flow, and credit conditions of Item-Four funds must all be handled in accordance with the loan contract and the competent authority’s regulations; if the use of the funds touches on home purchase, a down payment, or the scope of the central bank’s credit controls, you should confirm with the bank in advance and declare truthfully, and you should not evade the review of fund use through means such as passing funds through intermediary accounts, so as to avoid violating the “laundering a purchase” financial-inspection red line described earlier.

The AB-Account Mechanism of the Wealth-Management Mortgage

The wealth-management mortgage (also colloquially called the revolving type / working-capital type / overdraft type / easy-living type / star-vitality interest-offset type / long-contract-with-flow type) goes by different names at each bank, but its essence is always an “AB-account” design:

• A main contract: a standard mortgage account, paying the mortgage principal and interest each month
• B sub-contract: the “principal” paid in each month automatically flows into the B account, and can at any time be withdrawn with a debit card and used again

The key feature is “interest is charged only when drawn, and not charged when not drawn” — a large bonus or idle funds can be deposited directly into the B account to offset principal and immediately lower interest; and when a market crash or an investment opportunity appears, you can immediately withdraw from the B account to add to your position. In an unemployment emergency, you can even deduct directly from the B account to pay the monthly interest, creating financial breathing room and avoiding forced foreclosure. Note that most wealth-management mortgages are only opened to the “Item Four” clientele, and the interest rate is slightly higher than an ordinary mortgage (about +0.5%).

The Ultimate Grace Period of the 20-Year Reinstatement Mortgage

A very small number of banks on the market (such as Fubon and Taishin) offer a “20-year reinstatement mortgage” — although you still must pay principal each month, the moment the principal is paid in, that credit line can immediately be re-borrowed (paying interest only), effectively creating a 20-year grace-period effect. The application threshold is usually not open to “Item One” fresh home-buyers; you must be in a no-mortgage or already-converted-to-“Item Four” state before the bank will approve this contract.

Debt Consolidation Using Long Debt to Devour Short Debt

Advanced operators intensely detest personal loans and car loans — personal loans carry an interest rate of about 5%-8%, car loans about 5.5%-6%, with short terms (5-7 years) and heavy monthly-repayment pressure; the most fatal thing is that a personal loan is unsecured debt, so it eats into the individual’s DBR (22× monthly income) debt line, seriously affecting future home-purchase loan ability.

The correct approach is to use a home “top-up” to stretch the term to 30 or even 40 years to devour the short debt:

• A mortgage’s interest rate is about 2%-3.5%, far below a personal loan’s 5%-8%
• Secured debt does not occupy the DBR 22× line
• Stretching to 40 years greatly reduces the monthly payment, and long-term inflation will dilute the real value of future debt

The Structural Risk of Private Second Mortgages

If an ordinary bank will not lend, you must extremely prudently evaluate the second mortgages underwritten through private financing channels (such as some leasing-finance companies, auto/motorcycle-finance companies, private pawnshops, and scrivener channels). Such private second mortgages carry the following risk characteristics in their product structure:

• The interest-rate level is far higher than an ordinary bank’s second mortgage, commonly falling in a range from the high single digits into the double digits, and may add on penalty charges
• Once a second-lien mortgage right on the home is registered by a private institution, then even if credit later recovers, an ordinary bank will find it hard to step in for debt-substitution refinancing, and liquidity is easily locked up
• Some private lending contracts contain a “forfeiture agreement” or require the home to be placed in “trust” — once payment defaults, the creditor may directly acquire ownership of the home

A few ordinary banks also underwrite compliant second mortgages, but the CLEC system’s view is: in most scenarios, sacrificing long-term credit room for the limited extra line you can borrow is not worth it. Before actually choosing, please defer to each bank’s latest public policy and consult a qualified professional.

The Three Great Survival Bottom Lines

Before executing any advanced mortgage strategy, you must simultaneously hold three bottom lines:

• Do not borrow to consume or speculate: the money borrowed out can only buy “assets that will inevitably rise over the long term” (broad-market ETFs, high-quality indices), and must never be used for renovation, buying a car, day-trading, coin speculation, or Ponzi schemes
• Cash-flow defense line: after deducting all loans, keep at least 30%-50% of monthly income as buffer room, and never squeeze yourself into a paycheck-to-paycheck existence
• Emergency fund: be sure to keep 6 months to 1 year of emergency reserves on hand, ensuring that in unemployment or a crash you will not be forced into liquidation or a fire-sale of assets

The Defense Mechanism Against a Personal-Loan Chain Break

Although “refinancing old with new” is perfect, an investor must have ready a “four-year buffer” defense line to cope with a bank suddenly calling in the loan or a refinancing failure:

• Reserve the oxygen: on day one of drawing the personal loan, set aside the first year’s principal-and-interest repayment amount.
• Pledge to buy life: if in the following year you cannot refinance, deploy pledging of assets with a maintenance ratio of 300% or above for the second year’s repayment.
• Short-debt fuel: if for a third or fourth consecutive year you cannot refinance, sell off short-debt positions such as 00865B in order to pay.

Through the three defense lines of “cash → pledging → selling short debt,” the investor forcibly wins four years of buffer time. In the history of capital markets, four years is enough for any epic-scale market crash to complete its repair and restart the personal-loan cycle.

If after the four-year buffer things still cannot stabilize, and the personal-loan chain breaks completely and expands into an extreme scenario such as an investment loss, being defrauded, or a business failure, Taiwanese law still preserves one last right of survival: the “debt rehabilitation” procedure under the “Consumer Debt Clearance Act.” So long as the total unsecured debt is within NT$12 million, you can proactively apply to the court for debt rehabilitation. The court will, according to your repayment ability and asset situation, rule on an installment repayment plan; the repayment ratio, repayment period, and credit impact are all decided by the court at its discretion case by case, not a fixed discount, so readers must not treat rehabilitation as a predictable debt-discounting tool. This mechanism is not an encouragement to default, but rather the right the law grants an honest debtor to start over when all defense lines have fallen. Remember: using your life to fill in a debt hole was never an option in the CLEC system; only by staying alive is there a chance to turn things around.

For investors pursuing extreme efficiency, you can activate a breakthrough of the DBR 22 stress test: when your base salary is fully borrowed, use stock market value to additionally expand the line. At this point the defensive bottom line is that the inventory market value must reach at least “4 times” the recognized line (for example, a recognized NT$3 million needs NT$12 million of market value), to ensure you still survive a -70% market crash. “The 30-year sell-stock vs. pledging showdown” extends this defensive logic into an endgame comparison: under the same living-cash need, the 30-year net-worth divergence between drawing down by selling stock and drawing down by pledging.

The True Multiple of Principal Leverage and the Kelly Criterion

A leveraged ETF (such as QLD (2× leveraged NASDAQ-100) / 00670L) opens up “asset built-in leverage,” whereas what is obtained through a personal loan or a wealth-management mortgage is a completely different kind of leverage — “principal leverage.”

The essence of these two kinds of leverage is the distinction between a “perfect double” and a “double that drifts.” Principal leverage (a personal loan) magnifies exactly as much as the principal you borrow — up exactly double, down exactly double, zero drift; the compound leverage of a 2× leveraged ETF, by contrast, drifts because of daily compounding accumulation — in a continuous rise it rises by more than double, in a continuous fall it falls by less than double, and the price is that repeated choppy ranging grinds it away bit by bit through volatility. (See the insurance-concept primer “What Is Perfect Double Leverage? You Have to Know the Difference Between ‘Principal Leverage’ and ‘Compound Leverage.’”)

Take Taiwan’s 50 2× as an example:

• In the continuous bull run of 2019-2021, it rose 365.86%, far exceeding a perfect double of the principal’s 226.98%
• In the continuous bear of 2022, it fell only 36.44%, about 6 percentage points less than the 42.74% a perfect double of the principal should have fallen

Switching to this book’s tools, QLD / 00670L is the “drifting compound leverage,” while personal loans and mortgages are the “perfect-double principal leverage” — CLEC uses both together precisely to pair the stable predictability of principal leverage with the explosiveness of compound leverage in a big move.

▲ Figure 14-5 Principal leverage vs. compound leverage (Taiwan's 50 2×), where compound leverage rises more and falls less, at the cost of choppy-range decay

Many people, after borrowing a personal loan and entering the market, get even their true leverage multiple wrong, and this is the iron-blooded formula you must learn before borrowing to invest:

Leverage multiple = total market exposure ÷ net assets (total assets − total debt)

Take a classic landmine case: you originally had only NT$500,000 in the account, borrowed NT$1 million on a personal loan, and put all NT$1.5 million into 0050 or QQQ. Many people intuitively assume the leverage is only 1.5× — wildly wrong! Total market exposure is NT$1.5 million, but net assets are still only NT$500,000 (NT$1.5 million minus the NT$1 million loan):

NT$1.5 million ÷ NT$500,000 = 3×

The true principal leverage multiple is as high as 3×. In this state, the market need only pull back 33% for the principal to be substantively wiped out. Before borrowing to invest, first learn to calculate clearly the “net assets” in the denominator, and do not, without realizing it, open a fatal leverage capable of causing overnight bankruptcy.

As for “how many times reasonable principal leverage should be opened to,” there is a mathematical formula originating from the casino that gives the answer — the “Kelly Criterion.” It was originally used to calculate “in a betting game where the win probability and odds are known, what fraction of your stake to wager each hand so that, over the long run, the money rolls up the most while avoiding playing your seed money down to zero”; applied to investing, what it computes is the “most cost-effective leverage multiple”:

L* = (μ − c) ÷ σ²

The formula looks intimidating, but taken apart it is quite plain: the numerator is “what this target earns over the long run (μ, the expected annualized return) − your borrowing cost (c),” that is, “the stretch you truly net from borrowing to invest”; the denominator is “the square of volatility (σ²),” that is, “how bumpy this target is.” In one sentence — the more you earn and the cheaper you borrow, the larger the leverage you can open; the more violently it jolts, the more you must pull back. There is a pit most people step into here: c must use “your own actual borrowing rate,” not the risk-free rate that textbooks love to use, and getting this wrong makes the multiple come out too optimistic. Plug QQQ’s numbers in once and it becomes clear. Using this book’s designated expected annualized return for QQQ of 12% (μ), an annualized volatility of about 18.9% (σ, or 0.189 as a decimal, whose square is about 0.0357), and a personal-loan cost of 2.5% (c):

L* = (0.12 − 0.025) ÷ 0.0357 = 0.095 ÷ 0.0357 ≈ 2.66×

You can see that under this set of numbers, the numerator “the stretch truly netted” is 12% − 2.5% = 9.5%, and dividing by the volatility square of 0.0357, the theoretical optimal leverage falls at about 2.66×. But both academia and real-combat traders will advise you: do not actually open to this figure — cut it in half before using it. This is “Half Kelly”:

Half Kelly = L* ÷ 2 = 2.66 ÷ 2 = 1.33×

Why cut it in half? Because although full Kelly has the highest long-run return, it also maximizes volatility along with it, and just one encounter with a once-in-a-century crash can break the whole compounding path and never return. After cutting to half, volatility shrinks greatly while the long-run return drops only slightly — using “earning a tiny bit less” to trade for “much greater steadiness,” this is a bargain by any reckoning.

There is an even more critical layer: that 2.66× just now is not a fixed number at all. The return (μ) and volatility (σ) in the formula vary dramatically with “which stretch of history you take to compute,” and the computed optimal leverage jumps up and down along with them. Take QQQ as an example — count the entire 1999-2024 stretch (carrying the two deep plunges of the dot-com bubble and the financial crisis), and with the return pulled down and volatility pulled up, the Kelly optimum drops to only about 0.9×, meaning that over this period even no leverage is too much; but take only the golden AI-and-mega-cap-tech era of 2010-2024 (high return, low volatility), and the Kelly value soars to about 4×. The same formula, the same QQQ, and the answers differ by more than fourfold. This is why even Buffett takes only half to three-quarters Kelly, and this book simply locks the personal-loan multiple dead at Half Kelly’s 1.33×: because you can never know which stretch of history you are living through, and the moment you estimate the parameters at the optimistic end, the “theoretical optimum” turns into “over-leverage” in a second.

This mathematical conclusion perfectly echoes two iron rules of the CLEC system:

• The optimal leverage rate depends on the “true borrowing cost” rather than the risk-free rate — this is also why, under Taiwan’s low-interest personal loans (2%-3%), reasonable leverage can be opened above 1.3×, but under the U.S.’s individual borrowing rate of 6% and above, the Kelly optimal leverage rate drops substantially, even approaching 1×. What must be clarified is that this Kelly constraint targets “pledging/margin leverage that has a maintenance ratio and gets liquidated in a deep drop” — the higher the cost, the less worthwhile adding to a pledge; personal loans and mortgages are an entirely different matter, repaid from working cash flow with no maintenance-ratio forced-liquidation risk, and CLEC’s criterion is simple: so long as the borrowing rate is below QQQ’s long-term annualized return (about 12%), it is worth borrowing — even a U.S. personal loan or mortgage at 6% still falls within the worth-borrowing range (though the premise remains that the monthly principal and interest can be covered by a stable salary, the emergency fund is kept sufficient, and you can withstand assets falling for several consecutive years without being forced to deal with the position — a rate below the return is only a necessary condition for “worth borrowing,” not a sufficient one)
• Never open to the theoretical ceiling — the math of Half Kelly tells the investor that cutting leverage in half from the theoretical optimum loses almost no return yet greatly reduces volatility, and this is precisely the theoretical basis for CLEC’s “control Beta within the 1.0-1.2 range, strictly forbid full-margin leverage”

▲ Figure 14-6 The Kelly curve, where Half Kelly gives up only a small slice of return yet greatly compresses volatility, far safer than a full Kelly that chases the peak

The advantage of principal leverage is that you can deploy a large sum of capital all at once, but its drawbacks are the issues of a line ceiling and interest cost:

• Personal loan: can be repaid monthly, and after clearing the lock-in period you can find a new bank to refinance old with new and delay repayment, which can increase the fund volume and provide cash-flow flexibility, on the premise that you must calculate your salary-income cash flow and confirm you can repay on time before activating it; the drawback is the DBR 22 line ceiling, and some banks can recognize other assets to increase the principal line.
• Wealth-management mortgage: a tool that a person with property can use to mortgage the home, providing a large line to deploy, with interest charged only when borrowed; but the drawback is that owning property is still too remote a tool for the small saver, and the CLEC philosophy also does not advocate actively buying property.
• Stock pledging: a tool very much not recommended for reinvesting back into the stock market, which is an extremely dangerous move requiring calculation of the maintenance ratio and so on; the CLEC philosophy is to use pledging only to draw cash to support living expenses, and it does not recommend reinvesting into the stock market.

For U.S. tax residents, there is one “tax-saving tactic” of pledging that is often pushed by financial advisors and needs special clarification — “using borrowing interest (PAL interest; PAL means Pledged Asset Line, a credit line obtained by pledging securities) to offset capital-gains tax.” At first glance, this tactic seems reasonable: borrowing interest is an investment expense, which in theory can be deducted from taxable income. But in practice it hides a key blind spot:

If your stock is sold after more than a year it is a Long Term Capital, but the interest is Short Term, so you have to convert the Long Term Capital into Short Term Capital. You say, I do not want to enjoy the Long Term Capital Tax Rate, I will change it to Short Term, then you can use your borrowing interest to offset tax. But this is very complicated, you have to go find an accountant for this. We have a lot of cash, the money we earn in the Money Market is more than the interest, so the interest, to me, is negligible, and it is as good as no interest. (Video 00511)

The key understanding: in U.S. tax law, long-term capital gains (holding ≥ 1 year) enjoy a preferential rate of 15%-20%, but borrowing interest is a “short-term expense,” able to offset only short-term capital gains or ordinary income. To use borrowing interest to offset tax, you must proactively give up the preferential rate on long-term holdings and convert the gains into short-term gains to “offset in kind” — which amounts to trading a 15% long-term preferential rate for the short-term ordinary rate (possibly as high as 37%) that can offset borrowing interest. Worked out in practice, it is almost always a net loss. (Strictly speaking, this deduction is governed by IRS Form 4952 and the net-investment-income cap; whether to include some long-term capital gains/qualified dividends in investment income to expand the deductible amount, and at what cost, must be calculated case by case by a CPA (certified public accountant) or an EA (IRS-enrolled agent), and should not be oversimplified as “interest can only offset short-term gains.”) What is more, under a correct CLEC allocation, the interest earned on the cash position on hand (such as BOXX, a money market) is often already far greater than the pledge-borrowing interest (in 2026 the risk-free rate is about 4.8% and the PAL borrowing rate about 5%-6%, an extremely small gap), so the overall net interest cost is close to 0 or even negative. In substance it is already an “interest-free borrowing” state, and there is simply no need to go to great lengths again for the sake of tax savings to make a complex tax conversion. The advice to U.S. investors is: do not, in order to save a small sum, disturb the tax structure of long-term holdings; put your energy into maintaining the main thrust of “not selling stock, living on pledged cash flow.”

Getting the multiple, the Kelly, and the cash flow all calculated correctly is only passing the “financial threshold”; whether you can grow rich by borrowing has a second, harder gate — psychological fortitude.

Borrowing to buy in and then worrying so much you cannot sleep is another matter altogether. If you have thoughts like this, then do not use leverage for now, and do not borrow, because this is not something you can stomach. Financially feasible, rationally analyzed with no problem, yet you are stuck psychologically — then there is nothing to be done. Your mental health outweighs the potential profit. If you have to watch the market every day and grow anxious every day, then do not go and borrow. (Video 00550)

Teacher James uses a medicine analogy vividly: the right medicine can save a life, but if the side effects are more than you can bear, then this medicine, for you, is one you cannot take. Leverage is the same — mathematically it wins over the long run, but if you borrow and then watch the market every day, cannot sleep at night, and magnify every drop into anxiety, then no matter how beautiful the expected return, it does not belong to you. So borrowing is a “double threshold”: pass the financial threshold first (multiple, interest rate, salary repayment all calculated clearly), then pass the psychological threshold (able to sleep after borrowing, able to execute mechanically). Neither can be missing; if you cannot pass the psychological gate, the correct answer is not to borrow — safely holding the underlying and cash can make you rich just the same, only a little slower.

The Deep Meaning of Tax Avoidance Through Pledging and Borrowing Tools

▲ Figure 14-7 The 30-year performance showdown, where pledging keeps the stock mother compounding uninterrupted and its endgame net worth leads far ahead of drawing down by selling stock

The core of “the 30-year sell-stock vs. pledging showdown” is not to encourage borrowing to the max, but to prove the ordering of “guard the maintenance ratio first, then talk about the drawdown method.” This comparison chart reveals a brutal mathematical fact: with the same principal, the person who draws living expenses by selling stock each year has a net worth of about NT$554.22 million after 30 years; the person who switches to drawing down by pledging, letting the stock mother compound uninterrupted, has a net worth of about NT$659.77 million after deducting accumulated debt — a full NT$105.55 million more.

Borrowing money requires no tax; selling stock requires paying tax. Just borrow money to pay the tax; do not use your own money to pay the tax. (Video 00472)

Obtaining cash through pledging is, in tax law, not a taxable event, successfully sidestepping the capital-gains tax. A more advanced way to apply this is to use the CLEC golden allocation targets: when the interest on pledging 00662 is 2.5%, the 30% short debt (00865B) held on hand can generate a steady bond coupon of about 3.5%-4%. This bond coupon can “devour entirely” the pledge interest, achieving the true state where “the interest, too, is fronted by the bank.”

In Taiwan, PAL (Pledged Asset Line), this act of “obtaining a cash line with securities as collateral,” can mainly be classified into three forms. Although all are pledging in essence, the regulations and the underwriting entity differ, so there are marked differences in line and use:

The safe-defense core of this book’s main use of stock pledging (unrestricted-use fund lending / bank stock-pledge loan) lies in controlling the “maintenance ratio.” The truly rich never pursue an extreme line in their operations; instead they lock the initial borrowing dead at 20%-30% of total value (a maintenance ratio of 333%-500%), ensuring that even if a 2008-style extreme crash strikes, the position still stands steadily in the comfort zone above 167%. As for the real-combat details of pledging, the maintenance-ratio ladder, and how to respond to a securities firm “taking the umbrella away on a rainy day,” these are the life-and-death lines that must be thoroughly mastered before commanding this tool.

▲ Figure 14-8 The safe defensive zones of stock pledging (maintenance ratio = collateral market value ÷ borrowed amount, where the higher the number, the greater the margin of safety)

The truly advanced wealth game is to practice the “Buy, Borrow, Die” strategy commonly used by Silicon Valley’s wealthy: buy high-quality assets early, in the middle stage use pledge borrowing to tax-free support living and taxes, and finally, at the succession of assets, use the tax law’s step-up in basis to legally defer and reduce the capital-gains tax on selling the assets. Whether it applies, and how low it can be brought, still depends on the asset type, account type, tax-resident status, estate tax, and each state’s rules; the core is legal tax deferral and cost reset, not a guarantee of zero tax throughout. Here debt is not a burden but the moat for the generational succession of wealth. For high-net-worth unemployed people, you can make good use of the “asset-liability ratio < 60%” regulatory loophole or a life-insurance mortgage (such as Cathay Life counting deposit × 4.75% as annual income) to break through the approval predicament, using stock as silent proof of financial capacity.

To sum up, knowing how to use the wisdom of debt is an important watershed distinguishing the rich from the poor. Debt is not a shackle, but the fulcrum for prying open financial freedom. By seeing through the bank’s fund-transfer mechanism and skillfully mastering the techniques of asset pledging and tax avoidance, an investor will no longer fear debt. So long as you disciplinedly let the asset growth rate outrun the borrowing interest, you can make the wealth snowball roll ever larger, standing composedly undefeated in the game of capitalism.