Margin Loan as Part of Longer Term Investments

[ENP]

What is everyone's experience and feedback with the use of margin loans to invest in shares.

Mainly in regards to a conservative LVR amount of 30-40% for long term buy and hold investments?

Do the possible extra returns outweigh the risks, costs and administration of having one?

[percy]

If you are a successful investor then use margin loan.
If you are about even or average. Don't.
If you would have been very successful if it hadn't been for XXX corp letting you down,definately don't use a margin loan.

[shasta]

What is everyone's experience and feedback with the use of margin loans to invest in shares.

Mainly in regards to a conservative LVR amount of 30-40% for long term buy and hold investments?

Do the possible extra returns outweigh the risks, costs and administration of having one?

Margin lending should only be for those experienced investors with med-high risk tolerance & discliplined with managing cash/debt*.

I see it as a "tool" for use during a general bull market, certainly not in a static or declining market.

If you do not have additional cash available to cover any margin calls*, you will really need to set "stop losses" on each stock which also risks being triggered in a market fall & incurring brokerages costs etc.

ENP - I really don't think Margin lending is something you should be contemplating right now, i've used it before extensively & have both made good coin & been burnt, but most likely wouldn't use it again in the future.

As Percy stated, only successful & proven investors should use this tool, else you end up paying your broker, interest, loan fees & probably more brokerage.

[ENP]

Ok just wanting some feedback on it from people who have used them.

Been reading Noel Whittaker on Sydney Morning Herald and a few of his books and other Australian based stuff and they seem to all be strongly for it.

If I did use one, I'd only borrow 30-40% of the funds, and doing a few examples on excel, the added risk, hassle, etc would only equate to an extra return of 3-4% longer term p/a which I don't really see as ideal for the risk/return on them.

Just trying to learn all I can about things, I'm more curious about them than anything.

Thanks for the feedback! This forum has priceless info!

[Aaron]

I started using margin loans about 2007 but didn't borrow to the hilt so I had some safety. When 2008 and 2009 hit I fortunately had some savings to put in to stop the margin call and buy into the share purchase plans and rights issues. The SPPs and rights issues helped me to recover a lot of the losses but if I had pushed the margin to the limit I would have had a margin call probably in March 2009 and nothing left to invest in the SPPs and rights issues and it would have been a disaster for me financially.
That said if a company can pay you an 8%-10% dividend on money you borrow at 6.5% (ASB Securities) and there is capital growth why not. I am an unsuccessful investor (mostly due to a lack of effort(research) and buying and selling on emotion rather than fact) and currently don't have any margin loans as i think there will be more bad news before things get better but if we get another fall like 2009 I will be drawing down on my margin loans and buying companies that I hope won't disappear (think Babcock and Brown Infrastructure) I also keep intending to spend more time reading annual reports as I need to understand the companies better(thats supposed to have happened since about 2007). You don't get to be an experienced investor without trying things. I personally don't think leverage is the way to go at the moment (asset price deflation in the short medium term) but i can't see into the future and my track record would tell you to take any of my advice with a grain of salt.

[percy]

There is already a very good thread "Thoughts on Margin Lending" which covers a lot of ground.

[lou]

Margin lending should only be for those experienced investors with med-high risk tolerance & discliplined with managing cash/debt*.

I see it as a "tool" for use during a general bull market, certainly not in a static or declining market.

If you do not have additional cash available to cover any margin calls*, you will really need to set "stop losses" on each stock which also risks being triggered in a market fall & incurring brokerages costs etc.

ENP - I really don't think Margin lending is something you should be contemplating right now, i've used it before extensively & have both made good coin & been burnt, but most likely wouldn't use it again in the future.

As Percy stated, only successful & proven investors should use this tool, else you end up paying your broker, interest, loan fees & probably more brokerage.

One benefit when you are younger and have less equity is the margin will increase the size of the portfolio which will bring down transaction costs (relatively).

[CJ]

One benefit when you are younger and have less equity is the margin will increase the size of the portfolio which will bring down transaction costs (relatively).Agree. There is no point in buying lots worth less than say $5k as the transaction fees on they buy and sell will eat into a lot of profit.

One thing to think about for the younger with less equity is you are applying for debt. From my experience, it seemed harder to apply for a ML which was less than 50% of my current portfolio (ie, if fully invested, would be a LVR of less than 33%) than it did for my home loan which was up in the high 70%'s. What I am saying if is if you dont have much equity, and dont have a high paying job with a high disposable income, they might not approve you as there is a risk a margin call may cause you issues.

[Hoop]

ENP...some wise words from all the posters above...they seem rather negative......maybe for good reason...eh

Over the last few decades most people in NZ have done huge $$$ deals in margin lending for investment and have lost very little sleep over it.....buying their house!!!
Comforted by the misconception that property market will always be worth more in the future and the fact that it is a tangible asset of bricks and mortar rather than a piece of paper or a virtual script of a computer file they carry on living without much (or any) thought or worry of how much their house is worth on a day by day basis and they all certainly don't chart that progress, that's for sure....so what they don't know doesn't worry them and they have been lucky (comforted) by the property market's very long uptrend.

Margin lending in shares...ahhhh..different story...did it once that was enough...it was a fraction of the money i had but it worried and stressed me more than when I owned blocks of flats and houses with 70 /30 Debt/asset ratio back in the 1980's and 90's.

ENP.... doing dummy runs on Excel...having all the knowledge in the world at your fingertips...knowing it all in Share Market Theory, chaos theory, business cycles, economic cycles, companion market correlations, Market history, A business degree, being a FA tutor or a TA tutor or both......it is all worthless if you can not control that little piece of grey matter between your ears.

Most people start investing in shares taking in advise from many people but obviously pay more attention to those who have been very successful investors...eventually they decide to follow a certain investment Guru's strategy and then they proceed to lose money...why??....

Often it's something they overlooked such as they don't understand that a market environment is a variable and what may have worked well for the last 20 years may not work very well in the present and perhaps for years in the future.....you have bad luck???...Nah (Secular market cycles using Buy and hold strategies is a common example).....however the biggest reasons lie within your own head... emotion,,, mental analysis resulting in false logic (media is full of it)...bias (listening only to certain media to reinforce those false logic beliefs). Most common misconception (false logic) is good economic times equals good equity investing times,,, stress/ bad sleeping habits/bad social habits/medical health problems affecting your decision making process,,, the simple inabilibility to decide quickly (procrastination),,, lack of self confidence,,,,, lack of self esteem,,,,, over cautious or at the other extreme over confident,,,, The ability to invoke strict self discipline,,,, A linear thinker rather than a forward (exponential) thinker (unable to see possible future scenarios because you judge by presentday or past factors),,,,Stubbornness to accept the present happening. Susceptible to greed (an emotion) Distrust or overly accept (emotion) such as taking the printed word as true.,,,,, Age is a factor you can be too young or too old too be at your mental maximum,,, your temperment,,,,, your financial position,,,,,,and so on.

Newbies read books etc but they fail to read themselves.

Hoop was a newbie in Equity margin investing and I thought I could hack it because I was successful at property margin investing and an experienced long term investor using FA at that time...However I was not comfortable, the gut feel said stop get out of that strategy, so I eventually did, I didn't lose anything except sleep but I didn't gain much either except more grey hairs, stress related little health niggles, a more uneven temperament and a pot belly....fueled on by the fact that I looked everyday to see how I was doing and fretted when each drop occurred.

ENP and others,,,do a self analysis test..use the above examples I mentioned rate each question answer from 1 to 10 ...Do not cheat!!! Then confide in your best friend and get him to rate you using the same test..you will find out if you have subconsciously cheated or you have another weakness that being an over or under valuer.

I have done many self tests to develop my personal investment strategy to suit me and probably me only...however there are some weaknesses which can not be made ineffective in a Personal investment strategy so one ..For the record Hoop's rate (1 to 10) for his ability to invoke strict self discipline is 3 although I consider myself moderately successful my discipline stops me from being a lot better.

Some people may benefit and be very successful with an Equity Margin Investment Strategy....but sadly I'm not mentally good enough, and haven't got what it takes.

[lissica]

I've not used a margin loan, but have been leveraged in other ways (mainly instalment warrants).

When things head south, as they did in 2007/8, I was fairly heavily leveraged, and it can turn ugly very quickly.

One positive thing is that you can write off the interest as an investment expense (as you do with mortgage interest) if it's a long term investment.

Also, remember that many companies are already leveraged. If you are borrowing to own shares, you may be putting debt on top of more debt.

[Financially dependant]

ENP...some wise words from all the posters above...they seem rather negative......maybe for good reason...eh

Over the last few decades most people in NZ have done huge $$$ deals in margin lending for investment and have lost very little sleep over it.....buying their house!!!
Comforted by the misconception that property market will always be worth more in the future and the fact that it is a tangible asset of bricks and mortar rather than a piece of paper or a virtual script of a computer file they carry on living without much (or any) thought or worry of how much their house is worth on a day by day basis and they all certainly don't chart that progress, that's for sure....so what they don't know doesn't worry them and they have been lucky (comforted) by the property market's very long uptrend.

Margin lending in shares...ahhhh..different story...did it once that was enough...it was a fraction of the money i had but it worried and stressed me more than when I owned blocks of flats and houses with 70 /30 Debt/asset ratio back in the 1980's and 90's.

ENP.... doing dummy runs on Excel...having all the knowledge in the world at your fingertips...knowing it all in Share Market Theory, chaos theory, business cycles, economic cycles, companion market correlations, Market history, A business degree, being a FA tutor or a TA tutor or both......it is all worthless if you can not control that little piece of grey matter between your ears.

Most people start investing in shares taking in advise from many people but obviously pay more attention to those who have been very successful investors...eventually they decide to follow a certain investment Guru's strategy and then they proceed to lose money...why??....

Often it's something they overlooked such as they don't understand that a market environment is a variable and what may have worked well for the last 20 years may not work very well in the present and perhaps for years in the future.....you have bad luck???...Nah (Secular market cycles using Buy and hold strategies is a common example).....however the biggest reasons lie within your own head... emotion,,, mental analysis resulting in false logic (media is full of it)...bias (listening only to certain media to reinforce those false logic beliefs). Most common misconception (false logic) is good economic times equals good equity investing times,,, stress/ bad sleeping habits/bad social habits/medical health problems affecting your decision making process,,, the simple inabilibility to decide quickly (procrastination),,, lack of self confidence,,,,, lack of self esteem,,,,, over cautious or at the other extreme over confident,,,, The ability to invoke strict self discipline,,,, A linear thinker rather than a forward (exponential) thinker (unable to see possible future scenarios because you judge by presentday or past factors),,,,Stubbornness to accept the present happening. Susceptible to greed (an emotion) Distrust or overly accept (emotion) such as taking the printed word as true.,,,,, Age is a factor you can be too young or too old too be at your mental maximum,,, your temperment,,,,, your financial position,,,,,,and so on.

Newbies read books etc but they fail to read themselves.

Hoop was a newbie in Equity margin investing and I thought I could hack it because I was successful at property margin investing and an experienced long term investor using FA at that time...However I was not comfortable, the gut feel said stop get out of that strategy, so I eventually did, I didn't lose anything except sleep but I didn't gain much either except more grey hairs, stress related little health niggles, a more uneven temperament and a pot belly....fueled on by the fact that I looked everyday to see how I was doing and fretted when each drop occurred.

ENP and others,,,do a self analysis test..use the above examples I mentioned rate each question answer from 1 to 10 ...Do not cheat!!! Then confide in your best friend and get him to rate you using the same test..you will find out if you have subconsciously cheated or you have another weakness that being an over or under valuer.

I have done many self tests to develop my personal investment strategy to suit me and probably me only...however there are some weaknesses which can not be made ineffective in a Personal investment strategy so one ..For the record Hoop's rate (1 to 10) for his ability to invoke strict self discipline is 3 although I consider myself moderately successful my discipline stops me from being a lot better.

Some people may benefit and be very successful with an Equity Margin Investment Strategy....but sadly I'm not mentally good enough, and haven't got what it takes.

You speak with incredible wise words Hoop, thanks for sharing....Self analysis is the toughest of all subjects.

[Halebop]

Ditto, great post Hoop.

I don't think equity investing needs leverage. Just pick a leveraged company if you want a debt turbo charge. At least your losses are limited to your investment.

Also, while I get the mechanics of leverage, I don't think it always allows you to make the best decisions and retards calculated risks i.e. now I'm not just taking a risk but have to also factor cash flow and solvency in my calculations, so might not make a sensible investment because I'm more concerned with various ratios.

[drillfix]

What is everyone's experience and feedback with the use of margin loans to invest in shares.



Each to their own here,

1. Only go with Margin in a Bull Market, not a Bear Market.
2. Use margin in any market that you choose providing it is for Day or Swing Trading. (in and out = trade is done)
3. Do not over expose on one particular stock with margin.
4. Do not rely on the leverage of the use of margin to make you money.
5. Understand when to use it, and how to use it, and on what stocks, and log results into a journal.

Good luck with that ENP, and dont fear the reaper :)

[Snoopy]

1) Been threatened a few time with margin calls but have never had to sell
2) At present - 100% of margin capacity used!
3) Switching cash and near cash assets into the share accounts to continue accumulating.
4) sitting on 4% loss overall


All those margin plays of yours over the years and the result is a net loss of 4%? Tell me I am reading you wrongly Belg!

SNOOPY

[Snoopy]

What is everyone's experience and feedback with the use of margin loans to invest in shares.

Mainly in regards to a conservative LVR amount of 30-40% for long term buy and hold investments?


Anyone else remember the Money Managers days? I remember listening to a radio program where a certain Mr D Somers-Edgar introduced a share fund for very aggressive investors that had a borrowing element in it. My memory is a little hazy. But I think the fund borrowed 10% over and above their invested capital, possibly stretching to 15% when opportunities presented themselves. Naturally all this dates back to bull market days before 2008. Based on that, I would judge that borrowing 30-40% above your saved capital would be classed as aggressive to the point of being reckless. IMO it would be hard to design a more dangerous ‘get rich’ strategy than borrowing 30-40% over and above your available capital for sharemarket investment purposes.

SNOOPY

[Snoopy]

What is everyone's experience and feedback with the use of margin loans to invest in shares.

Do the possible extra returns outweigh the risks, costs and administration of having one?


The problem with borrowing strategies is that you then become beholden to the vicissitudes of the market. No matter how well you do your research, the market can remain irrational longer than you can remain solvent. Thus you can be (‘will be’ IMO if you play for long enough) forced to sell your carefully researched investment at an interim market low, regardless of the long term prospects of that company, simply because the share price has decreased at a bank determined time. That effectively gives you no option but to become a chartist, a pure trader, playing a game for the bank. And from there your fundamental reason for investing in the company starts to recede.

Options are IMO a safer way to have a leveraged equity investment. Although once again the exercise date puts an arbitrary time point on the time market sentiment and underlying performance must improve to keep those options viable.

An alternative I looked at myself seriously was borrowing money against very high dividend paying shares such that the dividends fully paid the interest bill. This takes away the share price ebbing and flowing that affects the protection of your capital, as I would have borrowed against my house that I own outright. This was again during the bull market days. The shares I was considering borrowing against were TEL, PGW and RBD. Telecom in the TG days was paying a great dividend. But local loop unbundling caused that divvie to be slashed. PGW got into all sorts of corporate problems, which resulted in their dividend being completely cancelled. Even the dividend of RBD went south before it came right. In short, if I had actually implemented this plan, subsequent share price collapses of all three shares would have made it a disaster that I would not have recovered from even today.

I tend to have the view that best way to make money from margin lending is to buy bank shares. They are the ones who are pocketing the money as the market margin suckers crash and burn. It is a guaranteed continuing income stream too. No matter how many market margin traders fail, the remote possibility of getting rich quick is sufficient to suck in a constant supply of newbies.

SNOOPY

[Stranger_Danger]

I'm with Snoopy on this one - in most circumstances, borrowing money to buy shares is usually dumb. I have no issue when people with 20+ years experience do it though, thats their call. Always scares me when youngsters want to though.

Two intelligent forms of leverage when it comes to shares are

- Options, especially long dated.
- Buying shares in suitable highly leveraged companies. Why hold the debt on your balance sheet? If you're a fan of using debt to accelerate growth and returns, fine - use cash to buy debt in a highly leverage company, which comes with the benefit of limited liability and no recourse to you if it all falls over.