Folly or fortitude?

[Vaygor1]

Warning. The following may cause some of you to swallow your chewing gum.

In a nutshell, I have borrowed HUGELY to fund my share purchases in the past. This included mortgaging the house, then mortgaging it more, then mortgaging it to the hilt.

Further than that, it has then involved taking my resulting shareholdings and using it to secure large borrowing (via margin lending) to buy more shares, then putting those newly bought purchases into security to buy more shares to borrow more to buy more to borrow more etc etc etc.

If that wasn't enough, I borrowed even more (than one would normally be allowed) to get more shares in a company I now had a large shareholding in who were issuing bonds to existing shareholders, whereby my lender wanted the bonds and the more shares I had before the cut-off date, the more bonds I got. I had to commit to giving my lender the bonds to pay off this 'extra' loan as soon as they were issued to me of course.

There is more behind-the-scenes info that needs to put the above into a more understandable context but the upshot is that the results were nothing short of a dream come true. Was it stressful?… absolutely, indescribably stressful at times.

The thing is this, if you know you will get 20%+ return per annum (made up of capital gain + post-tax dividends) then why not borrow as much as you can at 8%? The more you borrow the more you make (within the limits of not overdoing it should a Black Swan event occur) …. and yes the risks are a lot lot bigger… get it wrong and you end up with no money, no shares, and serious serious debt.

But with risk comes reward. You can't make it 'big' if you don't have volume. To buy volume you need money. If you don't have the money you have no choice but to borrow it. I have yet to hear of another way to do it.

……….

The above scenario occurred (in general terms) around the turn of the century. These days, for the above reasons, I happily maintain significant debt to fund my shareholding/share-purchases but I only need to sell 10% of my holdings to pay it all off. And I would have a lot more 'in the bank' if I wash't so conservatively geared (by comparison) these days. My approach has never let me down (yet), and I can afford a mistake or two now.

I am not saying my approach is either right or wrong… but it worked for me given my style. It's not a style that would (or probably should) work for anyone or everyone. Disclosure: I am not a trader.

Please do your own research in these matters. It is your money and prosperity at stake.

[kiora]

Nei nei VG
I didn't swallow my gum !Just concur & smiled.All too true !

[Aaron]

The above scenario occurred (in general terms) around the turn of the century. These days, for the above reasons, I happily maintain significant debt to fund my shareholding/share-purchases but I only need to sell 10% of my holdings to pay it all off. And I would have a lot more 'in the bank' if I wash't so conservatively geared (by comparison) these days. My approach has never let me down (yet), and I can afford a mistake or two now.

Turn of the century. I am guessing it wasn't an internet start up on the Nasdaq. That could have gone horribly wrong.

[BIRMANBOY]

I shouldn't have been surprised at the level of willingness to accept debt. I am a result of my upbringing, as we all are, and my parents went through the depression and never, ever purchased anything until the money was saved and available. In saying that however, that doesn't mean a subsequent (my) generation, (the baby boomers) ,couldn't and didn't gradually drop that philosophy and embrace credit as the obvious means to getting what they wanted as quickly as possible. All of you above posters all are seemingly relaxed about funding share purchases with debt so I have to accept that these generations, the children and grandchildren of the B.B's, are even more relaxed about credit. What's missing however are any reports of "things going bad". Now I can understand that because no-one likes to be seen or perceived as the idiot who c****d it up. So the lack of bad reports is not necessarily because they didn't happen. Lets face it, its human nature at its most basic to bury the bad stuff and remember the good...and it would be a rare human who doesn't embrace that behaviour. Otherwise we would all be grouching around like Victor Meldew in "One foot in the Grave". One of the underlying thoughts that has surfaced in my mind, in most of the above posts, was the need or desire to achieve success faster. In order to satisfy this "need for speed" investors want to pack as much punch in as can be managed...so 10000 shares times x profit is good but 200000 is much more effective because it concentrates and multiplies the result. This is of course highly rewarding when it succeeds so the perceived risk becomes smaller every time it works...and before you know it there's hardly any risk at all. The boy who called wolf has been silenced. Debt is now the norm for all of us..from the RB below
Fig 1 — Household debt
Last updated: 11 September 2014
In the 20 years to 2011, total housing and consumer loan debt increased around six-fold in dollar terms. As a ratio of household disposable income, the percentage at June 2011 of 147% is about two and a half times that of 58% at March 1991. Through the mid-2000s, household debt grew strongly, at an average annual rate of over 14% in the five years to June 2007. The rate of growth slowed sharply from 2007, averaging well under 4% per annum in the four years to June 2011. This deceleration in the rate of growth of household debt arrested the growth in the debt to income ratio from 2007. Falling interest rates have been the main driver of falling interest servicing as a percentage of disposable income from 2008.
So interesting that servicing debt is almost 9% of disposable household income according to the RB. So extrapolating from that if you don't have any debt you have just saved an extra 9% of your disposable income. I'm not an economist or a mathematician or even a highly educated individual but that says to me that the first thing anyone should do is pay off all of their debts. Making fast money is good as long as one doesn't forget the underlying issue of debt compounding faster.

[zb3]

I'll never understand why ppl borrow in nz at 8 percent when you can borrow overseas at a fraction of the cost

[fungus pudding]

I'll never understand why ppl borrow in nz at 8 percent when you can borrow overseas at a fraction of the cost

You might one day.

[zb3]

You might one day.

Doubtful. It's nonsensical.

[zb3]

Because a 20% depreciation in the value of the $ tends to really **** your return. The Australian dollar was worth $1.10 US$ 3 years ago, now its worth 85c.

It works both ways. At least get a margin loan from IB at 5 percent rather than 8 from asb

[zb3]

It does. But you are held hostage to the whims of the forex market. I'd only borrow offshore in order to buy offshore assets, keeping everything in the same currency.

If your portfolio was large enough you could easily hedge your currency exposure. Even if you didn't, a 20% currency loss would be made back in a few years from the difference in borrowing rates. The only other issue to consider is taxation, which slightly reduces the benefit of the lower borrowing rates.

[BIRMANBOY]

You obviously are trying to live up to the reputation of your avatar Mr. S, however I am immune to your amateurish efforts. Promise me the voice of Placido Domingo and I might be swayed but riches wont work since I'm already very comfortable thank you. Also I might add that they didn't come by way of the Sharemarket but 40 years of hard slog in a trade. I've only been investing in the Sharemarket since 2011. Also my returns and strategy revolve around modest returns of circa 10% PA and of course no debt.

"Saved by it"? Sounding a little religious there Birmanboy? You know you want to try it...everyone does, you could be rich...go on, just a little bite.