Thoughts on Margin Lending

[buns]

I’m a relatively safe investor. Pretty much only touch companies I know about and defiantly a fundamentalist. I very rarely take profits out and rather long term growth.

Anyway, over the past 3-4 months these safe investments have me about 35% up (SKC, NPX, RYM, PPL, XRO), yet my gains are pretty minimal as I have very little free cash to wing into them. Even though my returns are quite nice in proportion to my buying – I still feel I’m shooting my self in the foot, or leaving too much $$ on the table.

Being the safe guy, I still can’t really believe I’m considering this – but lately I’ve really been checking out some Margin lending (through ASB).. Even if I reinvested a large chunk of leverage into the same stocks listed above, they would only need to return half of what they have over a year, to validate the lending.

Thoughts on this? For the experienced investors out there, how did you control your first taste of decent gains on low outlays? I’m assuming a lot of people have got to hungry and burnt those selves not long after. That is my worry.

Tax – I realise there a lots of traders on this forum, hence are in the business of trading and pay tax on gains. I’m assuming you guys are all over the lending side of things as you can deduct the interest costs.

Even if you’re an investor, does margin trading lure you into paying tax on eventual gains? As the sole reason one leverages is to “Increase profits”..

Any opinions on anything related to this would be appreciated.

[shasta]

I’m a relatively safe investor. Pretty much only touch companies I know about and defiantly a fundamentalist. I very rarely take profits out and rather long term growth.

Anyway, over the past 3-4 months these safe investments have me about 35% up (SKC, NPX, RYM, PPL, XRO), yet my gains are pretty minimal as I have very little free cash to wing into them. Even though my returns are quite nice in proportion to my buying – I still feel I’m shooting my self in the foot, or leaving too much $$ on the table.

Being the safe guy, I still can’t really believe I’m considering this – but lately I’ve really been checking out some Margin lending (through ASB).. Even if I reinvested a large chunk of leverage into the same stocks listed above, they would only need to return half of what they have over a year, to validate the lending.

Thoughts on this? For the experienced investors out there, how did you control your first taste of decent gains on low outlays? I’m assuming a lot of people have got to hungry and burnt those selves not long after. That is my worry.

Tax – I realise there a lots of traders on this forum, hence are in the business of trading and pay tax on gains. I’m assuming you guys are all over the lending side of things as you can deduct the interest costs.

Even if you’re an investor, does margin trading lure you into paying tax on eventual gains? As the sole reason one leverages is to “Increase profits”..

Any opinions on anything related to this would be appreciated.

I use margin lending when the market outlook generally looks good.

As i'm using a form of leverage myself, i wouldn't invest in companies with debt (that's a no-no!), ie borrowing to invest in a company that's also borrowing. But most "wealthy" people get rich off other peoples money!

Margin lending magnifies your returns (& losses), so you do need a certain level of risk tolerance, & you do need to use stop losses/trailing stops.

You must protect your capital!

Margin lending costs, interest + loan fees are deductible if you're a trader.

But simply using margin lending does not constitute trading itself.

If you have other funds available to add to your margin lending a/c, or regularly put funds into the market then this could be for you.

My experiences are from both ends of the spectrum, i've made alot of money on some margin lending stocks, & have also had nasty margin calls.

I'm not currently using margin lending (although BPT is covered @ 60%), so i could use my holding to access additional capital.

I'm not in buying mode at present & have reduced my exposure to oil, by selling down some BPT & OEL, i believe we have a "correction" coming.

Something you can also do it put your existing stocks into a margin lending a/c which will give you access to additional capital.

I'm with ASB Sec myself, & have compiled a filter of all ASX margin lending stocks, looking for undervalued companies & those with chart reversals.

Generally the margin lending stocks are big enough to be in the main indices & therefore provide enough liquidity & are very tradeable.

Keep us up to date on how you go

[STRAT]

Hi Buns
Mmmm,
Never have and never will.
I wonder how many safe investors on margin have lost their shirts in the last year?

[CJ]

In my "investor" accounts, I've never claimed the interest as an expense as this would expose my capital gains to tax.

Why not and why. You are earning taxable dividends so your interest expense is deductible. Your capital gain still wont be taxable as it is in your investor account (assuming it truly is an investor account).

Replace shares with houses and dividends with rent and you will understand that you have made a mistake.

[shasta]

Why not and why. You are earning taxable dividends so your interest expense is deductible. Your capital gain still wont be taxable as it is in your investor account (assuming it truly is an investor account).

Replace shares with houses and dividends with rent and you will understand that you have made a mistake.

CJ

You'll find that Belg is right, you can't claim the interest expense, on just the basis that the dividend is taxable.

By claiming such a deduction exposes your capital gains to tax.

Belg is avoiding any "tainting", & quite frankly i wouldn't run the risk of having the IRD question any deductions.

[Mick100]

CJ

You'll find that Belg is right, you can't claim the interest expense, on just the basis that the dividend is taxable.

By claiming such a deduction exposes your capital gains to tax.

.

And you call yourself an accountant shasta?????

Cap gain is not taxable in NZ !!

[shasta]

And you call yourself an accountant shasta?????

Cap gain is not taxable in NZ !!

OK, "taxable profits/assessed income" then, same thing as CGT in principle really if your deemed a trader!

Being smug with the IRD won't help anyone though.

[peat]

In my "investor" accounts, I've never claimed the interest as an expense as this would expose my capital gains to tax. My "trading" account does however as I pay tax on this account.

I wanted to say that NZ Taxation 2010 volume clearly says under Eight Principles of Deductability "The CIR (Commisioner of Inland Revenue) will not deny an interest deduction simply because the taxpayer makes or intends to make a capital gain from the the asset acquired by the borrowed funds".
which of course doesnt actually allay your fears however in the regard of paying tax on capital gains, but I'm pretty sure theres no link between deductability and capital gain, so you're missing out on a deductible claim for no reason

There are a few factors as to whether your profits are considered capital gains or income but deducting the cost of interest isnt one of them. Its pretty much all about the intent at the time, and the amount of trading is a factor as well.

[Aaron]

I wanted to say that NZ Taxation 2010 volume clearly says under Eight Principles of Deductability "The CIR (Commisioner of Inland Revenue) will not deny an interest deduction simply because the taxpayer makes or intends to make a capital gain from the the asset acquired by the borrowed funds".
which of course doesnt actually allay your fears however in the regard of paying tax on capital gains, but I'm pretty sure theres no link between deductability and capital gain, so you're missing out on a deductible claim for no reason

There are a few factors as to whether your profits are considered capital gains or income but deducting the cost of interest isnt one of them. Its pretty much all about the intent at the time, and the amount of trading is a factor as well.

I would agree with Peat. The important issue is to have long term investments clearly separate from trading investments via separate companies or Trusts etc. The long term investments will still generate dividend income (much like residential property rental income) and the interest incurred on these would be a deductible expense. Claiming interest wouldn't necessarily cause your investments to be taxed but I guess there might be other issues in regard to your investments to consider.

[buns]

Thanks for your comments guys, quite handy. Quite a range of opinions – always good.

AA I also don't understand your logic. It kind of sounds like you are mixing in 2 definations of 'leverage' And your advice doesn’t really align to my portfolio either- longer term, easy to understand companies. Options related to some speculative gas in the ground from Mexico to stock pile in China doesn’t fit the bill.

Belgarion - I pretty much agree with you except the "near the bottom". Boy I would want to be 100% sure of the bottom before I leveraged. Remember I'm not a big chart guy so I wouldn’t pick the bottom through TA (golden crosses), hence you probably started leveraging a few months ago when those signs appeared, I'm just starting to look now as the good news stories arise and my current PF is trending up. I'm happy to pass up those gains for a more "sure thing" investment around now.

The reason that got me thinking about leveraging was - when was the last time interest rates were this low, in a bullish market? I haven’t even checked a margin lending rate but I'm assuming they are lower than normal, making margin lending more attractive?

Also, scanning the NZX right now. All your nice gainers (which don't seem to be finished) are paying nice Dividends, PPL, SKC, RYM.