Investing with debt - Opinions please!

[shasta]

Shasta thanks again for your posts. I have spent some time looking at other threads with advice you have given other novices like me.

#1 At this stage planing on holding my current position and potentially adding to them. Looking at increasing my holding in RYM, currently a smaller portion of my portfolio. In a post I mentioned i'm looking at investing another 10k. I am thinking two parcels of 5K. What would you recommend to be efficient sized parcels to Buy given the small capital available.

#5 The OE... This is the big one. My current idea for funding the OE is probably going to get beaten up. I am planing on reducing my debt before I go so I have 20k of the flexi available as a safety net for the properties and to fund the OE if I really get stuck (not my preferred option). The primary funding will be from my annual bonus at work, my accrued annual leave as a payout and selling my car. Should land me with 10-13 to play with. OE is going to be a working one!

#8 I have added the book to my Fishpond watchlist! Thanks for offer tho.

Looking forward to meeting people at the ST events. Keep me posted.

5k over two shares seems sensible, you wouldnt want to spread it any thinner.

How you any ideas what you are looking at?

[DarkRed]

5k over two shares seems sensible, you wouldnt want to spread it any thinner.

How you any ideas what you are looking at?

I am considering increasing my holdings in RYM.
Any ideas on other companies that might suit my situ? Got some free time this week so will get stuck into a bit more research.

[shasta]

I am considering increasing my holdings in RYM.
Any ideas on other companies that might suit my situ? Got some free time this week so will get stuck into a bit more research.

RYM is a well run company & a sector that is only going to get bigger when the baby boomers retire, so thats a good choice

I'll tell you about the companies im looking at, mostly off my LOW EV list, so you can check the relevant threads

MOX - Copper/Gold, Iron Ore, Manganese, Uranium, Bauxite
HLX - Iron Ore, Gold, Uranium, Base Metals
AYN/ARD - Silver near term producers ( i am very bullish on silver)
DGR - IPOing 3 companies covering Copper/Moly, Gold/Silver & Shale Gas - primary exposure to Gold & Copper/Moly

Others off the LOW EV list include: WCN, GES, GMM, CZN, LCR, FRY, AIV, AXE, SPQ

[Snoopy]

Well done DR-use leverage in this low interest rate environment. It is very rare in the investment world that the dividend yield is higher than the bank interest rate-so use it.

Actually RRR I have to disagree with you. entirely The normal situation is that dividend yield is higher than the bank interest rate, and this is especially so in New Zealand market. Granted if you have only been investing for the last fifteen years then I can understand your perspective.

SNOOPY

[Snoopy]

My situation now has changed with two rentals properties (80% financed) and between them they have a secured 30k flexi loan at 6% floating IR.
Over the years I have increased my share portfolio to include BHP CEN RYM and NZO funded by cash. Also held PRC : S

So my question: Do I start investing using my equity from my rental properties, I have invested 10k of it currently but should I expose myself more? should I be aiming for yields exceeding the IR or taking on higher risk and aiming for capital gains?

Welcome to Sharetrader Darkred. First of all I think you are asking the question:

Do I start investing using borrowed money that the equity from my rental properties allows me to raise?

That is more than subtlety different from the actual question you asked. You may think I am just being pedantic, but I think it is very important to keep to the forefront of your mind the fact you are using borrowed money and not equity.

First point I would make is you need to be able to keep your cost of borrowing as low as possible. The cheapest source of funding I know in NZ is to borrow money against your property. This is a far better strategy than taking out margin loans to buy shares directly, so IMO you are on the right track here.

Point 2 is that as a shareholder or part owner of a company you are becoming a genuine part owner of that company if you hold shares in it. That means any debt that you take on to buy those shares effectively multiplies the debt position of that company as far as you are concerned. In turn that means the question 'how much debt should you take on' cannot be answered without a knowledge of the debt position of the company you are investing in.

Th third point you should consider, and it is surprising the number of investors who don't appreciate this, is that every time you take on a debt you are also taking on an investment clock which must be watched. In the simplest case your clock runs out when it becomes time to refinance your debt. If you are relying only on capital gains then almost certainly some time in your future investment career you will be forced to sell when the markets are not in your favour. Perhaps 24 out of 25 years you will be O.K. But it only takes one rogue year to derail a lifetime of investment planning. And don't think a stop loss plan will save you. A stop loss plan that works 95% of the time will likely bankrupt you during the 5% of the time it doesn't work. I would regard full business cycle (not just bull market) share liquidity as absolutely critical in your planning.

For this reason, IMO you should only borrow if the dividend income of the underlying investment will pay your interest costs. Often companies that have high dividend yields can be in some kind of trouble that puts that dividend flow at risk. So even here you are going to have to be really really careful. Take excessive care.

Regards,

SNOOPY

[DarkRed]

Welcome to Sharetrader Darkred. First of all I think you are asking the question:

Do I start investing using borrowed money that the equity from my rental properties allows me to raise?

That is more than subtlety different from the actual question you asked. You may think I am just being pedantic, but I think it is very important to keep to the forefront of your mind the fact you are using borrowed money and not equity.

First point I would make is you need to be able to keep your cost of borrowing as low as possible. The cheapest source of funding I know in NZ is to borrow money against your property. This is a far better strategy than taking out margin loans to buy shares directly, so IMO you are on the right track here.

Point 2 is that as a shareholder or part owner of a company you are becoming a genuine part owner of that company if you hold shares in it. That means any debt that you take on to buy those shares effectively multiplies the debt position of that company as far as you are concerned. In turn that means the question 'how much debt should you take on' cannot be answered without a knowledge of the debt position of the company you are investing in.

Th third point you should consider, and it is surprising the number of investors who don't appreciate this, is that every time you take on a debt you are also taking on an investment clock which must be watched. In the simplest case your clock runs out when it becomes time to refinance your debt. If you are relying only on capital gains then almost certainly some time in your future investment career you will be forced to sell when the markets are not in your favour. Perhaps 24 out of 25 years you will be O.K. But it only takes one rogue year to derail a lifetime of investment planning. And don't think a stop loss plan will save you. A stop loss plan that works 95% of the time will likely bankrupt you during the 5% of the time it doesn't work. I would regard full business cycle (not just bull market) share liquidity as absolutely critical in your planning.

For this reason, IMO you should only borrow if the dividend income of the underlying investment will pay your interest costs. Often companies that have high dividend yields can be in some kind of trouble that puts that dividend flow at risk. So even here you are going to have to be really really careful. Take excessive care.

Regards,

SNOOPY

Snoopy, good point that it is actually "borrowed" money but secured with property equity, something I always need to remember.
I am not 100% on your second point about my debt position multiplying with the debt position of the company I am investing in. Help me out a bit here since I am playing the novice card. Ill have a stab at it but what I am getting is that my debt position and the the debt position of the company has an effect on my total debt position as far as I am concerned? The value of my personal debt is small in comparison compared to the $ amounts of some companies or should this be measured as a total debt position?

Your third point also emphasis how little I know about TA! Something I need to work on for exit strategies.

Good technical opinions thanks Snoopy. Getting heaps of food for thought from you guys.

[DarkRed]

RYM is a well run company & a sector that is only going to get bigger when the baby boomers retire, so thats a good choice

I'll tell you about the companies im looking at, mostly off my LOW EV list, so you can check the relevant threads

MOX - Copper/Gold, Iron Ore, Manganese, Uranium, Bauxite
HLX - Iron Ore, Gold, Uranium, Base Metals
AYN/ARD - Silver near term producers ( i am very bullish on silver)
DGR - IPOing 3 companies covering Copper/Moly, Gold/Silver & Shale Gas - primary exposure to Gold & Copper/Moly

Others off the LOW EV list include: WCN, GES, GMM, CZN, LCR, FRY, AIV, AXE, SPQ

Cheers Shasta. I will do some research over the next week and have a look around the threads on here. Watch out for the odd question...

Thanks!

[shasta]

Snoopy, good point that it is actually "borrowed" money but secured with property equity, something I always need to remember.
I am not 100% on your second point about my debt position multiplying with the debt position of the company I am investing in. Help me out a bit here since I am playing the novice card. Ill have a stab at it but what I am getting is that my debt position and the the debt position of the company has an effect on my total debt position as far as I am concerned? The value of my personal debt is small in comparison compared to the $ amounts of some companies or should this be measured as a total debt position?

Your third point also emphasis how little I know about TA! Something I need to work on for exit strategies.

Good technical opinions thanks Snoopy. Getting heaps of food for thought from you guys.

Snoopy wasnt refering to TA, in fact Snoopy is one of the more astute FA investors on Sharetrader!

The point being, you do not want to get caught having to refinance your loans etc, during a down cycle where the shares dont cover the interest costs, or you are losing money. I dont see this as a problem, giving you arent using all your available capital & your income can support your debt

Keep asking qustions!

[DarkRed]

Snoopy wasnt refering to TA, in fact Snoopy is one of the more astute FA investors on Sharetrader!

The point being, you do not want to get caught having to refinance your loans etc, during a down cycle where the shares dont cover the interest costs, or you are losing money. I dont see this as a problem, giving you arent using all your available capital & your income can support your debt

Keep asking qustions!

Woops that does seem to make more sense...cheers for the correction.

In one of your earlier posts you mentioned you are bullish on silver. My current portfolio has no precious metals as part of it. What are your/others thoughts on holding precious metals? There are heaps of threads relating to holding precious metals but relating to this thread what are your thoughts of holding precious metals funded by debt? This would rely purely on gains in the price of the metals and inflation lowering the real value of the $ held as debt and all of this being greater than the interest charged? Possible?

[shasta]

Woops that does seem to make more sense...cheers for the correction.

In one of your earlier posts you mentioned you are bullish on silver. My current portfolio has no precious metals as part of it. What are your/others thoughts on holding precious metals? There are heaps of threads relating to holding precious metals but relating to this thread what are your thoughts of holding precious metals funded by debt? This would rely purely on gains in the price of the metals and inflation lowering the real value of the $ held as debt and all of this being greater than the interest charged? Possible?

My interest in Silver especially over Gold/other precious metals, is based on:

1. The additional US economic injection of $US600b into there economy @ $75b a month over 8 months started late 2010, this was following on from the earlier much larger injection (some $1T+) & as the US is still effectively printing money, & heavily in debt, i dont see there economy picking up for a while, therefore Gold/Silver remain a safe haven, even when the US economy picks up, it will likely start with a strengthing $USD, which will assist the Gold/silver price in $A/$NZ.

2. Silver has a far wider industrial use, from such items as miltary weapons, solar panels etc

3. Gold to Silver ratio is still much higher than it has been historically, meaning either Silver is undervalued or Gold is overvalued

4. AYN, ARD & CCU - due to start up production in 2011 & all have very healthy profit margins at current Silver prices, & AYN/ARD have undemanding market caps so should provide good share price returns by years end , plus there are Gold/Silver companies that pay a dividend, TRY comes to mind, plus mining investment companies like GMI & LRF. Nb, I have selected AYN in the 2011 ASX comp

5. Lack of pure silver mines in the world (most silver mined comes as a by product of Gold/Zinc/Lead mines), & scarcity of silver companies on the ASX (Peru & Mexico mine the most silver), especially since the large Silver producer CXC delisted

6. Retail demand, there is still a high demand for Gold & Silver coins & bars, the likes of the Perth mint tends to sell out of coins, plus both China & India have started buying Gold at a Govt & individual retail level, the mid/long term charts for Gold & Silver in $USD are still trending up (although the $USD weakness has had an effect)

7. Manipulation of the Silver market (in the past & present), & Silver shorts/longs, there is still alot of Silver being shorted on paper, & when these contracts have to be covered, & the physical silver bought could move the price up very quickly, read JBMurc's posts on the Silver threads, he has posted all the links etc & is another Silver bull, his posts are worth following.

Silver has had a decent run last year, but at roughly $US30/oz, i still believe whilst the Silver price will remain volatile, that during the 1st 6 months of 2011 we will see at least $US35/oz, & by years end $US40/oz+

Re your question about using debt to invest into precious metals, if you were buying the physical coins/bars then yes, you would be relying on inflation lowering the value of your debt & increased metal prices to provide a return in excess of the debt costs. Same with precious metal stocks that dont pay a dividend, but there are many resource producers who pay dividends who have silver as a secondary source of revenue.

Inflation will be an issue down the track, just as rising interest rates will when the economy turns & picks up as part of the natural economic cycle, but i see that as a minimum 18 months away. We are on a knifes edge of slipping back into a technical recession, so we havent got out of the fire just yet!

Do i personally think Silver will outperform the 6% financing costs of your loan, yes i do, but ultimately the market will decide what Silver is worth, not me!