If you think you want to invest based on this amount of leverage, I encourage you to read the greatest bogleheads thread of all time: https://www.bogleheads.org/forum/viewtopic.php?t=5934
I make myself re-read this annually.
(3 hours later)
Wow. So should we be concerned that people are popping in that thread these days to ask "and what's wrong with this strategy exactly?" and "clearly, the only thing wrong with that strategy was his timing." #Bubble #StretchedValuations
I would state it differently. Timing was everything that was wrong with that strategy. Note: I've only read up to page 13 of 29. Personally, at this point, I'm desperately hoping--hope against hope--that the OP had a surprisingly unexpected good outcome, even though I doubt that it is likely.
To me, this is a treatise in why timing the market is such an unlikely path to success; even without leverage. To my eye, this is a case study on why you shouldn't use leverage to bet your future life's savings on a binary timing event depending on today's (this week's, this year's) market action.
It is definitely arguable that placing your entire future's earnings potential, today, on a black or red outcome of a single spin of roulette today is simply a good or poor choice of timing.
The OP's entire convoluted strategy depended entirely on timing; i.e., avoiding a bad spin of the roulette wheel on the first several spins. He lost those bets spectacularly, and then he doubled down, again and again, each time, and he lost more money even faster.
I sincerely hope that thread ends with a happy outcome, even though I doubt it will. His "strategy," as he has adjusted it, so far, throughout the thread, is much worse than betting everything you have on red or black. It's tantamount to betting everything you will ever have on a series of red or black spins of the roulette wheel today.
Based simply on timing, some folks will win really big, and some will remain destitute for the rest of their lives. It's hardly a strategy. It's an over-leveraged bet, and nothing more. It goes one way or the other strictly based on timing well or or on timing badly, at the point of entry.
The OP's timing decisions have proven catastrophic, so far, but not nearly as catastrophic as it would have been if he'd had the capacity to borrow 2x or 10x more money earlier in his experiment (as he said he would have done, even given the unlikely opportunity to do that).
So I'll withhold the spoilers then.
That's the issue with leverage anytime. In my younger days not all that long ago of playing poker online and occasionally in casinos, I learned this while very many of my friends did not. They employed strategies similar to market timer. Sign up for free offers. Go all in with small sums, get up big, continue to reinvest the proceeds in progressively higher and higher stakes until you got to a point where you felt "safe." With each of us starting at, say $50, I thought I had a pretty good deal. I'd get another $50 if I won a certain number of hands. A month later, I cashed out about $1,000 in proceeds.
The other guys would buy in for $50, sign up for the same deal as me, and immediately start betting aggressively every time they were favored to win hands. They weren't bad at math, or bad poker players, they understood odds, but they didn't understand the general principal that all-in works every time but once. If the risk is so great that a negative outcome returns you to zero (or, as is the case with leverage, returns you to negative, possibly significantly), then you can't risk it in the first place.
I think of it like playing the possible game. You are the Death Star. You have to choose which ships to obliterate with your cannons, systematically and repeatedly for a certain time period. There are 4 possible outcomes:
-You blow up an enemy ship correctly, and prevent the Death Star from being blown up.
-You blow up a friendly ship incorrectly, and kill a few Stormtroopers.
-You let a friendly ship fly uninterrupted, and nothing bad happens.
-You let an enemy ship fly uninterrupted, and it blows up the entire Death Star.
The risk is too significant to justify *not* shooting something that can't be clearly identified down. The risk might be different if the worst thing that happened was the enemy splashed red paint all over the Death Star.
I look at gambling, or investing the same way. You can't leverage because it increases the risk of the catastrophic failure scenario. That's exactly what this guy did, and it was a perfect storm because the margin calls later forced him to sell low, and his strategy didn't work. At the levels of capitalization he would have needed for the margin calls to be a nonfactor, he would have had no reason to leverage to generate outsize returns as he could have simply dollar cost averaged down without leverage, and been fully invested in the market when things recovered. Just my 2c.
PS - I don't profess to be some great poker player (in fact, I almost never even play anymore), but the other guys that dabbled with me, one was finally able to cash out $200 at one point. The other went all in four times. Each time a desire to sit at a table with the pros, and bet aggressively led to his downfall. He couldn't understand that when growing a stack you can't keep risking the entire thing, even to favorable odds. An undesirable outcome will sink you. He bought in 5 different times, each time got up to over $2,000, and never cashed out a penny because he went bust every time. That's kind of how I view using leverage in the market. All the downside, but not quite matching the risk adjusted rate of return since interest rates on borrowed money will eat into the returns in the event of a positive outcome. A negative outcome forces the sale of the very assets at their low to cover margin calls or interest payments on the debt, which exacerbate an already bad situation. They also lower the threshold for a negative outcome that creates catastrophic failure.
