Author Topic: The right level of safety for Margin loans  (Read 3308 times)

hodedofome

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Re: The right level of safety for Margin loans
« Reply #50 on: July 08, 2020, 08:13:42 AM »

When you buy an index with no leverage you can and should buy more of it the further it falls, but when you introduce even the tiniest amount of leverage then that rule should be flipped; you should only pyramid up on a position that is in profit and never add to a losing position.


I'm intrigued by this alteration of the dominant strategy due to leverage. I suppose that is because the risk/reward line is so much steeper when leverage is used that the risk of a "game over" insolvency event is so much closer. Additionally, because the upside is so steep, you are trying different trades to find one that will go up and up until you are rich (e.g. bullish on TSLA 3 months ago). And the only way to do that is to quickly cull the losing attempts before they become "game over" events. Is there anything I'm missing with regard to this gambling strategy?

Here’s a way to do that https://www.amazon.com/Perfect-Speculator-Markets-Lose-Nothing-ebook/dp/B007F2O020/ref=nodl_

As far as buying or selling based on the trend, with tight stop losses if the trend reversed, Commodity Trading Advisors have been doing that for decades. It doesn’t work as well as it used to, but in the 70s and 80s many people became millionaires from this approach.

vand

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Re: The right level of safety for Margin loans
« Reply #51 on: July 08, 2020, 09:43:30 AM »

When you buy an index with no leverage you can and should buy more of it the further it falls, but when you introduce even the tiniest amount of leverage then that rule should be flipped; you should only pyramid up on a position that is in profit and never add to a losing position.


I'm intrigued by this alteration of the dominant strategy due to leverage. I suppose that is because the risk/reward line is so much steeper when leverage is used that the risk of a "game over" insolvency event is so much closer. Additionally, because the upside is so steep, you are trying different trades to find one that will go up and up until you are rich (e.g. bullish on TSLA 3 months ago). And the only way to do that is to quickly cull the losing attempts before they become "game over" events. Is there anything I'm missing with regard to this gambling strategy?

It's the difference between investment and speculation.

I'm a bit old school, so I believe that the definition of an investment is that it must have some objective intrinsic value. When you buy an investment you're buying it to earn a return from it's future cashflows, or however else you choose to value it.

But if you are speculating you are not buying it for its future value. You are buying something because you believe that someone will pay more for it tomorrow than you are paying today. Someone else has to take the other side of that trade, and you can't both be right and benefit. One person's gain is another's loss. So if you start pyramiding losses then by definition you are making the person on the other side of the trade richer and richer. 

I don't always agree with everything Buffett says, but way back in the Intelligent Investor, Ben Graham and by extension Buffett have always been very clear that they consider anything bought with borrowed money to be speculation, which is a position I concur with. Of course, there's nothing wrong with trying your hand at some speculation.. the odds may be against you, but some people will be good to be long term profitable.
« Last Edit: July 08, 2020, 09:47:36 AM by vand »

Goldielocks

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Re: The right level of safety for Margin loans
« Reply #52 on: July 08, 2020, 10:18:12 AM »
Most brokerages like to give a fake margin loan interest, then add a number to it.  It's consistent enough across brokerages that it's probably legally required language.  Here's the rates for a margin loan of $50,000:

https://investor.vanguard.com/investing/margin
Vanguard adds a +6.0% "base rate", so they show both "1.50%" and "7.50%" in that table.

https://www.schwab.com/margin/rates
Schwab does the same with a +6.5% base rate, showing both "0.375%" and "6.875%"

https://www.fidelity.com/trading/margin-loans/margin-rates
Fidelity mentions that "6.875%" is "(0.200% below base rate)" of 7.075%.

https://www.interactivebrokers.com/en/index.php?f=46376
Interactive Brokers mentions a Benchmark Rate each time, with "1.59%" being "+1.5%" over benchmark.


It's also worth mentioning that margin rates can change with interest rates, which might be part of why each brokerage splits their rates between interest rate and base rate.  According to Fed chairman Powell, the Fed doesn't expect to raise rates in 2021.

Awesome info.  Thanks for this.

Goldielocks

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Re: The right level of safety for Margin loans
« Reply #53 on: July 08, 2020, 10:22:53 AM »
If you’re gonna be leveraged you need to have stop losses in place to control the downside.

Put this strategy on some leverage and you’ll have greater than market returns with much less volatility.

https://www.portfoliovisualizer.com/test-market-timing-model?s=y&coreSatellite=false&timingModel=5&startYear=1985&endYear=2020&includeYTD=false&initialAmount=10000&periodicAdjustment=0&adjustmentAmount=0&inflationAdjusted=true&adjustmentPercentage=0.0&adjustmentFrequency=4&symbol=SPY+IEF&singleAbsoluteMomentum=false&volatilityTarget=9.0&downsideVolatility=false&outOfMarketStartMonth=5&outOfMarketEndMonth=10&outOfMarketAssetType=1&movingAverageSignal=1&movingAverageType=1&multipleTimingPeriods=false&periodWeighting=2&windowSize=10&windowSizeInDays=105&movingAverageType2=1&windowSize2=10&windowSizeInDays2=105&excludePreviousMonth=false&normalizeReturns=false&volatilityWindowSize=0&volatilityWindowSizeInDays=0&assetsToHold=1&allocationWeights=1&riskControl=false&riskWindowSize=10&riskWindowSizeInDays=0&rebalancePeriod=1&separateSignalAsset=false&tradeExecution=0&comparedAllocation=0&timingPeriods%5B0%5D=5&timingUnits%5B0%5D=2&timingWeights%5B0%5D=100&timingUnits%5B1%5D=2&timingWeights%5B1%5D=0&timingUnits%5B2%5D=2&timingWeights%5B2%5D=0&timingUnits%5B3%5D=2&timingWeights%5B3%5D=0&timingUnits%5B4%5D=2&timingWeights%5B4%5D=0&volatilityPeriodUnit=1&volatilityPeriodWeight=0&symbol1=SPY&allocation1_1=50&symbol2=IEF&allocation2_1=50

Another risk item to be aware of.   Whether you are keeping your mortgage to increase invested assets, run a rental property business using a loan, or using margin, these tools only work well for people with copious income coming in (much more income than base expenses), who can otherwise cover 6 months of hiccups in the business plan.

The use of margin is trickier than other leverage, specifically because the calls are tied to the market losses.  Most people are covering their risk using other investments that they would sell.   So the margin call pulls your assets out at the worst time, or demands that you top up with new cash at the start of a downward streak (not near the end of it), creating further losses.
« Last Edit: July 08, 2020, 10:34:00 AM by Goldielocks »

Paul der Krake

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Re: The right level of safety for Margin loans
« Reply #54 on: July 08, 2020, 10:50:58 AM »
Stop loss isn't a magical tool that will save you under all circumstances. There is no guarantee that your price point will be hit, it could get jumped over by a big margin. The flip side of this coin is that you could have a wild swing that triggers the sale then it immediately recovers.

Juan Ponce de León

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Re: The right level of safety for Margin loans
« Reply #55 on: July 09, 2020, 05:36:29 AM »
Not sure what you're all on about here.  We just had a 30%+ crash, by the logic in this thread I should have been margin called, liquidated and bankrupted.  Reality is PF is back in the green and LVR is at 37%, kept buying at my regular scheduled intervals as always.

talltexan

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Re: The right level of safety for Margin loans
« Reply #56 on: July 09, 2020, 09:54:37 AM »
I make myself reread the markettimer thread once a year. Keeps me honest about my risk tolerance.

20% bonds through the spring, never unable to sleep.

I don't see you discussing your mortgage or other debts, leverage is part of that package. I could see seeking a way to keep total debt stable as you are paying down a mortgage, and--with a rate far superior to a HELOC--the IB loan product is useful for that.

Roger

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Re: The right level of safety for Margin loans
« Reply #57 on: July 19, 2020, 03:46:54 AM »
I am also a customer of InteractiveBrokers and had the same temptation last year. My conclusion was not to increase my market exposure beyond 100%.
Investing more than 100% is basically like having a negative cash allocation, so I think the question is really how much cash do you need - for your spending and for feeling safe.
I appreciate the possibility to lend money secured by my portfolio for various reasons. But the recent market downturn has again shown that banks take away your umbrella when it rains. When the market turns down or you lose your job, the risk models will show you are less likely to pay back you loan and the bank will increase interest rates and/or reduce your limits - when you need it the most.
The other way to use the margin is to be able to add to your portfolio in a market downturn instead of on a permanent basis. Volatility is real and crisis come frequently.
While the math might work out for investing more than 100% (you can convince yourself you are just investing the dividends of the next year or two) - for me it doesn't work for my sense of security with regards to my investment decisions.
I believe most people have a positive cash allocation, possibly some bonds to cover expenses during a market downturn. Obviously, this costs some money due to lower yield expectations. Nevertheless, I do think it is the right approach, especially when you come closer to retirement or are already retired.

Panly

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Re: The right level of safety for Margin loans
« Reply #58 on: July 19, 2020, 11:43:12 AM »

in principle I don't have any problem with using margin, using it regularly.

But the real problem is that the rules will be changed against you instantly, with no explanation given and no chance to appeal or anything.

If IB finds the idea profitable for themselves, it may suddenly decide that all companies with letter "D" or "L" in their stock ticker symbol can no longer be bought on margin.   
Or that companies with a market cap of less than 639,23m (or any other arbitrary number )go from 25% to 100% margin requirement. Tomorrow.


And those unexpected changes of the rules can hurt you badly.