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Stock Picks Bob's Advice
Thursday, 31 May 2007
A Reader Writes "...have you found using margin to be a good investment?"

Hello Friends.  Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice!  As always, please remember that I am an amateur investor, so please remember to consult with your professional investment advisers prior to making any investment decision based on information on this website!

I had a nice comment from one of my most loyal of readers, Eric, who wrote:

"Hi Bob,

Thanks for the posts!

I was wondering if you could share your thoughts on using margin. The 10% interest rate seems steep but the increased buying power is a big draw. I realize you are trying to buy down your margin, but overall have you found using margin to be a good investment? Would you suggest using it with an interest rate as high as 10%?

Thanks for your time and advice! 

Eric"

I think this deserves an honest response.  I spend a lot of time preaching against using margin and then I go and use it!  It is certainly one of those "Do as I say, not what I do!" moments.  But I certainly do not believe that margin, or buying on leverage, is a good idea for most investors.  It simply increases the volatility of one's account.

In an up-market, it certainly does help.  But it also magnifies losses on the way down, so that is the part that all of you 'newbies' are not quite as familiar with.  That is why I stopped at 20 positions as my margin balance really became unrealistic.  If anything, I wouldn't recomment getting below 80% equity levels on margin or borrowed money.  If you are to have margin at all.

Currently, my own Trading Account, even after the big rally and my latest sale, sits at $53,853.72.  I have $66,205.55 in margin debt.  My total holdings stand at $120,059.27.  Thus, I am sitting at a 44.85% margin level.  Way too much debt to make me comfortable.

It is well known that margin contributed to the calamity of the Great Crash in 1929.  At that time people were putting, as I recall off the top of my head, like 10% down.  Currently minimum margin requirements are as low as 30%.  I am really not that far above the minimum level to avoid what is called as a "margin call".  Different equities have different margin requirements.

So while I believe in an aggressive and disciplined trading and investment approach.  My own goal is to eliminate margin and to use my own trades and sales to do so.  By the way, year-to-date, I have a net of $12,309.61 in realized gains so far, including a net of $3,062.06 of short-term gains and $9,247.55 in long-term gains.  These are real profits based on net sales of stocks including losses and gains combined.  So the market has been kind to me.  

In addition, I have $32,335.12 in unrealized gains which represent my net of profits and losses that are still paper profits, that are what would happen if I sold all of my 20 stocks today.  So the market is kind to me.

I do not plan on moving beyond 20 positions until I have reduced my margin balance significantly.  I may move back to 25 if I get to 80% equity levels.  Or I may wait to pay off the whole thing.  I will keep you posted :).

Thanks so much for commenting and visiting.  If you have any other questions, or any of you other readers, (is that good English?), then go ahead and leave them on the blog or email me at bobsadviceforstocks@lycos.com.

Bob

 

 


Posted by bobsadviceforstocks at 5:42 AM CDT | Post Comment | View Comments (4) | Permalink
Updated: Thursday, 31 May 2007 8:27 AM CDT

Thursday, 31 May 2007 - 10:50 AM CDT

Name: "hapmoorii"
Home Page: http://hapmoorii.blogspot.com

Great article.  I was just considering asking you about some of the numbers you gave here after reading a recent post where you said something about margin.  Going further with the topic, do you ever take short positions, and if so, how do you take margin issues into account?  Same kinds of questions on options.  

Thursday, 31 May 2007 - 11:00 AM CDT

Name: bobsadviceforstocks
Home Page: http://bobsadviceforstocks.tripod.com

Hap,

Thanks for writing and commenting.  I do not go short on stocks although I don't think it would be an unreasonable approach using the same methodology of analyzing stocks.  However, I am challenged enough with my long positions.

Some years back I speculated with options, and lost a whole bunch of money buying Calls.  It is probably more conservative to write options on existing positions and I know a lot of astute investors have added to their own performance in that fashion.  Again, I don't do any options at all currently.

If you can have a successful investment program, it shouldn't be necessary or even prudent to borrow money to accomplish your goals.  I know it magnifies gains, but it also adds risk.  I am not happy with my margin balance.  This was the reason I decided to stop at 20 positions and hopefully will be able to pay this down significantly before any big bear correction comes to pass.

Bob 

Friday, 1 June 2007 - 2:18 PM CDT

Name: "anonymous"

Hi Bob,

Thanks for the response. I always appreciate your thoughts and opinions.

As you mentioned, your year to date net is about $12,300 (which is great! congrats!), including about $3,000 in short-term gains and $9,250 in long-term gains. Could you comment on the differences between short-term and long-term gains? I am not familiar with the terminology.

Thanks!

Eric

Friday, 1 June 2007 - 8:59 PM CDT

Name: "anonymous"

Hi Bob, 

I may be missing something, but when you say, "Currently, my own Trading Account, even after the big rally and my latest sale, sits at $53,853.72.  I have $66,205.55 in margin debt.  My total holdings stand at $120,059.27.  Thus, I am sitting at a 44.85% margin level.  Way too much debt..." Doesn't that translate into 56% ($66,502.55)of margin debt rather than 44% ($53,853.72)?

How are you able to have more debt than your trading account is worth? Are you aiming to get your margin debt down to 30%?  What do you consider a comfortable amount of debt? Do you think there is a certain percentage that someone should try to remain around when it comes to margin debt?

Thanks,

Eric

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