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:
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!
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 firstname.lastname@example.org.
Updated: Thursday, 31 May 2007 8:27 AM CDT