Conservative Margin Lending?

[thecaptain]

What is your view on the market? This is crucial to your gearing decision. I have the exact numbers around somewhere but I'm too lazy/busy to fish them out. Roughly (and from memory) speaking therefore...

If you are geared at 75% ($25,000 of your own money in a $100,000 portfolio). The Market (or more correctly the value of your shares held in the margin loan) needs to fall between 6 and 10% before you are in a margin call.

If you are geared at 50% ($50k of your own money in a $100K portfolio), the market needs to fall between 32 to 36% before you are in margin call.

If you are geared at 25% ($75k of your own money in a $100K portfolio), the market needs to fall 75 - 79% before you are in margin call.

Given that our market has seen some substantial rises from it's bottom are we more or less likely to have a corrective pattern in the near term?

Is it therefore in your best interest to gear heavily (yes I consider a 60% gearing to be aggressive), at this time?

Cheers

Sir O

I concur with the majority that gearing at 60% is aggressive. What do i think the market is going to do...who knows, but i hope its going forward.

When is a good time to be aggressive in the market then?

Im quite young and considering my age to be an influencing factor in how aggressive i might consider being with my money. Its certainly not the be and end all. But i certainly wouldnt be as aggressive later in life, when i might not have the opportunities to bounce back from a hit.

 

[wayneL]

Can you expand on why a buy and hold basis wouldnt be advisable?

(Im doing some reading on Taleb!)

1/ There is no guarantee that the market won't take another swan dive in the near future. Roubini has floated this very idea only last week

Nouriel Roubini believes that a "wall of liquidity" is chasing all kinds of assets, yet once the economy disappoints expectations, it will all come crashing down.

2/ The object of buy and hold is the buy and... ummm, hold... through thick and thin. IF, the market does go into the crapper again, you may be forced to sell via a margin call; perhaps at the worst possible time.

 

[Lone Wolf]

At the market highs I was geared at 60%, which my financial adviser at the time told me was quite conservative for someone my age with a long term outlook. His recommendation was that I have time up my sleeve to wait for the market to recover should it fall, so gear up now while I'm young.

I must say that after sweating out the market lows I don't feel so young anymore. I've even got a post on here from the start of the year asking how to hedge against further losses because I thought I was heading for financial destruction. I had cash on the side for a margin call, enough for a few actually, but for a while it looked like it wouldn't be enough. And as drsmith pointed out, does it make sense to keep lots of money in a bank on a lower interest rate than the money you borrow to invest?

You might think that we've had the crash now, the worst is over and so 60% gearing is much safer now than it was before. Maybe, but you should prepare for the possibility that the worst is yet to come. What do you have planned in case of another market drop that takes us to new lows? When will you sell? Or will you hold until the bitter end? How much are you willing to lose?

Out of interest, why 10 individual stocks instead of an index tracking ETF like STW? Do you have individual stops on the stocks to limit your risk? Or is this a buy and hold forever strategy? I'm not saying buying 10 individual stocks is a bad way to go, I'm just interested.

I'm not here to talk you out of it. My only advise on your strategy is to have a plan in place for the worst case scenario. Any strategy looks great when you're winning. What's important is how your strategy protects you during the bad times.

 

[Rainmaker2000]

I'm someone who does not invest without a margin loan............

And the concept of 'conservative margin lending' is only talked about by financial planners.....

I love margin.......but prefer to take Benjamin Graham's view on things........anyone who uses margin is basically a 'professional investor' and is introducing speculation into his/her method.

If you are new to margin.......you are the perfect customer to get ripped off.............do you know the special conditions???????

During the correction, Comsec deciding with no warning that they would take back LVR.........that is secuirty valuation.......on perfectly good stocks......without any warning or reason.......they were doing this weekly

Do you know what happens to 60% LVR when the lender deems a security worthless for lending purposes??????

I thank god I had the balls to stick to my method and keep the ship on track.........because the bottom of the market was littered with margin lending defaults.........with lenders literally killing stock prices and their customers

 

[skc]

At the market highs I was geared at 60%, which my financial adviser at the time told me was quite conservative for someone my age with a long term outlook. His recommendation was that I have time up my sleeve to wait for the market to recover should it fall, so gear up now while I'm young.

Personally I think that's one of the BS amongst the financial advise industry. It should actually be the opposite. When you are young, you are in no hurry to gear up. Every $1 you lose now by taking an aggressive stance is many dollars of compounding lost in the future.

I'm not here to talk you out of it. My only advise on your strategy is to have a plan in place for the worst case scenario. Any strategy looks great when you're winning. What's important is how your strategy protects you during the bad times.

Wise words. Just like BNB and Storm. Your car would go a lot faster if you don't install any brakes, airbags, seatbelts and safety cell.

 

[wayneL]

....do you know the special conditions???????

During the correction, Comsec deciding with no warning that they would take back LVR.........that is secuirty valuation.......on perfectly good stocks......without any warning or reason.......they were doing this weekly

Do you know what happens to 60% LVR when the lender deems a security worthless for lending purposes??????

This is perfectly reasonable. Watch what happens to futures margin when the market gets volatile. It's the same principle.

It's to protect both the broker and the investor.... though it might not actually work that way for the investor.

 

[Rainmaker2000]

How do you think it protects the investor to have a perfectly good collateral termed useless by the banker without predictability, warning or rationale????

How many people do you think could satisfy the bank if it 'called in a mortgage on a home loan'...........what do you think would happen if banks just all of a sudden called in mortgages asking them to be immediately paid back cause the collateral is no longer valued???

I'm thinking the value of housing would fall very, very quickly.....and for what....the banks change of attitude....

I wonder why the banks are always 75% LVR when they are the most assetless businesses in the market.......funny that

Comsecs attitude in the bear market just 9 months ago was absolutely stupid............and they completely changed their risk methodology following it.......but what will happen in the next bust???

 

[wayneL]

Rain,

Please note my last comment.

 

[Judd]

Most margin lenders allow a 10% buffer of the value of the portfolio. A million dollar portfolio therefore has a $100,000 buffer attached to it. If you exceed your security value and enter into a margin call, you are then required to pay the call within 24 hours.including bringing the account completely out of the buffer.

Yes, I have read that the theory by the "pundits" is to have $1,000 in cash set aside for every $10,000 borrowed. However, what the "pundits" don't say is what is the situation if you receive multiple margin calls. As you imply Sir O, has thecapitain considered all aspects. And LoneWolf has described what such a situation may feel like.

I can attest that it ain't no fun. Fortunately in our case, other assets outside of the margin loan were especially useful to prevent and mitigate total damage.