How many people get above average returns over the long term?

[StockyGuy]

I wouldn’t suggest a beginner use leverage.

Indeed, to be droll, it's one of those ironies...by the time you are ready to use leverage you presumably have had so much success that your trading capital is such you no longer need leverage.

But, to be more serious, if I have method with expectation of say 10% a year and margin loan at 5% per annum, why not use it to double or triple my portfolio size, to grow my profits faster? That's not same as 500:1 CFDs or Forex leverage...

 

[Zaxon]

But, to be more serious, if I have method with expectation of say 10% a year and margin loan at 5% per annum, why not use it to double or triple my portfolio size, to grow my profits faster? That's not same as 500:1 CFDs or Forex leverage...

There's no reason that you couldn't. But you'd need a way of servicing the loan. The stock market can go through lengthy periods of down or sideways growth, year after year. In which case, you're restricted to high dividend stocks, which is only a small subsection of the market, or you're prepared to sell down stocks because you have a bill to pay, not because your trading system (etc) says to.

 

[rnr]

500:1 Leverage

FP brokers with how much capital behind them ?
https://www.fpmarkets.com/

Nothing like giving hand grenades to children to play with. 500:1 Leverage ,,, gee a 0.2% move and your GONE !!

this address rings a bell ... isn't it Tri-continentals old location ?

First Prudential Markets Pty Ltd. ... First Prudential Markets Ltd is licensed and regulated by CySEC (Cyprus Securities and Exchange Commission) with licence number 371/18.

Hilarious.

Good luck.

@kahuna1
This is the statement you made!

"CFD's whilst I understand popular, during times of crisis, and whilst I never touch them, ever, the prices are not ASX ones but the person with WHOM you have the opposing position with. A BIG BIG issue."

Interesting response....just a shame it has no relevance in the support your claim.

I don't believe that I am being unreasonable with my response, if you are willing to address the issue you've raised, I am more than happy to listen.

Cheers,
Rob

 

[leyy]

I have been reasonably successful as a medium to long term investor.

This is a summary of my stats for all trades in all portfolio's (personal + SMSF) between 2012-2019.

Win%: 53%
Win/Loss Ratio: 2.24
Profit Factor: 2.50
Average Days Held: 315 days
Gross Trading P&L: 17.1%
Net Trading P&L: 18.8% (including dividends, franking credits and minus brokerage).

No leverage used, mainly invest in small/medium cap equities.

 

[aus_trader]

There's no reason that you couldn't. But you'd need a way of servicing the loan. The stock market can go through lengthy periods of down or sideways growth, year after year. In which case, you're restricted to high dividend stocks, which is only a small subsection of the market, or you're prepared to sell down stocks because you have a bill to pay, not because your trading system (etc) says to.

Spot on Zax, I think leverage used for buying a house is OK where the bank usually funds 90 to 95% of the purchase. Unless of course someone has full amount up front, probably not the case for many of us.

The problem with a margin loan for stocks is the dreaded "Margin Call". If your portfolio goes through a downturn (drawdown), then you'll be forced to sell near the bottom not because you want to but your margin loan provider forces you to !

It's a weapon of wealth destruction, so use with extreme caution.

 

[tech/a]

Spot on Zax, I think leverage used for buying a house is OK where the bank usually funds 90 to 95% of the purchase. Unless of course someone has full amount up front, probably not the case for many of us.

The problem with a margin loan for stocks is the dreaded "Margin Call". If your portfolio goes through a downturn (drawdown), then you'll be forced to sell near the bottom not because you want to but your margin loan provider forces you to !

It's a weapon of wealth destruction, so use with extreme caution.

Sorry don’t agree.

Using other people’s money for a fee (interest) is THE way to increased wealth.
THE WAY to poverty is not understanding and implementing risk control.

Margin calls are alarm bells not something that you HAVE to tolerate.
If you run a business a loss is an alarm bell.
Negatively geared property without being used as a hedge or increase in capital value is also an alarm bell.

Only a small minority master RISK
Probably the most important skill you CAN master.

 

[Knobby22]

My gearing is near 100% so I cannot afford too many mistakes.
I don't keep track of my profits (except for tax purposes).
The dividends go to an offset account on my home loan and my share loan repayments come out of that.
As this does not cover the total loan cost I end up putting in about the same amount as the dividends.

When I make $4,000 over the initial loan amount I spend it, sometimes half / half paying of my house and share loan or sometimes doing things like pay for my wife's 50th (last year), sometimes towards a new car etc. It is a useful, if intermittent, income stream.

If you are learning though it is better to not borrow.

 

[tech/a]

Knobby who are you with?

 

[Knobby22]

Knobby who are you with?

The loans? CUA Credit Union Australia.

Just like a bank only honest.
https://www.cua.com.au/

 

[aus_trader]

Sorry don’t agree.

Using other people’s money for a fee (interest) is THE way to increased wealth.
THE WAY to poverty is not understanding and implementing risk control.

Margin calls are alarm bells not something that you HAVE to tolerate.
If you run a business a loss is an alarm bell.
Negatively geared property without being used as a hedge or increase in capital value is also an alarm bell.

Only a small minority master RISK
Probably the most important skill you CAN master.

You may be right tech/a. But I don't personally use any form of leverage for my stock trading/investing purposes. I did try a long time ago but I ended up getting stressed out about margin calls and about the portfolio going up and down like a yo-yo.

Borrowing for real-estate is something that I have done with loans. Firstly I don't have that kind of money up front and secondly I am much more calm about it as my house value doesn't go up and down like the stock market.

 

[Smurf1976]

You may be right tech/a. But I don't personally use any form of leverage for my stock trading/investing purposes. I did try a long time ago but I ended up getting stressed out about margin calls and about the portfolio going up and down like a yo-yo.

If a particular approach keeps the psychological aspects under control then that's an advantage to that approach aside from any other attributes of it.

 

[Garpal Gumnut]

As you guys say, the psychological aspects are moot.

Particularly when you are retired and have no income/super contributions to hide your inadequacies.

I've become more conservative and slow with age, and am now likely to follow NABHA buy $69 up to $89 sell, rather than the helter skelter of maybe's.

BHP. RIO CWN LLC been all good to me by buying and selling at critical times.

Keep it simple baby.

gg

 

[aus_trader]

As you guys say, the psychological aspects are moot.

Particularly when you are retired and have no income/super contributions to hide your inadequacies.

I've become more conservative and slow with age, and am now likely to follow NABHA buy $69 up to $89 sell, rather than the helter skelter of maybe's.

BHP. RIO CWN LLC been all good to me by buying and selling at critical times.

Keep it simple baby.

gg

That's it GG, I also like to keep things simple. So it's one less thing that I need to consider(& worry about) when investing when I don't borrow and only use my savings.

 

[Zaxon]

I can see both sides of borrowing to invest. Here's a few pros and cons that come to mind.

For Case

• Loans are historically very cheap. Cheap money could be a once in a generation opportunity too good to miss.
• If your investing/trading system has a positive expectation, why wouldn't you capitalize on that by feeding it more money?
• You can borrow against real estate, which eliminates the risk of margin calls
• If you have independent serviceability of the loan payments, that is you have leftover money from your salary that can cover the interest payments, you're not solely dependent on your investments to pay their way. Hence you can survive an extended down stock market easily.
• Gearing could be the difference between retiring modestly, or retiring wealthy.
• When you retire, you'll be drawing out 4% (etc) consistently from your investments, both in good and bad markets. If you keep your loan-to-value ratios low and make sure the repayments don't go over 4% of your total investments, in a sense you're "practising" for retirement, while magnifying your returns.

Against Case

• Warren Buffett and Charlie Munger have spoken out strongly against borrowing to invest. Using words like "crazy" and "risking everything". Are you wiser than Warren Buffett?
• The market will halve by 50% in the future (if history teaches us anything). If you're leveraged, you still have to pay the loan plus risk a possible margin call. A market crash could risk you losing everything, if your LVR isn't very conservative.
• If you're debt free in a market crash, your net worth drops, sure, but there's no additional risks. There's no loan to repay. Your costs are zero. You simply ride out the crash. You're not going broke. You've got time.
• ANZ margin interest rate (as an example) is 7.03%. You need >7% returns just to break even.
• Most listed companies (but not all) have debt of their own. That's why company profit growth typically exceeds GDP growth. So most shares are internally leveraged. Are you really going to leverage an already leveraged product? Isn't that the definition of super risky?
• If you're prepared to increase your risk for potentially higher returns, you can already do that without borrowing. Have a look at small caps. The returns of APT, ANO, A2M etc have been huge. No debt required. In fact, margin loans will have a list of approved shares you're restricted to. By using a margin loan, you're limiting yourself to bigger, slower growth companies.
• No loans means you can sleep at night. If there's another 9/11 and the market closes for a week, it doesn't matter. If a company you own goes broke, that's sad, but you don't have a loan to pay off on a stock that no longer exists.

 

[aus_trader]

ANZ margin interest rate (as an example) is 7.03%. You need >7% returns just to break even.

There you have it folks. Zaxon has made the argument highly tilted towards the 'Cons' side of the equation. Not to mention there are more dot points on the Cons

Even if it didn't come from the investing legends like Charlie Munger / Warren Buffet the argument against borrowing to invest in the stock market should be common sense. Just think about it. You need to have a system that produces ridiculous returns per year in order to be ahead, don't forget as a trader/investor you are already stacked up against inflation, possible downturns and trying to get above index returns. It would add additional pressure for your portfolio to perform in order to account for the margin interest rate, so in this case your system has to produce another 7% compared to someone without leverage !

 

[tech/a]

Perhaps this example of how to use Leverage PROPERLY will
get you thinking about how you use it and why there are
very sensible and correct ways to use it WITHOUT taking on
any more risk than using your own cash.

You have a $50,000 account---your money. You risk 2% on a trade
(Or just insert your Percentage). In this case $1000.
You see a trade in BHP You already have $35,000 invested.
In the example Posted here which I noted and posted as it happened
The stop was $1.40 from the Buy the trade would have cost $28,000

The only way I could take the trade was on margin. No more risk
I would have moved the stop to ## have the trade and be sleeping
well at night. All of my other trades are similar with mitigation of risk
the prime objective. You do not take on more risk


Profit ratio to risk starts at 2% for most of my trading (3-4% rarely)
but OVERALL on accumulated trades through a year averages .07%

 

[Zaxon]

Not to mention there are more dot points on the Cons

Against by one point? lol. It wasn't planned that way. I was trying to give a balanced view on both sides.

But in listing the points, I inadvertently discovered whether I should personally use leverage or not, although that wasn't my plan going into the post.

 

[PZ99]

Against by one point? lol. It wasn't planned that way. I was trying to give a balanced view on both sides.

But in listing the points, I inadvertently discovered whether I should personally use leverage or not, although that wasn't my plan going into the post.

One dot I would add is not to rely on dividends as an interest offset because they are not term deposits.

I use leverage all the time for trading bank stocks and it works well.
7% p/a is 0.13% a week. Banks usually trade over a 1% spread even on a flat day.

Although I won't be doing any more until after the reporting is over in a few weeks

 

[aus_trader]

Against by one point? lol. It wasn't planned that way. I was trying to give a balanced view on both sides.

But in listing the points, I inadvertently discovered whether I should personally use leverage or not, although that wasn't my plan going into the post.

That's the main thing, that each person discovers their individual style and use tools and advantages that complement it.

I think I have learnt a fair bit too from this discussion. I actually didn't say in the posts to never use leverage even with stocks, just to use them with "extreme caution" and I still hold that view. From the discussions above I can see how tech/a and PZ99 uses them for the shorter term strategies where the interest cost will be very small and if the strategy is a good one then leverage is going to boost returns. But for longer term investors you really have to ask yourself is it worth it to put another 5% to 7% per year burden on your portfolio.

 

[Knobby22]

That's the main thing, that each person discovers their individual style and use tools and advantages that complement it.

I think I have learnt a fair bit too from this discussion. I actually didn't say in the posts to never use leverage even with stocks, just to use them with "extreme caution" and I still hold that view. From the discussions above I can see how tech/a and PZ99 uses them for the shorter term strategies where the interest cost will be very small and if the strategy is a good one then leverage is going to boost returns. But for longer term investors you really have to ask yourself is it worth it to put another 5% to 7% per year burden on your portfolio.

My interest rate is 4.49 for the share loan but point is good. The problem is that I built a new house and have to pay that off also at 3.59%.

I am better to concentrate on that while making money through the shares and negative gearing the interest.
Both loans have dropped due to payments and successful share trading so my share gearing has been dropping. The longer it goes the less risk.

If I didn't do it this way I wouldn't be able to take decent share positions and make much money.
Trading at $3000 for instance has its own costs.