Leverage is a tool.
One that is akin to using a bulldozer in a confined space. An expert can do this, a not so expert person will destroy everything. As a rule, margin is to be used even for very experienced well disciplined traders or investors at less than say 50% margin overall. Even at that level, holding 200% of shares verses equity, should be ONLY short term and exceptional circumstances if you want to survive longer term.
A leverage for a portfolio at say 25% MORE or 125% or even 150% gives you a better chance and playing this off against returns IS a good thing. As happens, periodically markets correct and being invested at 200% at the wrong time, will occur if one is NOT adverse to leverage at extremes. NOT just our market extremes but WORLD market extremes. Australian equities are irrelevant in driving long term direction of global markets. USA is approaching 3 times, or 300% of the GFC lows, DOUBLE the highs of the PRE GFC period. DOUBLE. If we applied this to our market, ignoring other things, we should be at an ASX 200 of say 9,500 to 13,000- so lets say 11,000 verses 6,300. We have and WILL and do under-perform the USA as does the rest of the world, for some very good reasons.
The things that MAKE markets and equities MOVE are quite simple on the MACRO side. Interest rates, on the fiscal side and goverment spending and taxes on the other. USA has decided NOT to pay for its elderly, pay for pensions, pay for healthcare and as such its now, 10 years after the GFC in a supposed recovery, running a deficit to GDP in spending of 4% of GDP. It is in itself on of the largest deficits ever run in the past 150 years outside of the GFC or say WW2. It is ignoring its debt level, the world is ignoring its debt level and when a taxpayer has $200,000- per tax payer DEBT ... and it does need to be serviced and the lower 80% of taxpayers have an income of a mere $35,000- PRE tax and $31,000- POST tax and social security, owing $200,000- and even servicing at 2% a $200,000- debt or $4,000- is being ignored FOR NOW.
Perspective, and a very long term one is needed for any portfolio. We In Australia seem to have an idiotic fiscal concept that a BUDGET SURPLUS is needed. On one hand EU and Australia as life itself went from 72 years in 1980 tp close to 84 years so too did the RISING cost of living medically and pension wise and TAX verses GDP went UP by 2% or sso. It ROSE ... to cover pensions and super and so too medical care. USA which operates on what is good for the 1% it FELL ... and FELL sharply. It went from 35% PLUS of GDP to 30%. The awful, sickening impact of this is NOT being as per normal fuller reported, but what is, is a disgrace and life expectancy instead of as it was in 1980 being close to number one, is NOW officially 78.6 years but clearly, easily 75 at best. Of course the top 1% even 20% can afford the worlds most expensive healthcare, bugger the rest and one side lives to 90 or so and the other is fast approaching 65 years.
Tax in the USA has fallen from 35% even 36% of GDP to 30%. Australian and EU and most others its risen by 2% of GDP and here,including super as one must its at 38% of GDP and EU around 40% of GDP.
Margin and leverage, is RELEVANT to the very big long term picture. USA is here also due to its actions into the GFC and it DOUBLED its debt in dollar terms, clearly has no intention to repay it, let alone service it and if one party stays in will cut what was free medical care to over65;s which is NOW not free and costs 20k per year for over 65's even further. Quite a sick display of human greed verses the needs of the many.
It will, obviously change at some stage and USA will ... get universal free or low cost healthcare. Either 2020 or 2024 will start the ball rolling. Either that, or outright revolt as even the most red blooded GOP party person crosses the lines even now for better healthcare. The impacts it will have on the healthcare industry in the USA where they see fit to charge 3,4,5 times the cost and the similar impact on healthcare provider sand insurers where a mere hospital bed costs 500% the EU average is obvious.
Other factor as to WHY in the USA ... is up here is two fold. One is it had interest rates at ZERO for a very long time. Every law about finance and lending below inflation, out the window. EU is following and still there, but it was LATE to the game for its bonds and endured, despite a much better 40% of GDP int axes, it was paying 2-3% MORE for debt verses a nation which collected bugger all tax.
Interest rates at zero ... dividends at 3% or 4% ... is a massive stimulus.
Second factor is tax theft ... evasion, avoidance and Australia, we clearly loose 30 billion easily seen in tax theft. We have laws, ignored, we are changing them and will do so ... the money FLOWS ... on the main to the USA. Gelncore os Swiss and one of the biggest evaders, but then we have oil companies, USA based, and the tech group where Microsoft with 3.6 billion sales books 3 billion via Bermuda and misses 10% GST let alone a profit margin over 25% and pays virtually no income tax.
Again big things, relevant if your going leveraged that MUST and WILL change mid term in say 5-10 years.
Lastly and perspective again, ignoring madness ... for 100 years the USA equity market traded in the 40% of GDP region. YES 40% of GDP .... two world wars, a few minor ones, good times and bad, but 40% of GDP. It NOW approaches as it did in 2000 .... a 125% of GDP level and in 2008 or late 200 that WAS the reality ... 125% of GDP until the goverment stepped in and prevented a fall in GDP of 1930-33 size.
USA equities are trading close to 300% OF The long term averages. WE are NOT ... but still inflated a fair bit as is the rest of the world.
If your going to use margin ... think about it !!
Perspective ... and very long term is needed in times of madness.
USA is LIKELY to go higher, short term, despite the long term perspective and its just a cautionary tale. Reason being is again linked to MACRO side and USA just cut its taxes and ignored its 99.99% of people and tax collected went from 17.5% on profits for companies to 7.5% ... despite the headline tax being now 21% verses 35%, GREECE had woeful tax collection and massive avoidance, USA makes it look like a novice. The 21% company tax rate is incompatible with HUMAN life, and whilst 35% headline rate was irrelevant when only HALF that was being collected on profits, instead of the loopholes being closed .... and the fall in collections being not a lot, it IS NOT the case.
Short term, USA I would like it to kiss say 3,150 on the S+P 500 in its madness. So that's still some ways away. But, eventually a more fair healthcare system will evolve, some USA sector are DOOMED profit wise when this occurs. But till then .... the top end dictates.
Buffet and his situation, he made or outperformed PRE 2000 via a good fundamental analysis of values of stocks. These stocks were valued at times close to 25% of GDP .... verses here at say 120% pf GDP one is 5 times CHEAPER than the other. His money I might also add is made up via 75% of it, his wealth, by NOT PAYING TAX. The companies he has his main investments in ? The largest tax evaders such as APPLE and Goldmans. Of course it legal in the USA, not really what they do raping the rest of the world and paying no tax .... but such is life.
This like most things cannot go on. Free trade does not mean rape the tax system of other nations and these are private companies .... greedy ones who need a few CEO's to spend time in jail.
Leverage here ? Well ... I have an interesting background and long term perspective. I would of course urge extreme caution. It would as experience tells me be wasted breath. Investing and trading is where someone makes a profit on a stock, or even a loss and more likely a loss, and they become an expert.
Back into my hole .... just be cautious, or think about perspective. Less than 50% .... say 150% ... I could live with ... 200% borrowing half ? Risky and oh and DIVERSIFY ..... or perish. Buffet himself gets it VERY VERY wrong despite 60 years plus in the industry. His pre GFC buys were trashed to the tune of a zillion gazillion or so total loss .... TOTAL loss.