Read? Leverage With Margin Account???
Long long ago; in the famous CBox; Uncle88888 came to know one guy going around forums and cboxes boasting about his leverage return on his bond trading like you didn't leverage on low interest rate you are dumb!
Not sure now what happened to his bond trading and his leveraged gains?
Our OWN Money and Other People Money?
How do some people think about Return On Capital? Actually it is Return on Own Capital
All cases have $50K as Capital
Investor A invested all $50K @ 5% yield and received $2.5K investment income. ROC or Return on OWN Money is 5%
Investor B invested $40K @ 5% yield, $10K as war chest and received $2K investment income. ROC or Return on OWN Money is 5%
Total investment @ 5% yield and e.g. margin interest charge @ 1% will receive $2K + $0.4K = $2.4K and Return on OWN Money is 6%
Somehow Investor C will feel that he is getting superior Return on OWN Money by thinking Mathematically in this form $0.9K/$10K = 9%! Wow!
Hmm ...
Posts
How different Investor A from Investor C?
ReplyDeleteCW,
ReplyDeleteYou and that guy are basically "bei kambings" when it comes to Margin Trading...
Hello!
Magin account interest where got 1% one???
Its 6% on average today. OK, for special promotions with terms and conditions we may get 2.88%...
1. Investor B's return on portfolio is 4% - 2K on $50K (40K stocks plus 10K cash). That's the common error of ommision
when most people use XIRR ;)
2. Investor C I don't want even to comment...
3. This is how you explain kindergaten level carry trades that EVERYONE can understand:
Margin account interest 6% - invest in a stock that yields 9% dividend. Wah lah! We make 3% out of nothing!!!
Provided the stock doesn't tank. No free lunch!
Its the same with property rental investing. Borrow from bank at 3% interest; rent the property out at 6% rental yield.
Provided the rental does not shrink or you can't find a tenant!!!
4. Math no good count in dollars and cents highly recommended. If I start with $1 in my pocket, at the end of the day, if
I got more than $1, I made money! If I got less than $1, back to the drawing-board!
LOL!
Got this fellow blogging about his initial margin trading:-
ReplyDeletehttp://treeofprosperity.blogspot.sg/2017/05/equity-management-13-how-to-think-about.html
http://treeofprosperity.blogspot.sg/2017/05/equity-management-14-starting-positions.html
http://treeofprosperity.blogspot.sg/2017/06/equity-management-15-finally-managed-to.html
He's the one getting 2.88% :) :)
He's also seeing whether his account will bow up by end-2017. Haha! But I think it will do quite well all the way into mid-2018.
In environment of rising stock markets or steady-state like now, leveraged trades will do well. More interesting is what happens during financial crisis or major recessions.
Leveraged trades and pay for holding the trades to Exit. Yes on trading with margin account.
ReplyDeleteBut, still scratching head to understand the reason for using margin account to invest for income over prolong period without any clear Exit.
CW,
DeleteThat's why I say he "bei kambing".
At least he got put a big "L" sign on his posts. He learning as he go.
1. Yes, for trading, you are right. 6% a year is "just" 0.5% interest charge if we hold the position for only a month. Very manageable ;)
2. For holding period of more than a year, the irony is he is using too little leverage... A 2% differential in yields for a currency carry trade can be very profitable if we use 10 times leverage. 2% x 10 = 20% return in a year. Not bad! But very risky!
You see in the papers billionaires and millionaires suing their investment banks for millions of losses are for similar highly leveraged trades gone bad... (But when they were right, rich gets richer)
But to do it for 2 times leverage? 2% x 2 = 4%... All this work for so little... Maybe for getting the feet wet?
For equities, max leverage is only 3.5 times for retail investors :(
Unless you join a brokerage as a full time prop trader. Then the leverage is 10 times :)
3. Trading volumes must be quite bad... I see brokers lowering commissions and now lower interest rates for margin?
My forex and futures interest charge is 4.5%.
That's the power of low interest rates. People who normally will stay clear of margin accounts will be tempted.
2.88% only!!!
Lower than trading forex and futures! Lower than interest charge for CFDs (long 4%; short 3%)!
4. He is trying to replicate what people do in the physical property market for paper assets like in REITs.
REITS are already leveraged entities. You use leverage on them is like debt on debt.
The window of opportunity was during 2009/10 when quite a few stocks have dividend yields of 12-15%.
How many clearly know that REITS are leveraged entities? The higher yield is due to leverage and yet many are pom pi pi of higher yield.
DeleteA view of Margin Account from multi-millionaire investor...
ReplyDeletehttp://www.koonyewyin.com/2016/02/18/the-advantage-of-margin-call/
http://www.koonyewyin.com/2014/01/05/why-how-to-use-margin-finance-to-increase-profit/
p.s. I don't trade with margin as I am very scare of margin call. lol
LOL!
DeleteI won't get call from my broker ever again.
He called me in the morning to remind to pay up fully by 4 pm or forced sell by 5 pm and then agin he called me at 3 pm to give me the final reminder pay up fully by 4 pm or forced sell by 5 pm.
Bloody ego hurting call!
Where is our friendly broker in those good times?
Uncles CW & SMOL,
ReplyDeleteThat "bei kambing" is trying to just double his yield from 7% to 14%. So far the 4 REITs he mentioned are relatively low gearing --- but I dunno their full debt picture e.g. whether any & how much short-dated debts due or need to be re-financed.
I no longer invest in single companies / REITs / Trusts since before GFC so I don't bother too much with all these nitty-gritty.
To reach that leveraged 14% yield, that blogger calculated he needs to build up portfolio of about $240,000 of his own money, with equivalent $240K borrowed amount.
His plan is basically to use his new lawyer salary to pump into this margin account. I dunno how long that is gonna take. The final leveraged $480,000 portfolio is supposed to give enough yield to cover his $500K monthly mortgage payments (!!!).
In the event the $480K portfolio rise 50% to $720K (another bubble anyone???), then he can simply sell all, return the borrowed $240K and pay off his remaining mortgage.
Well, all the best!!!
Spur,
DeleteThat's a simplistic linear thinking assuming leverage with ZERO interest costs.
Beside the usual bear market case scenario where a plain vanilla -20% loss will become -40% with 2x leverage, there are further 2 hurdles:
1) Bull market continues. This means further investments of the dividend stock will yield less and less when prices go up and up. 7% becomes 6%, then 5%... Risk remains the same; but risk/reward goes further against us :(
2) Volatility increases. Now market calm, volatility low; hence brokers can give special 2.88% interest to attract new margin accounts. Once volatility returns, brokers will "reclassify" the stocks and margin interest will balloon back to 6% and beyond! Yes, margin interest can go to double digits if shit hits the fan! Anyone remember taper tantrum?
3) Carry trades work better in FLAT markets. Alternatively, you must know how to hedge your positions. I better stop as to reveal more I'll need to charge kpoi :)
Hahaha ... ok, ok .... noted!! :)
DeleteWas actually wondering similar to the points you highlighted e.g. whether that 2.88% is permanent, what happens when yields decrease, need for rights issues especially during the worse times.
Hedging also involves costs (although may be low now in calm environment) and will eat further into portfolio yield. Basically no free lunch!!
I think he later mentioned about backtesting and bad case scenarios being 2SD tail risks of 2.5% probability. Unfortunately 2SD event doesn't mean only occurring once every 40 years. Every time there is a major recession or financial crisis IS a 2SD event (or even 3SD like in GFC).
Anyway I wish him all the best!!! :)
Do we need to re-read this book?
DeleteWhen Genius Failed