Hmm .. interesting!
Is there something with Maths below?
Powerful ROC from leveraging?
For example; if one has $110K capital to invest.
Without margin account:
One can fully invest $110K for e.g. 7% dividend yield
Leverage on margin account :
1. One can invest $100K for e.g. 7% dividend yield.
2. Leverage $40K on margin account at net 3.5% dividend yield after offsetting 3.5% interests payable to broker.
3. $10K as cash reserve to top up margin call when necessary
Does leveraging on margin account to improve yield on own capital look fantastic?
Really?
Or something wrong with the Maths?
Posts
Leverage tua tua to win?
ReplyDeleteWith low leverage of 1.4X ... most won't bother to have much cash reserve.
ReplyDeleteSo base on capital of $100K and borrow $40K @ 3.5% financing will give effective yield of 8.4% (assume your example of underlying 7% yield).
Current margin ratio is 140/40 = 350%
Most brokers have threshold of 140% i.e. if drop below then margin call to bring back above 140%
In our example the $140K will have to drop over -60% to below $56K before triggering margin call. E.g. $50K/$40K = 125%
Will their reits drop over -60% in next bear? Who knows?
People look at what happened for those reits that were around during 2008/2009 for once in 50 yrs stress test LOL!
The big jump in financing to 3.5% has really reduced the attractiveness of this method.
ReplyDeleteSome ppl will just push their luck borrow more for bigger bang. :P
Greed/Fear ratio? Something is that abstract to measure.
ReplyDeleteGot a lot in the market e.g. CNN Greed & Fear indicator, AAII weekly survey, CBOE Put/Call ratios, VIX and other volatility indexes, good old fashioned oscillators on individual charts etc.
DeleteGood overview: 9 sentiment indicators
CNN Fear & Greed gauge
China fear Invest when hit 50 & above? LOL!
Use of leverage needs caution. 40% leverage is very high and that will need the 10k safety as you shared.
ReplyDelete