As a long-term margin investor, I feel that I should offer my perspective on this topic. Frank-san, the need for caution is well understood, but I believe that being a greedy investor is the only way to truly achieve massive wealth. Greed in investing is different from being a greedy person. For example, I am a very greedy investor, but it is because I need to raise millions in a few years to start a foundation for underprivileged kids. Of course, some people may not want massive wealth so there is little need to invest greedily for those people.
Margin is one of the best tools in Greedy Investing. Like all strategies that involve higher returns, margin includes higher risks, but if wisely used, I believe that the risks are very manageable.
Risk 1: The burden of a finance charge.
I find this risk to be minimal. If you pick any decent stock, let alone a gorilla, you will make more than the ~.66% each month that the firm charges you.
Risk 2: Margin Call.
As dreaded as a margin call may be, it can be avoided as long as your timing isn't terrible. I must admit that every time I buy a stock, it drops 10-20% within days. That may be bad timing, but not what I consider terrible. I have received several margin calls this summer mostly due to DELL, but that can generally be resolved by bolstering your account by a few thousand dollars. If worse comes to worse, sell enough stock at a loss. But once again, if you are not too terrible at finding an entry point, then margin calls should not be problems for you.
Margin is considered risky because you have more to lose if the stock plunges. However, another theory in which I (and many others on this thread) believe, that of concentration over diversification, is more risky than margin. With a fully margined account, at least you have a friendly broker to call you and let you know when the stock is down and maybe even persuade you (through margin call) to get rid of this loser. At the very least, a margin call can be a wake-up call. But you don't even have this feature when you are concentrating your portfolio without margin. You can lose your shirt both ways.
If you have a narrow portfolio, how do you keep your shirt on? You watch your stocks closely, read SI posts, and keep a watchful eye on potential competitors. That's what the GG is all about. When you find your gorilla, you concentrate your assets on that gorilla and scan the horizon for possible collisions.
When it comes to margin investing, you use the same strategy. I believe that margin investing is the only 'safe' way to magnify your returns. Sure, you can lose everything if you are fully margined on a stock that nosedives to near 0, but you will lose nearly everything even if you are not fully margined. Just as you 'watch your few baskets very carefully' to protect yourself against the added risk of a concentrated portfolio, the same applies to a fully margined account.
The benefits of margin-use are well worth the added risk if you know what you are doing. My returns on stocks for the past year are 75%. However, my return on my portfolio for the past year is over 200%. I add this not to boast (indeed there are many here who achieve this rate without even using margin) but to exemplify the dramatic upside potential of using margin. For the record, I am 150% invested in Q and the rest in Softie and RNWK.
Again, I agree with Frank-san that caution is very important. This is not an endorsement of margin use but rather, a discourse as to why I believe margin use is worth it. For me, huge improvements in my returns are worth the extra (minimal imo) risks.
Sorry for the long opinion. Guess I'm just bored today :)
Daiju |
