Insights can often arise from contentious discussion so no pardon is required imo.
To clarify a few things and discuss some of your points I would like to mention the following:
Margin calls force you to take action at precisely the worst moments
I must disagree with this. Barring any major marketwide crash, no well-researched gorilla stock should suffer a 30%+ drop in a single day. If it does, then I will say that margin calls force you to take action at precisely the correct moments. If you haven't gotten out of a 'bad' stock by the time it requires a margin call, then by all means do so when you get that call.
making what would have been temporary portfolio losses permanent
Unless you pull your money out of all investments, nothing is permanent. When I received my DELL margin call, I should have followed my own advice and sold all my DELL. Yes, that would have made my losses 'permanent', at least until the next investment vehicle came along which happened to be Q. In any event, permanence in stock market gains and losses is mostly an illusion, unless of course, you get wiped out.
your returns of 200% for the last 12 months using margin are less than those achieved by many unmargined Gorilla game
investors
Frank-san, as much as I respect your knowledge and contributions, I must believe that perhaps your passion on this subject got the better of you. I believe I stated, almost verbatim, what you are contending here. Also, my returns are much higher than 200%, I just didn't feel a need to share an exact number. When I said for the year, I meant YTD, not 12 months. And finally, my point was to demonstrate the difference margin can make. Show me anyone who has translated a 75% stock gain into over a 200% return simultaneously, and I will show you someone who uses some form of leveraging.
Go back to the dell thread and ask many of our old friends about the damage caused by margin
That damage was not caused by margin but by poor investing. I held on to Dell longer than you did and a lot longer than Lindy, and I paid for it dearly. I was also one of the most heavily margined dellheads at the time, if I remember correctly. I don't mean to demean our old friends when I say 'poor investing', for I was one of them. But any investment strategy that consists of holding a stock devoutly when 1) it is underperforming, 2) you are on margin, 3) it is royalty rather than primate, and 4)there are better investment opportunities is a poor strategy.
I survived DELL by selling all of it after my third margin call, and I learned a valuable lesson: Using margin is fine, but as the manual says, hold Kings and Princes lightly. To that I would add, hold any margined stock lightly. And to go further, hold Kings or Princes bought on margin extremely lightly.
The following portfolios summarize how I rate the risk of investments from least risky to the most:
Gorillas Diversified
Gorillas Concentrated
Gorillas Diversified on margin
Kings Diversified (same as) Gorillas Concentrated on margin
Kings Diversified on margin
Kings Concentrated
Kings Concentrated on margin
I would contend that many of our friends were hurt not because they used margin but because they tightly held a royalty on margin. In other words, on my personal risk scale, they were in the most risky situation (at the bottom).
Investors do not like to admit that they have made a mistake. It is my belief that this is the reason why people often rant against margin, TA, analysts, the Houses, the impossibility of timing, Greenspan, etc... They all make convenient scapegoats so the investor can decrease the amount of blame that he (or others) place on him. A good investor will recognize this and try to acknowledge his own shortcomings. There is enough knowledge out there to allow good investors to make money in any kind of market. There is no excuse for losing money; blame squarely rests with oneself. (except perhaps in the case of fraud) I mention this aspect of my philosophy because I believe it is directly linked to the stigma attached with margin investing.
Please feel free to respond to my points, as I find your posts enjoyable and insightful as always.
Daiju (Still Bored :) |
