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Strategies & Market Trends : Gorilla and King Portfolio Candidates
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To: Boa Babe who wrote (14403)1/7/2000 9:34:00 AM
From: Mike Buckley  Read Replies (2) of 54805
 
OFF TOPIC

Kay,

I look forward to Frank's or anyone's response to your query about using margin and hope you don't mind if I step up to the plate.

Theoretically, for a buy-and-hold investor there should be no particular risk of using a nomiminal amount of margin so long as the investor has the cash set aside to address margin calls. However, if the cash is set aside for that purpose, the use of margin is only an accounting function, not a real function.

The risk of using the margin is that your investing strategies can be turned topsy turvy if the market tanks sufficiently to require margin calls. Those margin calls can also trigger taxable events, which brings me to the issue that I don't understand why you think using margin avoids taxable events.

On the other hand, dollars don't know where they come from, making it very sticky when we talk about the essence of margin. Most people think of it as a loan from their broker and that's probably the technically accurate use of the word. I think of it as a loan from anyone that allows us to leverage our financial wherewithall. Using leverage adds more reward and risk at the same time. To that extent, anyone who has a mortgage and is at the same time buying stocks is using that leverage.

For me, the most important thing to keep in mind when using margin is that you keep its use limited to your personal tolerance for risk and that you keep it limited to the extent that you don't risk having to change your strategy in the middle of the game.

Just my thoughts.

--Mike Buckley
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