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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 12:38:00 PM
From: Seeker of Truth  Read Replies (1) of 54805
 
What's wrong with margin?
1. Somehow we tend to be less discriminating when using borrowed funds. I think that's because we're willing to buy on margin only when the market has been rising rapidly, we are giddy with success, feel invincible, feel smart. That's the time not to buy of course. Take the lower profit that results from being less discriminatory and subtract the broker's interest charge and there's not much left.
2. Stocks go down faster than they go up. Margined portfolios go down faster than ordinary portfolios. So when you're margined and the markets are dropping you're really losing fast. We all want to survive so panic results and we give the bargain away to somebody. This makes the average result less profitable than even point number 1 allows, in fact it makes it unprofitable. You might say "I don't panic"
but there may be the rare situation when you really should panic because a very big market break has begun. You avoid most of this by not being on margin.
3. When you're on margin you tend to get focussed on the short term, that means every hour. So your regular job performance goes down. And the constant attention to price diverts us from deep study of quality of the companies and their competition.
This is anecdotal of course but Buffett said he never needed margin. Of course he doesn't mind borrowing at zero interest via insurance float.
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