Is this an example of New Millenium Reaganomics
Dr. Id, it's called "Broke-E-Nomics". <g>
I digress to share a true story. A friend of mine, who I'll call Max Margin, with a huge portfolio, has had the investing style of margining his positions to the limit, at all times. For example, he was early in QCOM, and as the stock rose, he averaged up on his newfound margin availability. He obviously made a fortune on the way up.
We have it all drummed into our heads the idiocy of maximum margin. Even during the run up, I thought my buddy Max was crazy. I had a bit of margin, but nothing like he.
After one particularly good run-up, Max took a break from buying more stock and used his margin "cash available" to get the funds for a downpayment on his new luxury house. (I thought to myself, Max has gone truly bonkers - financing his house downpayment with a margin loan on QCOM at $180!)
So who did the best (least worse) on the way down? (You'd think it would be the more cautious primarily LTB&H'er me, right?)
NOT.
Max Margin of course received many, many margin calls, and after a while Mr. Broker just started selling him out automatically. When this started, I felt for Max just getting brutally and involuntarily sold out at every 5% NASDAQ drop, while I, Mr. LTB&H'er hung on for dear life.
What Max had, even if he didn't realize it, was a series of self-executing stop losses courtesy of Mr. Broker. Which, in retrospect, saved Max Margin a ton of future losses, which I've incurred from the LTB&H mantra.
So, if you look at portfolio performance on an original equity base over the course of the cycle, with investments in many of the same issues, Max, with his "push it to the limit" style has totally blown away my pathetic LTB&H results. Both on the way up (natch) but also on the way down!
Lo, how the wicked do prosper. |
