Crispin - the advantage of trading is greater flexibility. Sure, I could just go on margin on the first trading day of the year and sell on the last trading day - but how am I taking advantage of daily swings? Just going on margin, simply would mirror whatever MSFT does that year... the point of trading is to do *better* than "buy and hold". Thus far I have done 65% better than had I just gone on margin and held.
In any case, how else can you leverage? Other than margin, which I just explained, doesn't give you flexibility, you can do options (including LEAPS). First, I have not devoted as much time to options as to trading, but from my point of view there are several problems. Without question, seems to me that I can trade common stock with greater speed and precision than options. It would be hard to trade options the way one can trade stock - sometimes 30 second trades, for 1/2 point move. Second, cost of trading options, and then I have to contend with premiums. Most importantly, I know MSFT is in a long term uptrend - but I don't know exactly where it will be in 3 weeks, or 6 weeks or whatever timeframe I have to nail with options. With common stock, I don't need to know exact levels weeks in advance - as long as it goes up over time, even if I make a mistake with a given trade, one day it will be good - but with options, you have this nasty thing called expiration. I can't lose trading - I can lose doing options. Bottom line, trading is far safer, more flexible and cheaper.
Just to finish off your margin leverage proposal - imagine the following: scenario A - I buy on margin and hold for 12 months. My return is whatever MSFT does that year. Scenario B, the same, I buy on margin and hold, except that on one occasion, I sell, and buy back lower. Now, unless I sold on the low of the year (statistically tiny chance), my return in scenario B is higher than in A... see, the advantage of trading. Now, imagine I do it many, many times a year, and I never lose, because I never sell for less than I bought - as I always hold a "losing" trade (I would lose only if I bought at the very height of the year, statistically very unlikely, and anyway, in that case I simply hold LONGER, and even that trade will be good).
You say - leverage "while taking into account the downdrafts" - uhm... that's called trading. Other than that, how are you taking into account downdrafts - with options, you can get nailed. With margin, you are simply not flexible and you limit your returns. So, I take downdrafts into account by TRADING. |
