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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: Boa Babe who wrote (14403)	1/7/2000 9:34:00 AM
From: Mike Buckley	Read Replies (2) \| Respond to 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

To: Boa Babe who wrote (14403)	1/7/2000 10:33:00 AM
From: Uncle Frank	Read Replies (4) \| Respond to of 54805

>> Why no margin "anytime", Frank? Is that because you don't feel comfortable with it, or because you have some knowledge that hasn't yet hit my brain? I expected to get called on that sweeping generalization, Kay. Obviously there are times when the use of margin is justified, just as there are valid medical uses for cocaine. The "type of margin" I was referring to was the use of borrowed money to increase investing leverage. There are folks that regularly venture into high margin to increase their positions when they are convinced they are about to experience a period of growth. In these cases the use of margin is simply a timing play (which we know is a flawed approach based on tekboy's experiment <g>) and approximates a "double or nothing" bet. If their stock or option pick continues to decline, the user faces a margin call that will force them to cover by selling their investments at the worst possible time, unless they opt to mortgage their house as one wag suggested. In an extreme case earlier this year, I watched a friend reduce a 7 digit portfolio to a few thousand dollars in one week. It was like viewing a train wreck up close and personal - nothing I'd care to see again. I advise my friends to never use margin in the same sense I'd tell them to never to use cocaine. uf

To: Boa Babe who wrote (14403)	1/7/2000 11:30:00 AM
From: mauser96	Read Replies (2) \| Respond to of 54805

One of the key points of Gorilla Game investing is that it's intended to be a low risk form of buy and hold investing. The more margin you use , the more you reduce these qualities since you increase the risk and could be forced by a margin call to reduce the holding period for a stock. The only good financial reason for debt is if the return is more than the cost (both after tax) and if there is a high probability of the return, since there is a high probability you will have to pay off the loan. Most people stretch this to include a house, since a place to live is a necessity, wheras other debt for most of us is a matter of wants rather than needs. Small amounts of margin are probably OK (though they intrude on the purity of the gg) as long as you are young enough to make up losses. Psychologic studies have indicated that fear is at least twice as powerful as greed, and margin leverages this even more, thus making investors even more likely to act irrationally in moments of crises. All IMHO only...

To: Boa Babe who wrote (14403)	1/7/2000 12:38:00 PM
From: Seeker of Truth	Read Replies (1) \| Respond to 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.

To: Boa Babe who wrote (14403)	1/7/2000 2:22:00 PM
From: john99walsh	Respond to of 54805

OT - Use of Margin jazzesq, I have been using margin for the last five years on a steady basis. It has been very useful in magnifying my returns, but then this has also been a period of an incredible bull market in tech stocks. When corrections occur the increased leverage does take you on a down elevator ride pretty quickly. I have no ability to time the market and I strongly try to avoid being swept up in the latest fade of the day. I own stock in companies I really believe in. I intend to hold those stocks for the long term (my longest holding so far being a little over five years). I avoid options because I truly believe this is just another attempt to time the market (something I have proved to myself I am terrible at). Regarding margin, if my companies are growing at 30% plus per year and I can borrow to buy additional shares at 8% per year I consider that a great deal. As already noted the GG bible is anti-margin because the emphasis is on superior returns at reduced risk (by the way, I have been a lurker on this thread for the last 6 months and have enjoyed its discussion - thanks all). It is true that margin is like an addictive drug and your judgment can be impaired when the new investment money seems to come almost for free. I would advise that before considering margin that you become very comfortable with the companies you are investing in and that you learn to ride the ups and downs of the market without panicking. Without these two skills margin is probably a mistake waiting to happen. On the positive side, margin has let me start positions in new companies without selling my beloved winners (and paying taxes). Also, the accumulated margin interest has been useful to offset gains when I exit a position where the fundamentals of the company have changed (while still incurring a capitol gain). Obviously, your results will also compound faster over the years if you can avoid taxable gains. Just my initial thoughts (sorry for the rambling, single paragraph). John Walsh