Tuesday, December 29, 2009

20/20 Hindsight

Most of us have thought at one time or another that we’d like to use what we know now to go back in time and make different choices. Looking back at stock prices in 2009, it’s clear that a big bet on stocks in March would have paid off handsomely.

In a discussion of leverage in November 2008, I came dangerously close to making a prediction:

“Let me reiterate that I’m not a fan of leverage, but if there ever is an appropriate time for it, now is probably that time.”

As it turns out, stocks dropped further, but are now significantly above the level on that day. Suppose that I had borrowed $250,000 against my house to invest in the TSX Composite index, which was sitting at 9424.00 that day. The lows in March would have produced a painful paper loss of nearly 20%, but I’d be ahead 24.7% as of the closing value of 11,754.61 on Christmas Eve.

Assuming that I paid about $10,000 in interest on the mortgage, my net gains right now would be $51,800. That’s not a bad payoff for minimal effort.

But, I wasn’t really making a prediction, and I wouldn’t make a big bet like this with borrowed money. If I had collapsed this investment on 2009 March 9 when the TSX Composite was at 7566.94, my loss would have been about $52,300 (assuming interest costs of about $3000). The possibility of that kind of loss is enough to cure me of actually considering such a bet.

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