tag:blogger.com,1999:blog-5465015914589377788.post7045377685399956173..comments2024-03-20T09:32:16.592-04:00Comments on Michael James on Money: Borrowing to InvestMichael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.comBlogger9125tag:blogger.com,1999:blog-5465015914589377788.post-2086130543549409992020-07-04T08:59:10.888-04:002020-07-04T08:59:10.888-04:00Hi John,
As I explained in the article, the dange...Hi John,<br /><br />As I explained in the article, the danger of using leverage doesn't come from normal circumstances. What if the stock market crashes and something causes a huge spike in your spending, such as medical bills or helping a child who lost a job? You say this doesn't matter because "they are already in deep doo-doo," but but there is a big difference between being leveraged and not leveraged before all this happens. The unleveraged retiree would take an unpleasant financial hit. The leveraged retiree takes a devastating financial hit. The more leverage you use, the more exposed you are to unexpected problems. The only thing that can make leverage sensible is to limit the borrowing percentage. What I think of your dripping in advance strategy comes down to how much leverage you're using.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-31606031720486792892020-07-04T07:03:08.061-04:002020-07-04T07:03:08.061-04:00Great article. However, I take exception to the st...Great article. However, I take exception to the statement "When you’re forced to sell at huge losses". This only applies if an investor has used all of his available margin. If a retiree needs to sell their whole nest egg to pay living expenses they are already in deep doo-doo. More than likely they will have to sell a small portion of their nest egg at a loss. Painful? Sure. But not the end of the world. <br /><br />Regarding leverage. If done sensibly is not a problem either in good markets or bad. I make liberal use of margin. My margin rules limit the amount to no more than one year's dividend income. <br /><br />I take it that you approve of "Dripping". I call my strategy "Dripping in advance". The advantages of doing this is that the dividends of the shares bought on margin contribute to the repayment of the loan. Also, I have no idle cash sitting around.<br /><br />I would like to know your thoughts on that strategy.<br /><br />Cheers, JohnJohnhttps://www.blogger.com/profile/09014171319726764035noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-29755457923542470642020-06-24T08:50:55.661-04:002020-06-24T08:50:55.661-04:00Anonymous: I guess that would mean that investors ...Anonymous: I guess that would mean that investors who own just one Canadian bank tend to use leverage, but those who diversify across 3 or 4 Canadian banks don't tend to leverage. :-)Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-47964003900890478592020-06-24T08:21:14.494-04:002020-06-24T08:21:14.494-04:00I can't resist adding the following :-). I ha...I can't resist adding the following :-). I haven't seen any data on it, but there likely is a correlation between overconfidence and the use of leverage and concentration. That correlation will tend to increase the asymmetrical risk of leverage and concentration. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-72835655259667119462020-06-22T01:03:14.226-04:002020-06-22T01:03:14.226-04:00Volatility is a commonly used surrogate for risk i...Volatility is a commonly used surrogate for risk in investing. It's not without controversy. The case is made that until you get near the time that you have to sell a asset, volatility is irrelevant. Indeed, one hears of volatility harvesting to obtain the rebalancing bonus. <br /><br />However, volatility becomes a risk, with commonly used forms of leverage. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-32808528935536241422020-06-20T11:20:25.353-04:002020-06-20T11:20:25.353-04:00Anonymous: "less than zero" is a soberi...Anonymous: "less than zero" is a sobering thought. While I was working, I was always very comfortable with my portfolio 100% in stocks, but I never used any leverage.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-27793925773402039942020-06-20T10:30:00.716-04:002020-06-20T10:30:00.716-04:00With both concentration and leverage, there is asy...With both concentration and leverage, there is asymmetrical risk. Perhaps the only two ways for a portfolio to go to zero are concentration and leverage. Perhaps the only way for a portfolio to go to less than zero is leverage.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-64370110633442254982020-06-20T09:59:58.925-04:002020-06-20T09:59:58.925-04:00Anonymous: For the most part, I agree. On concen...Anonymous: For the most part, I agree. On concentration, for random stock picks, diversification actually increases returns. So, concentration can only increase returns for skilled stock-pickers, which is an extremely rare skill in recent years.<br /><br />On leverage, if all goes well it increases returns, but it increases the odds of blowing up if things don't go well for a time.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-30352216295471697352020-06-20T08:58:16.818-04:002020-06-20T08:58:16.818-04:00Many make the analogy that the stock market is a b...Many make the analogy that the stock market is a bit like a casino, except that if you play it right, the odds are in our favor. One can calculate your risk. However, there are problems in stock markets that don't happen in casinos, and in which risk calculation is difficult and perhaps impossible. Some might call those uncertainties, as opposed to risk. An example would be covid 19. People talk about black swans, and tail risk protection strategies. But for the average retail investor, I haven't seen good data to support such strategies. However, two ways to protect against uncertainty are to not concentrate but diversify and avoid leverage. In both cases, that might decrease return. Anonymousnoreply@blogger.com