Margin Investing
Some random thoughts on investing on margin in response to this thread on TMF.
I use margin and my portfolio waxes and wanes between 50-150% invested, over multiple year time frames. I am currently slightly net cash in my personal accounts.
I don’t think now is a good time to be on margin as there is an above normal risk of it bitting you on the bum. I use margin when the probability of success is high and risk is low. The time I like to use margin is when most people feel nauseous just pressing the “buy button”.
If the US is in a recession and falls into a deeper recession then the time for me to use margin should occur. Prices can fall a long way from here. If you are already on margin and that occurs then not only do you not get to buy at the best time to be buying, you may be forced to sell at the worst time. You MUST ignore how far something has fallen and concentrate more on how much further it can fall.
I do think now is a good time to be buying, especially if you have ongoing cash flow.
I have little cash flow in my US based portfolio, and don’t want to use margin right now, yet I want to buy. So, unlike most newsletters, I practice the art of portfolio management. Selling fully valued holdings to buy under valued positions.
I believe in market and stock timing. I never get it exactly right and even get it wrong a fair bit, maybe 30-40% of the time I am wrong. Being right 60-70% of the time is good enough for great returns as long as you never suffer a serious loss of capital. I suggest being on margin now has the possibility of resulting in a serious loss of capital. I think I read Mike Klein suggest 20-30% chance, if I’misread that then take that as my prediction. Importantly margin also reduces your options and increases mental pressure and emotional stress. Two things you generally want to reduce.
Here is how I use margin.
When I think an important bottom has been put in I start to invest on margin. I have generally used all available cash buying on the way down! If the bottom-in thesis holds and the bull appears to gaining ascendancy then I use more margin. I guess you could call me a momentum margin investor.
Then when the market starts getting more pricey I begin to sell down back to around 100% invested. If the market becomes considerably overpriced and all my friends are once again talking to me about investing I sell even more.
While that is an oversimplification and this is a very fluid process that is roughly my process.
One more thought. There should be no need to closely monitor your portfolio every day.
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