What is a concentrated portfolio?

[SharperDingaan]

The reality is that most of us have significant others. We can pay down mortgage - but not remortgage.

The additional 35K per 100K of house is going to come from margining an existing portfolio, which is also more tax efficient.

In Canada, margin interest is deductible whereas mortgage interest is not.

 

A fully paid off house worth 600K, net of 20% reduction has a value of 480K. A 50% re-mortgage would fund a 240K investment.

You decide to margin instead - subject to a self imposed portfolio margin limit (risk tolerance) of 25%.

The size of the portfolio after the investment would be 960K (240K/.25).

The existing bearish portfolio was worth 720K (960-240=720).

 

Over the cycle this investment triples from 240K to 720K, and is sold out at a 480K gain - taking the portfolio to 1.2M.

The existing bearish portfolio declines 144K (20%) in the rising market - reducing the portfolio to 1.056M 

You walk away from the casino, withdraw the 336K of net gain to restore the portfolio to 720K, & do something life changing with it.

 

The cycle turns & the industry busts.

The bearish portfolio runs up 33% to 960K, & is sold down to 720K (for a 240K gain).

When you're feeling 'safe', repeat the investment in your two best 'long' picks.

 

Per the textbook this is simply a long straddle. The more cyclical your industry - the greater your total reward will be.

Per the common man - this is just an application of Talebs antifragility.

Apply what you know.

 

SD

 

 

 

 

 

 

[DooDiligence]

The reality is that most of us have significant others. We can pay down mortgage - but not remortgage.

The additional 35K per 100K of house is going to come from margining an existing portfolio, which is also more tax efficient.

In Canada, margin interest is deductible whereas mortgage interest is not.

 

A fully paid off house worth 600K, net of 20% reduction has a value of 480K. A 50% re-mortgage would fund a 240K investment.

You decide to margin instead - subject to a self imposed portfolio margin limit (risk tolerance) of 25%.

The size of the portfolio after the investment would be 960K (240K/.25).

The existing bearish portfolio was worth 720K (960-240=720).

 

Over the cycle this investment triples from 240K to 720K, and is sold out at a 480K gain - taking the portfolio to 1.2M.

The existing bearish portfolio declines 144K (20%) in the rising market - reducing the portfolio to 1.056M 

You walk away from the casino, withdraw the 336K of net gain to restore the portfolio to 720K, & do something life changing with it.

 

The cycle turns & the industry busts.

The bearish portfolio runs up 33% to 960K, & is sold down to 720K (for a 240K gain).

When you're feeling 'safe', repeat the investment in your two best 'long' picks.

 

Per the textbook this is simply a long straddle. The more cyclical your industry - the greater your total reward will be.

Per the common man - this is just an application of Talebs antifragility.

Apply what you know.

 

SD

 

My industry has gone bust & I'm still one of the survivors.

 

I didn't know that Canada allowed margin deduction but not mortgage (is the Gov trying to encourage risk taking on equity investment as opposed to home ownership?)

 

You're gonna force me to become rational about my home here in the US...

[SharperDingaan]

In Canada, any interest paid on a mortgage against your principal mortgage (you live there > 6 months/yr) is not deductible.

Any interest paid on a loan (margin) for investment purposes is.

So ... rearrange accordingly.

 

SD

 

[scorpioncapital]

Not any loan, generally it must earn investment income. So there is some debate as to whether holding Berkshire on margin in Canada would qualify as a margin expense deduction because Berkshire has never paid a dividend except once in the 1960s and doesn't seem that it will at this time.

[rb]

Not any loan, generally it must earn investment income. So there is some debate as to whether holding Berkshire on margin in Canada would qualify as a margin expense deduction because Berkshire has never paid a dividend except once in the 1960s and doesn't seem that it will at this time.

There is no debate. In Canada you can only deduct margin interest if the loan is used to earn investment income - interest, dividends, rent, etc. Since Berkshire does not pay a dividend it doesn't qualify for interest deduction. Normally this doesn't matter because presumably one will have some other names that pay dividends so one will say that the margin is for that. But for example one has an account that only holds BRK and has a margin loan then the margin interest on that account is not deductible.

[KCLarkin]

Since Berkshire does not pay a dividend it doesn't qualify for interest deduction.

 

I don't think that is precisely true. You can claim interest if there is a "reasonable expectation of profit".

 

So there is debate:

http://business.financialpost.com/personal-finance/taxes/watch-for-the-dividend-wrinkle-when-writing-off-interest-on-investment-loan

 

But still, probably best to stay away from this grey area.

[scorpioncapital]

I've seen some stocks pay a very tiny dividend, the conspiracy theorist in me feels this piddling amount might be used to technically allow interest deduction. Even Berkshire could pay like 1 cent per year but I'm not sure how many other countries besides Canada have this system of equating 'profits' with 'dividends' and having to interpret/guess if a company might in the future pay a dividend. We must feed the paper shufflers and accountants or they will starve :)