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Huge amounts of non-recourse leverage possible?


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Can anyone think of a strategy to take on a huge amount of non-recourse leverage with little down and invest in stocks?

The only thing I could think of was Leaps.

 

1. Start an asset management firm and charge incentive fees.  Losses on LP capital are non-recourse to you, but you get a nice slice of the upside on any increase in value on that capital. 

 

2. Invest in the equity of highly levered firms.  Small changes in their enterprise value will lead to large changes in their equity prices, which would be similar to the effect on the value of your portfolio of levering your own balance sheet to buy unlevered firms, with the benefit that debt at the firm level is non-recourse to you.

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Can anyone think of a strategy to take on a huge amount of non-recourse leverage with little down and invest in stocks?

The only thing I could think of was Leaps.

 

1. Start an asset management firm and charge incentive fees.  Losses on LP capital are non-recourse to you, but you get a nice slice of the upside on any increase in value on that capital. 

 

2. Invest in the equity of highly levered firms.  Small changes in their enterprise value will lead to large changes in their equity prices, which would be similar to the effect on the value of your portfolio of levering your own balance sheet to buy unlevered firms, with the benefit that debt at the firm level is non-recourse to you.

 

KJP,

 

1. In theory true.  In practice you have to be very very good at sales to pull it off.  Judging from most people on this board, we're mostly doers rather than sales guys. 

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Can anyone think of a strategy to take on a huge amount of non-recourse leverage with little down and invest in stocks?

The only thing I could think of was Leaps.

 

1. Start an asset management firm and charge incentive fees.  Losses on LP capital are non-recourse to you, but you get a nice slice of the upside on any increase in value on that capital. 

 

2. Invest in the equity of highly levered firms.  Small changes in their enterprise value will lead to large changes in their equity prices, which would be similar to the effect on the value of your portfolio of levering your own balance sheet to buy unlevered firms, with the benefit that debt at the firm level is non-recourse to you.

 

KJP,

 

1. In theory true.  In practice you have to be very very good at sales to pull it off.  Judging from most people on this board, we're mostly doers rather than sales guys.

 

Agreed.  You can't take advantage of the leverage unless you have the scale to cover the overhead costs, and, in general, you can't get scale unless you can sell.

 

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Mortgage?  At least until renewal. 

 

If we could access large amounts of non recourse leverage, then everyone could. 

 

Practically speaking lines of credit have worked well for me for nearly 20 years right through the financial crisis.  They were never cut or frozen.  I dont really use them and the amount of leverage is not huge.  Of course, you need to pay interest which is quite high relative to a margin account. 

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Maybe not what you're looking for, but most(here, not generally speaking) can probably get a no interest for 12-18 month credit card with a 25-50K limit. Send 25K to a related Paypal account as payment for services. This works around the cash advance fee. You pay about 3% to paypal. Send the proceeds to a bank account. Wire to brokerage account. You can then also margin this money further if desired. After 12-18 months worst case do a balance transfer to another 0 interest promo card.

 

I'm not advocating this either, but if you are looking to leverage your investments with borrowed money...

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Maybe not what you're looking for, but most(here, not generally speaking) can probably get a no interest for 12-18 month credit card with a 25-50K limit. Send 25K to a related Paypal account as payment for services. This works around the cash advance fee. You pay about 3% to paypal. Send the proceeds to a bank account. Wire to brokerage account. You can then also margin this money further if desired. After 12-18 months worst case do a balance transfer to another 0 interest promo card.

 

I'm not advocating this either, but if you are looking to leverage your investments with borrowed money...

 

While no doubt a riskeir option, I do this all the time. Just rolled 50% of my car onto an offer that was 0% interest for 18 months (w/ a 3% charge). The 2% rate that approximates is far less than the car loan and I was going to have the whole car paid off in the next 12 months anyhow.

 

Also, seconded on the options opinion which is more expensive, but truly non-recourse

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What if you mortgaged your house, put it in a margin account, and with that account purchased far OTM calls.  That seems to be the best way to get HUGE leverage.

 

It also ensures there will be no assets to fight over in divorce court either.

 

Or you gonna be multibillionaire instantly (but then the divorce will suck). YOLO!  8)

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ERICOPOLY made a brilliant post (or maybe it was a sequence of posts, I can’t remember) years ago on how to do this by combining margin debt with married puts.  It’s conceptually similar to buying LEPAS calls but it comes with certain tax advantages (at least for US based investors) because it allows you to defer the capital gains on your appreciating assets and at the same time deduct the losses on your puts from your current income.  I’m too lazy to find the link now, but I’m sure you can dig it up if you’re determined. 

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ERICOPOLY made a brilliant post (or maybe it was a sequence of posts, I can’t remember) years ago on how to do this by combining margin debt with married puts.  It’s conceptually similar to buying LEPAS calls but it comes with certain tax advantages (at least for US based investors) because it allows you to defer the capital gains on your appreciating assets and at the same time deduct the losses on your puts from your current income.  I’m too lazy to find the link now, but I’m sure you can dig it up if you’re determined. 

 

I remember that, I think it was in the Bank of America thread.  I remember it, because I was trying to wrap my head around it and I ended up just sticking to BAC LEAPS. 

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Can anyone think of a strategy to take on a huge amount of non-recourse leverage with little down and invest in stocks?

The only thing I could think of was Leaps.

 

1. Start an asset management firm and charge incentive fees.  Losses on LP capital are non-recourse to you, but you get a nice slice of the upside on any increase in value on that capital. 

 

2. Invest in the equity of highly levered firms.  Small changes in their enterprise value will lead to large changes in their equity prices, which would be similar to the effect on the value of your portfolio of levering your own balance sheet to buy unlevered firms, with the benefit that debt at the firm level is non-recourse to you.

 

Both potentially good ideas. 

 

Equities of highly levered companies act like warrants without an expiration. 

 

Another option is what Beal Bank did - delevered prior to the financial crisis then lever up when it hit.  Not sure how much leverage Beal used and there are regulatory issues. 

 

Insurance companies like Berkshire is also an option but probably also regulatory constrained.

 

Are there any non callable bonds/preferreds or other debt instruments that don't act like margin debt?  Margin lenders get nervous and can call the loan quickly.

 

 

 

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What if you mortgaged your house, put it in a margin account, and with that account purchased far OTM calls.  That seems to be the best way to get HUGE leverage.

 

It also ensures there will be no assets to fight over in divorce court either.

 

Or you gonna be multibillionaire instantly (but then the divorce will suck). YOLO!  8)

 

Nah, if it works out, your wife will think you're a genius. ;)

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What if you mortgaged your house, put it in a margin account, and with that account purchased far OTM calls.  That seems to be the best way to get HUGE leverage.

 

It also ensures there will be no assets to fight over in divorce court either.

 

Or you gonna be multibillionaire instantly (but then the divorce will suck). YOLO!  8)

 

In 2008, I have seen people whose house was bought at 300k (bought decades ago), and took out a couple millions of home equity loans. A couple years later the house is foreclosured. Maybe that guy used that money to buy stock.

I also had a ex-coworker who got a loan using his house and bought AIG in 2008

 

Nah, if it works out, your wife will think you're a genius. ;)

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What if you mortgaged your house, put it in a margin account, and with that account purchased far OTM calls.  That seems to be the best way to get HUGE leverage.

 

It also ensures there will be no assets to fight over in divorce court either.

 

Or you gonna be multibillionaire instantly (but then the divorce will suck). YOLO!  8)

 

In 2008, I have seen people whose house was bought at 300k (bought decades ago), and took out a couple millions of home equity loans. A couple years later the house is foreclosured. Maybe that guy used that money to buy stock.

I also had a ex-coworker who got a loan using his house and bought AIG in 2008

 

Nah, if it works out, your wife will think you're a genius. ;)

 

that sucks for those guys. I was just kidding around by the way!

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What if you mortgaged your house, put it in a margin account, and with that account purchased far OTM calls.  That seems to be the best way to get HUGE leverage.

 

It also ensures there will be no assets to fight over in divorce court either.

 

Or you gonna be multibillionaire instantly (but then the divorce will suck). YOLO!  8)

 

In 2008, I have seen people whose house was bought at 300k (bought decades ago), and took out a couple millions of home equity loans. A couple years later the house is foreclosured. Maybe that guy used that money to buy stock.

I also had a ex-coworker who got a loan using his house and bought AIG in 2008

 

Nah, if it works out, your wife will think you're a genius. ;)

 

Bought a house in 2006. MA did not decline horribly though.

 

Got severance in 2007-2008.

 

It was great time to get cash.

 

I did really well with that.

 

No divorce.

 

Not multibillionaire.

 

Yet.  8)

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Seconding the low rate balance transfers. I have about 10 cards with 25k limits and no balance. All you do is pick the lowest fee (0-3%) and longest duration at 0%, 18-24 months usually. Use the checks they send you and deposit, that's it. Roll over to another card at end of period if needs be. Also, a heloc is nice to have. Locally I have america first credit union heloc fixed for five years at 4.5% then it re rates once and is fixed for five years again. Also, pentagon federal credit union offers the same thing. Payment is 1.25% of balance per month but you can always re use whatever you've paid down. For a smaller payment go interest only, but the rates higher.

 

 

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Knew a guy in 2007 who used to day trade on some obscene margin.  He'd brag each day at 4pm about how much he made.  "Guys, made another $1k today." "Another $800 day."

 

His strategy was a "secret".  He was a trading guru right up to October 2007.  Then after that he went silent and spoke as if nothing ever happened.  I believe the start of the market drop coincided with his wife asking to see a statement and subsequently him being given an extremely short leash by her.

 

For background.  This guy cashed out about $90-100k in a merger.  I think he lost about $40k, with the remaining $60k he spent it on a boat and new truck.  I'm not sure the wife was happy with the boat and truck either, but at least they couldn't vanish from a few mouse clicks.

 

He claimed he didn't need to save for retirement because he'd stike it big one day....

 

For a while this guy would send links to sites that offered 400:1 margin on crops and currencies....uh.....

 

My rule of thumb is if you need obscene margin (currencies) to make money on a trade then it probably isn't a good trade in the first place.

 

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Can anyone think of a strategy to take on a huge amount of non-recourse leverage with little down and invest in stocks?

The only thing I could think of was Leaps.

 

What you need to do is find a really, really bad loan and take the other side  8)

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Knew a guy in 2007 who used to day trade on some obscene margin.  He'd brag each day at 4pm about how much he made.  "Guys, made another $1k today." "Another $800 day."

 

His strategy was a "secret".  He was a trading guru right up to October 2007.  Then after that he went silent and spoke as if nothing ever happened.  I believe the start of the market drop coincided with his wife asking to see a statement and subsequently him being given an extremely short leash by her.

 

For background.  This guy cashed out about $90-100k in a merger.  I think he lost about $40k, with the remaining $60k he spent it on a boat and new truck.  I'm not sure the wife was happy with the boat and truck either, but at least they couldn't vanish from a few mouse clicks.

 

He claimed he didn't need to save for retirement because he'd stike it big one day....

 

For a while this guy would send links to sites that offered 400:1 margin on crops and currencies....uh.....

 

My rule of thumb is if you need obscene margin (currencies) to make money on a trade then it probably isn't a good trade in the first place.

 

Nate,

 

You have to give, that this friend of yours actually did something right. He "married up" [so to say, "out of" his own stupidity]. I've never been able to find such persons on any Forbes list.

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Thanks for posting and writing this Eric.

 

The more I think about it, long term call Leaps are probably one of the best way to achieve this.  Long with puts could be similar. 

Options pricing does not take fundamental values into account and therefore on a long term basis this can be the inefficiency.

 

To get really great odds though I think 2 things have to be present.

1.  Extreme undervaluation

2.  Low cost of the option premium. 

 

The upside is magnified returns vs unlevered long only.

 

Downside is getting wiped out if the stock is down.

 

So to be 100% invested in calls has wipeout risk. 

 

 

 

 

 

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