POLL - With how much leverage do you feel comfortable? Question to board members!

[Luca]

Currently 1.2 leveraged, majority in China and Nintendo. 

 

How much leverage do you use and how much do you think can be held comfortably? 

 

Cheers! 

Edited January 26 by Luca

[LC]

I usually don't but will go up to 20% or so.

[Luca]

10 minutes ago, LC said:

I usually don't but will go up to 20% or so.

Makes sense to me! 

[ICUMD]

1.4 Leverage. 

Mainly a way to reduce taxes against dividend income. Also allows flexibility to invest at favorable valuations.

[Gregmal]

Rolling average over the past 15 years is probably around 1.3x but it totally depends on the opportunity set. Have gone well over 2x a few times; lowest I think I’ve ever been is 1.1x. Really just depends. 
 

Wall Street spends a lot of money advertising things that prevent investors from maximizing their returns. The overall misrepresentation of levered investing is one of them. If for example, I am 60% long Berkshire, 60% long the SPY, and have a 15% position in index put options, I wouldn’t consider that risky at all. But my account statement would show 1.35x or whatever.

[Value_Added]

I’m at 0% but not because I think it’s stupid.  I think it is an extremely useful tool , but unfortunately is one I don’t understand how to properly manage.  To elaborate, I understand leverage…but I don’t understand how it is initiated, what kind of market scenario would constitute a margin call, which investments are viewed by the broker as risky vs safe, etc…for now I just use options as a form of leverage, though it isn’t true leverage which is the topic of this poll.

 

I’ve looked into it via some Google searches in an attempt to learn the ins and outs but can’t seem to get comfortable.  All I really find is how people use it for their investment style versus a fact sheet of how it works.  Probably because of the multitude of different results and scenarios possible with its use.

 

 

[ValueArb]

You should be heavily levered, if you are 30 years from retirement and your entire portfolio is less than one half years income.

 

You probably should not be heavily levered, if you are less than 20 years from retirement and your entire portfolio is multiples of your annual income.

[james22]

The appropriate percentage of your net worth you should put in a stock when its a cinch is 150%

 

Sure, if only I knew a cinch when I saw it.

[Sweet]

I don’t use leverage but I don’t think using leverage is stupid.  I just don’t yet feel comfortable using it.

 

Edited January 26 by Sweet

[Sweet]

For those who are using leverage how are you using it?

 

Are you protecting against downside?

 

Is diversification more important with leverage?

 

Doesn’t leverage work against you when the market drops - how do you avoid this?

 

I don’t think I can use leverage competently.

[ICUMD]

Mortgages are leverage.

What's the difference leveraging stocks?

[Value_Added]

17 minutes ago, ICUMD said:

Mortgages are leverage.

What's the difference leveraging stocks?

Knowing the circumstances which would cause a margin call is the big pause for me.  I know a lot of people out there use leverage in an unintelligent way which is also where most of the horror stories come from.  
 

When I get a mortgage on a rental property, I have a pretty good idea of the risk before signing the papers.  The value of the home dropping during a housing downturn doesn’t scare me because I won’t get a call that the loan is due because of it.  I’m ignorant on the subject, but it seems like stock market hysteria could cause just that even though you know you hold a company’s stock which didn’t really lose any long term value (hopefully).  I just don’t understand that aspect enough to feel comfortable with it.

[nwoodman]

Running 1.35 at the moment in 2 currencies.  AUD and JPY.  I am pretty bearish on the AUD long term.    JPY margin is 3/4 invested in Japanese stocks so it is a bit of a currency hedge too. Similar to @ICUMD it is partly directional, partly a tax offset against divs. 

 

Contrary to what others have suggested I wouldn’t recommend leverage to those starting out.  It could be a very slippery slope.  Not sure how other brokerages work but mine has prescribed LVRs based on market capitalisation.  I simply would not have been able to use margin on the smaller companies I cut my teeth on.  98% of my investments these days are >$10bn so reduces but doesn’t eliminate the dreaded margin call in a 50% sell off

 

 

The other issue is position sizing.  Margin favours a more diversified portfolio. Mine at the moment is about as concentrated as it has ever been.

 

The Single Issuer Concentration applies across all assets in the client portfolio, this determines the largest exposure on a single issuer. The single issuer concentration requirement will be determined based on the worst loss result from different price shocks according to the market capitalization in equity

 

 

 

Edited January 26 by nwoodman

[Luca]

2 hours ago, Sweet said:

For those who are using leverage how are you using it?

To own more shares in a company that I think will outperform the interest paid on the borrowed money. 

2 hours ago, Sweet said:

Is diversification more important with leverage?

You will get more margin room if you have a more diversified portfolio and your risk of a margin call is less because not everything will fall as much together. Holding 20-30% margin with MAG 7 is much safer than having 30% margin with commodity stocks where a huge drop is way more likely. 

2 hours ago, Sweet said:

Doesn’t leverage work against you when the market drops - how do you avoid this?

It works against you but as long as you dont get margin called you can still ride the wave up again and have a margin position over 5 years+.

2 hours ago, Sweet said:

I don’t think I can use leverage competently.

Practicing with it just with small amounts and getting a feel for it is a good exercise.

14 minutes ago, Value_Added said:

Knowing the circumstances which would cause a margin call is the big pause for me.  I know a lot of people out there use leverage in an unintelligent way which is also where most of the horror stories come from.  
 

When I get a mortgage on a rental property, I have a pretty good idea of the risk before signing the papers.  The value of the home dropping during a housing downturn doesn’t scare me because I won’t get a call that the loan is due because of it.  I’m ignorant on the subject, but it seems like stock market hysteria could cause just that even though you know you hold a company’s stock which didn’t really lose any long term value (hopefully).  I just don’t understand that aspect enough to feel comfortable with it.

I can only speak about IB but you have one big problem that is the unpredictable increase of margin requirement during volatile times. They can up the margin requirements by an unknown amount like 30% and if your excess liquidity is too low at that point you will get margin called. Thats why keeping margin to 10-20% is quite safe but of course depends on your other holdings and how deep they will fall if shit hits the fan. There is this tiny percentage of a once in a 100 year event where the market drops so hard that even with 10-20% margin you will get a call but It's very unlikely. I am also talking about portfolio margin here which is way better than REG T margin which id never use. 

[LC]

When using leverage you want lots of ways to win and only a few, hopefully known, ways to lose.

 

JPY is where I could see using leverage

-low interest rate, so the carry cost isn't going to kill you

-purchasing stable, undervalued assets, hopefully even with a dividend that covers the carry

-has a macro theme in your favor (Japan, Buffett, etc.)

 

Even Fairfax (maybe a year ago) would be another one.

-Industry tailwinds (hard market)

-Stable, known earnings

-Stable FX

-Tempered macro environment (Powell could be content raising, holding, or lowering rates - but nothing drastic)

 

Size it so there needs to be a really large macro swing to really hurt you, i.e. great recession/COVID style thing. Sell, take your capital loss, and buy options to the upside. 

[Gregmal]

Knowing what you own is important. I have zero issue borrowing heavily against stuff like MSGS, FRP Holdings, the Berkshire or Fairfax stuff too would fit the bill. Stuff that has clear value and won’t get zero’d. For lots of last decade I then bought stuff like Google, Waste Management, Costco, Visa, etc…fully on margin.
 

Essentially, Wall Street likes to scare people with tales of “well there was this one time”…and “if you bought xyz on (insert all time high before crash) you’ve never recovered” stories. I’m basically short the shit out of that fear mongering bullshit. Use your head and you should be fine, if not just stick to indexing. Like yea, I have access to the “max” button on the Yahoo finance chart for Berkshire Hathaway. I’m capable of seeing it has had a drawdown before. If I own it, I’m either not expecting that to happen, or perfectly ok if it does. Next….

[fareastwarriors]

Pretty much always have 20-30% leverage now. If I borrow at X and I think my returns can be X+, over a longer horizon, then I'm going keep borrowing.
 

Edited January 27 by fareastwarriors

[WayWardCloud]

Thanks for starting this discussion Luca!

 

I have used leverage successfully during covid (the highest I reached was 1.28 margin) and during the slump of late 2022 (mostly through LEAPS this time, maybe 1.15 or so). I find it easy to identify moments when markets are already down quite a bit and people are in fear mode and I'm good at staying calm and adding during those moments without trying to time the bottom or overthinking the crisis du jour.

 

For those who do use leverage, how have the new interest rates changed that?

I believe USD at Interactive Brokers went from around 2.5% to around 6%.

Given the long term returns of stocks around 7%, I find the 6% hurdle too high and I'm currently at zero margin (but fully invested). Maybe it's just anchoring from the past. looking back we've been spoiled, what an opportunity for leverage the past 15 years have been!

Edited January 27 by WayWardCloud

[ICUMD]

Important rules I follow when using margin:

1. Quality, quality, quality

2. Attractive valuation

3. Must generate dividends that cover the margin interest payments. (On the whole)

 

My margin has also collateralized some fixed property assets. So taking this into account, the chance of a margin call is much less.

 

Big market drawdowns allow me to add to quality companies, esp ones paying generous dividends.

 

 

[Gregmal]

4 minutes ago, WayWardCloud said:

believe USD at Interactive Brokers went from around 2.5% to around 6%.

That’s what they said last year…that the 6-7% margin hurdle was just too much….heck we had people hooting and hollering about how attractive cash and t bills were at 5%….and the market did 30% or whatever. Just gotta make a decision based on the opportunity set. 
 

This year I’m slightly less margined, but still confident my aggregate easily exceeds the carry cost.

Edited January 27 by Gregmal

[ICUMD]

2 minutes ago, WayWardCloud said:

Given the long term returns of stocks around 7%, I find the 6% hurdle too high and I'm currently at zero margin (but fully invested). Maybe it's just anchoring from the past. looking back we've been spoiled, what an opportunity for leverage the past 15 years have been!

Agreed.

The big question is where are interest rates going.

 

I think they will be going down.

So I continue to add. Once interest rates come down, these equities will take off.

[aws]

At first I used too much leverage and had some near disasters. Luckily I caught the covid recovery in a massive way, and now that I have basically enough to live on in almost any scenario I've let the pendulum swing the other way to give me a strong aversion to leverage. I even paid off my 3% mortgage 21 years early. Occasionally I have a small margin deficit when I need to pay a tax bill or something, but even then I want to pay it off within a few days at most.

[Paarslaars]

20-30% for me, which is about half of what my broker allows.

It's similar to what Greg said, I have sizeable positions in companies like BRK, FFH, JOE, etc... where I am comfortable these won't have huge drawdowns.

Then I use margin for more speculative option positions (Prosus, PACB, UMI,...).

[backtothebeach]

13 minutes ago, Paarslaars said:

20-30% for me, which is about half of what my broker allows.

 

If your broker is going to margin call you at 150%, I think being 120-130% invested is too much.

 

Portfolio margin at IB, allows you to go up to 500-600% in theory (depending on what you are holding) so your 120% would be much saver.

[Parsad]

5 hours ago, ICUMD said:

Mortgages are leverage.

What's the difference leveraging stocks?

 

• Your mortgage is fixed for 30 years in the U.S. generally.
• The bank isn't going to come in and sell your house from underneath you if the price falls but you can still pay your mortgage payment.

Cheers!