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

[Viking]

Other than when i owned a home and had a mortgage, i have never used leverage. I don’t think that using leverage is a stupid idea. I probably read too much Buffett early on. However, i have always had a pretty concentrated portfolio - and that has definitely helped my returns over the years.

[ICUMD]

9 hours ago, Parsad said:

 

• 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!

@Parsad for sure.

 

 

I was referring of the psychology of using debt to purchase assets.  Most people can have a mortgage, but are hesitant to use debt to invest.

Edited January 27 by ICUMD

[John Hjorth]

I voted the "I use zero leverage .." while I like some other fellow CoBF members posting here do not consider it [the use of leverage] in any way stupid. I remember I was thinking a lot about it in the yearly years, while I practically never think about it anymore. I don't think I need it anymore to progress with investing in a satisfactory way going forward. It has likely also something to do with a wish to keep things as simple as possible because I've become older.

[schin]

8 hours ago, ICUMD said:

Mortgages are leverage.

What's the difference leveraging stocks?

 

Look at the 2008 Housing Crisis for reference.

[Sweet]

Thanks @Lucaand others who provided an explanation of how and why they use leverage 

[enoch01]

cc: the “have we finally hit the bottom” thread

[backtothebeach]

There are many ways to employ leverage, each with its own nuances and execution quirks. They all involve interest as either a direct cost, indirect cost, or opportunity cost.

 

Let’s say you have exactly the cash needed to buy 1000 shares of BRKB in your account:

 

1. You buy 1200 shares of BRKB, and end up with a negative cash balance on which you pay interest.

 

2. You buy 1000 shares and go short 2 ITM puts, for example strike price 5-10% above the current share price and expiring in three months. You end up with a positive cash balance on which you earn interest, but have limited your upside.

If things were perfect, with a smooth uptrend, you could possibly roll this short ITM put up and out when it expires (higher strike and longer expiration), and basically have the leverage for free or even take in a little extra time value. Unfortunately, it rarely works out like that over longer periods, even BRKB is too volatile.

This worked great when interest rates where close to zero, one could sell rather deep ITM puts. Nowadays these puts are assigned quicker once the time value has evaporated. If the puts get assigned, you end up with scenario (1.)

 

3. Similar to (2.), you buy 1000 shares and sell 2 ATM or OTM puts for some extra income and possibly getting your 20% leverage at a cheaper price if the stock drops below the strike price, in which case you end up with scenario (2.) or (1.) if assigned.

 

4. You buy 800 shares and go long 4 deep ITM calls (for example LEAPS) that use up the rest of your cash. The time value in the options is basically the interest paid on not having to pony up the entire stock price for 400 shares. Positive: there’s no risk of getting margin-called.

 

5. You borrow money somewhere else (mortgage etc.), put it into your account and buy 200 extra shares. This way you cannot get margin-called by your broker.

 

6. There used to be single stock futures, and now it appears there are CFDs (contracts for difference) available at IB with a financing rate similar to the margin interest. However I have no experience with the mechanics of CFDs. For example buying 1000 shares and buying exposure to 200 additional shares via CFDs may or may not have advantages over scenario (1.) above.

 

Feel free to add to the list or correct any inaccuracies.
 

Edited January 27 by backtothebeach

[John Hjorth]

40 minutes ago, enoch01 said:

cc: the “have we finally hit the bottom” thread

 

@enoch01,

 

Thanks, 

 

On the former software platform for CoBF, where we could have a so called signature [a section, that was repeated in the bottom of every post of ours individually, mine was :

 

""In the race of excellence .... there is no finish line!"

HH Sheikh Mohammed Bin Rashid Al Maktoum, current ruler of Dubai, VP, prime minister, and minister of defense of UAE"

 

- - - o 0 o - - -

 

Mr. Buffett talks about "To win, you first have to finish".

 

- - - o 0 o - - -

 

I also remember a few accounts here on CoBF almost hyperactive for a fairly short period, alone for after a period to disappear in silence.