Does Anyone use Margin in Their Personal Portfolio

[Gregmal]

Appaloosa, absolutely, like 1000% certainly, does use leverage, as do most major funds. Especially those who run credit funds and get involved in distressed asset investing(which is Appaloosa's bread and butter)

 

Even the simple structure funds like Perhsing Square deal in swaps/OTC derivatives, which is another form of leverage.

[wabuffo]

Appaloosa, absolutely, like 1000% certainly, does use leverage, as do most major funds. Especially those who run credit funds and get involved in distressed asset investing(which is Appaloosa's bread and butter)

Even the simple structure funds like Perhsing Square deal in swaps/OTC derivatives, which is another form of leverage.

 

I wouldn't condone or recommend it - but every great investing track record employs leverage, in some form.  Buffett has used leverage at every stage of his investing career (Munger was even more aggressive).  For example, Buffett talks about the great returns he made in the years before the Buffett Partnership (1951-56) ("I killed the Dow").  But he was aggressive in the use of leverage even then (this is before insurance float or Blue Chip stamp float).

 

There's a page in one of Andy Kilpatrick's books that shows Buffett's personal portfolio for 1951.  His opening capital is $9,800, but he basically buys GEICO ("the stock I like the best"), his biggest position during the year, on borrowed money ($5K) and makes a 76% return on the year. 

 

Leverage is best left to the pros (and they do use it).

 

wabuffo

[StubbleJumper]

I have used margin off and on for years. My living situation is probably most similar to Al's post in this thread.

 

My uses have traditionally been "bridge" financing if called on written options. Also when pursuing corporate actions or one-time events with discrete outcomes. In these cases I'll be on margin for a few weeks but ultimately try to pare it down.

 

I have sometimes done the spread play with dividend paying stocks. I think in all cases I have never exceeded 1.2x leverage. As Greg mentioned valuation is important but so is asset quality. Some assets are more suitable to leveraging. Sanjeev made a warning earlier in this thread that with margin, one mistake can blow you up. It's important to take heed of that, probably moreso in the current environment.

 

Mortgage I presume isn't what you're interested in but I have that as well.

 

Thanks for reviving this thread, good to see some long forgotten names.

 

Absolutely agree. I’ll still most likely refrain from leverage. I avoid most types of debt in my life and choose to live with the loss of potential gains.

 

I guess I mostly wanted to revive it to see what the mentality was alongside this ever increasing frothy market.

 

Thanks

 

 

You don't necessarily need debt to lever your position. 

 

The biggest leverage-fest that we've ever had on this board was probably the widespread purchase of bank LEAPs and Tarp Warrants.  Lots of people on this board made lots of money from that opportunity.  The LEAPS and warrants were objectively cheap, and it was nice to not be at risk of a margin call if the market temporarily moved the wrong direction.

 

The second biggest leverage-fest on this board was when a smaller group made heavy purchases of FFH LEAPs back when they were objectively cheap.  That one was one of my most expensive errors -- I bought the stock for less than US$100, which is all fine and dandy, but other guys harvested 40 and 60 bags off the the LEAPS.

 

The third most significant leverage-fest was BRK options and LEAPs about 4 or 5 years ago.  I think it was TWA's thread "The Mother of Easy Trades" that really identified how stupidly cheap BRK had gotten, and how even more stupidly cheap were the LEAPs.  Once again, I was stupid and just added shares rather than lever the hell out of the situation...

 

I need a painfully obvious opportunity before I use any meaningful amount of leverage (either debt or options).  So far, my errors of omission have cost me a shit-load.

 

 

SJ

[Castanza]

I have used margin off and on for years. My living situation is probably most similar to Al's post in this thread.

 

My uses have traditionally been "bridge" financing if called on written options. Also when pursuing corporate actions or one-time events with discrete outcomes. In these cases I'll be on margin for a few weeks but ultimately try to pare it down.

 

I have sometimes done the spread play with dividend paying stocks. I think in all cases I have never exceeded 1.2x leverage. As Greg mentioned valuation is important but so is asset quality. Some assets are more suitable to leveraging. Sanjeev made a warning earlier in this thread that with margin, one mistake can blow you up. It's important to take heed of that, probably moreso in the current environment.

 

Mortgage I presume isn't what you're interested in but I have that as well.

 

Thanks for reviving this thread, good to see some long forgotten names.

 

Absolutely agree. I’ll still most likely refrain from leverage. I avoid most types of debt in my life and choose to live with the loss of potential gains.

 

I guess I mostly wanted to revive it to see what the mentality was alongside this ever increasing frothy market.

 

Thanks

 

 

You don't necessarily need debt to lever your position. 

 

The biggest leverage-fest that we've ever had on this board was probably the widespread purchase of bank LEAPs and Tarp Warrants.  Lots of people on this board made lots of money from that opportunity.  The LEAPS and warrants were objectively cheap, and it was nice to not be at risk of a margin call if the market temporarily moved the wrong direction.

 

The second biggest leverage-fest on this board was when a smaller group made heavy purchases of FFH LEAPs back when they were objectively cheap.  That one was one of my most expensive errors -- I bought the stock for less than US$100, which is all fine and dandy, but other guys harvested 40 and 60 bags off the the LEAPS.

 

The third most significant leverage-fest was BRK options and LEAPs about 4 or 5 years ago.  I think it was TWA's thread "The Mother of Easy Trades" that really identified how stupidly cheap BRK had gotten, and how even more stupidly cheap were the LEAPs.  Once again, I was stupid and just added shares rather than lever the hell out of the situation...

 

I need a painfully obvious opportunity before I use any meaningful amount of leverage (either debt or options).  So far, my errors of omission have cost me a shit-load.

 

 

SJ

Wow that thread is full of interesting stuff. Thanks for the insights. I guess hindsight it always 2020 right?

[Cigarbutt]

^There's one insight I just came up with (last few weeks).

Looking back, use of margin debt spiked ++ in 2002 and in 2009, not because of a 'macro' derived posture but because of a different risk-reward profile on the limited things I can do.

https://www.gurufocus.com/economic_indicators/4266/finra-investor-margin-debt-relative-to-gdp

Painfully, from the cognitive point of view, I've come to the conclusion that the extent of leverage used the last time around was both unnecessary and reckless and don't ever plan to use margin debt to any significant degree going forward. It seems that writing it will make it more likely that I keep a level head but who really knows?

 

[wabuffo]

The biggest leverage-fest that we've ever had on this board was probably the widespread purchase of bank LEAPs

 

LEAPs can be expensive.  LEAP calls are essentially margin with an embedded put option.

 

You can often achieve the same result (more cheaply) by buying the underlying stock on margin and writing LEAP puts to protect the downside of the margin.  Plus - if the underlying pays a dividend, you get to keep the dividend (which you don't with a call option).  Margin interest rates can be low if you use a broker like IB.  Its not out of the question that a margin+put can cost 500bp less than the exact same position via a LEAP call.

 

wabuffo

 

 

[Gregmal]

Yea I think there are tons of misconceptions and false narrative around margin. For instance if I had 120% of the portfolio in BRK(or substitute any name of your liking) and then further margining that position bought a mixture of put options and hedges I have zero risk of being wiped out.

 

Now take the same example and just diversify out, or engage positions that have little to no correlation or even behave inversely. Its quite simple while at the same time a little bit complex. But at the end of the day if you are a good shooter the objective should be to take as many uncontested shots as possible. Just make sure you dont get caught up chasing around your ball when you miss.

[thepupil]

Agreed, whenever i use margin (and often when I don’t) I hedge wipeout with OTM puts, often recovering the premium via call sales on exit and/or capital return, or just paying the premium.

 

Unhedged margin no matter how right you may be eventually is crazy to me.

[LC]

The biggest leverage-fest that we've ever had on this board was probably the widespread purchase of bank LEAPs

 

LEAPs can be expensive.  LEAP calls are essentially margin with an embedded put option.

 

You can often achieve the same result (more cheaply) by buying the underlying stock on margin and writing LEAP puts to protect the downside of the margin.  Plus - if the underlying pays a dividend, you get to keep the dividend (which you don't with a call option).  Margin interest rates can be low if you use a broker like IB.  Its not out of the question that a margin+put can cost 500bp less than the exact same position via a LEAP call.

 

wabuffo

 

Good post. Attached is the old spreadsheet that someone (I forget who - but we all owe them a beer) put together with this formula. It's based on Eric's "Cost of leverage" posts (we all still owe this guy 2 beers).

 

I keep a copy of this spreadsheet handy for whenever I am interested in taking a large leveraged position, to compare costs between the various leveraged strategies available. Anyone interested can check column Q for the formula, it's based on the old warrant tickers so nothing is populated but the formula should be intact.

Copy_of_Options_Calculations.xlsx

[StubbleJumper]

I have used margin off and on for years. My living situation is probably most similar to Al's post in this thread.

 

My uses have traditionally been "bridge" financing if called on written options. Also when pursuing corporate actions or one-time events with discrete outcomes. In these cases I'll be on margin for a few weeks but ultimately try to pare it down.

 

I have sometimes done the spread play with dividend paying stocks. I think in all cases I have never exceeded 1.2x leverage. As Greg mentioned valuation is important but so is asset quality. Some assets are more suitable to leveraging. Sanjeev made a warning earlier in this thread that with margin, one mistake can blow you up. It's important to take heed of that, probably moreso in the current environment.

 

Mortgage I presume isn't what you're interested in but I have that as well.

 

Thanks for reviving this thread, good to see some long forgotten names.

 

Absolutely agree. I’ll still most likely refrain from leverage. I avoid most types of debt in my life and choose to live with the loss of potential gains.

 

I guess I mostly wanted to revive it to see what the mentality was alongside this ever increasing frothy market.

 

Thanks

 

 

You don't necessarily need debt to lever your position. 

 

The biggest leverage-fest that we've ever had on this board was probably the widespread purchase of bank LEAPs and Tarp Warrants.  Lots of people on this board made lots of money from that opportunity.  The LEAPS and warrants were objectively cheap, and it was nice to not be at risk of a margin call if the market temporarily moved the wrong direction.

 

The second biggest leverage-fest on this board was when a smaller group made heavy purchases of FFH LEAPs back when they were objectively cheap.  That one was one of my most expensive errors -- I bought the stock for less than US$100, which is all fine and dandy, but other guys harvested 40 and 60 bags off the the LEAPS.

 

The third most significant leverage-fest was BRK options and LEAPs about 4 or 5 years ago.  I think it was TWA's thread "The Mother of Easy Trades" that really identified how stupidly cheap BRK had gotten, and how even more stupidly cheap were the LEAPs.  Once again, I was stupid and just added shares rather than lever the hell out of the situation...

 

I need a painfully obvious opportunity before I use any meaningful amount of leverage (either debt or options).  So far, my errors of omission have cost me a shit-load.

 

 

SJ

Wow that thread is full of interesting stuff. Thanks for the insights. I guess hindsight it always 2020 right?

 

 

No, the worst thing is that it was foresight!  Some very smart guys on this board identified multi-bagger opportunities in both FFH and BRK, and they posted about it for everyone.  As I said, the FFH LEAPs were closed out for 40 to 60 bags, and the BRK LEAPs were closed out for 4 or 5 bags after a few months.  I scooped 4 or 5 bags off the FFH common, but not grabbing the LEAPs instead probably cost me $100k or $200k or so (can't remember exactly because this was about 15 years ago now).  And then Eric's work on the BAC TARP warrants and LEAPs was another opportunity for 4 or 5 bags (I don't remember exactly how mine closed out, but suffice it to say that I made a shit-load).

 

Thinking of Buffett's punch-card, there are not too many opportunities like this that pop up.

 

 

SJ

[StubbleJumper]

The biggest leverage-fest that we've ever had on this board was probably the widespread purchase of bank LEAPs

 

LEAPs can be expensive.  LEAP calls are essentially margin with an embedded put option.

 

You can often achieve the same result (more cheaply) by buying the underlying stock on margin and writing LEAP puts to protect the downside of the margin.  Plus - if the underlying pays a dividend, you get to keep the dividend (which you don't with a call option).  Margin interest rates can be low if you use a broker like IB.  Its not out of the question that a margin+put can cost 500bp less than the exact same position via a LEAP call.

 

wabuffo

 

 

Yes, you really need to do the arithmetic to decide whether margin or derivatives are the better approach to lever the opportunity.  When Eric and Francis Chou pointed out the TARP warrants, they were not that well known to the investment community.  Options of 5, 6 or 7 years of duration, with the strike adjusted to reflect the value of dividends!  All of this applied base securities (the equities) that were objectively undervalued.  Those TARP warrants cost us a pile of theta, but who really cared when the bet was so asymmetric?

 

 

SJ

[jgyetzer]

I do to a very small extent - enough for margin interest deductions to negate the taxes on investment income which is not large in relation to the portfolio value.

 

JY

[james22]

Anyone believe the opportunity today is so attractive that they are extending themselves?

 

Usually wouldn't consider margin (or a HELOC), but wonder if I shouldn't consider taking advantage of BRK trading where it is.

 

 

 

 

[meiroy]

Appaloosa, absolutely, like 1000% certainly, does use leverage, as do most major funds. Especially those who run credit funds and get involved in distressed asset investing(which is Appaloosa's bread and butter)

 

Even the simple structure funds like Perhsing Square deal in swaps/OTC derivatives, which is another form of leverage.

 

 

Not now.

[james22]

Anyone believe the opportunity today is so attractive that they are extending themselves?

 

Usually wouldn't consider margin (or a HELOC), but wonder if I shouldn't consider taking advantage of BRK trading where it is.

 

Investing a borrowed lump sum today into BRK at $160 instead of DCAing over the next several years until I retire doesn't seem crazy. Just locking in an attractive entry point.