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Indirect Leverage & Cash In A Portfolio


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I was wondering if you guys had ever given much thought to the idea of indirect leverage (and indirect cash) in a portfolio. This came to me when thinking about my portfolio and the small percentage of it that is occupied by SVU.

 

In my own portfolio, I view SVU as a relatively risky security, that will either go to nothing or preform quite well (largely, due to their leverage). However, I own, as a percent of my portfolio, a lot more SODI, which is a net cash play with a relatively stable business (though, one that is threatened by budget cuts). I would imagine that it would be very hard for it to go to zero as a result.

 

The idea here, is that I get a little bit of stability from the cash of SODI, almost, but not quite, viewing it as a decent way of sitting on cash, whereas I can own some SVU to get a lot of leverage without actually paying borrowing costs out of pocket, plus, I don't really have to use margin. While I have not done any calculations, I would imagine that when contrasting each companies assets as a percent of my own portfolio, there is a lot less leverage than meets the eye- I wouldn't be a bit surprised if there is a net debt that isn't far off from 0 when looking at the 2 positions relative to one another.

 

This can also be applied to the use of LEAPS.

 

It seems like I have seen a lot of discussion that kind of goes around this idea, but never directly addresses it. That said, I am sure that I am not the first to think of this.

 

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I have thought about this as well: I own a lot of asset and cash rich companies (also long SODI by the way), so my leverage is probably pretty low. But having cash or debt at the company level is not the same as having it at the portfolio level. You listed some positives, but it also has some obvious negatives: you don't have control over the cash. You cannot use it if you find a great opportunity. And while you don't risk a margin call if you have debt at the company level, the company is probably paying a higher interest rate than what you would pay if you used margin. And as a shareholder you are in the end also the guy paying for this debt.

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