Corner of Berkshire & Fairfax Message Board

General Category => General Discussion => Topic started by: LongHaul on December 06, 2018, 08:19:42 AM

Title: Huge amounts of non-recourse leverage possible?
Post by: LongHaul on December 06, 2018, 08:19:42 AM
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.
Title: Re: Huge amounts of non-recourse leverage possible?
Post by: KJP on December 06, 2018, 08:22:52 AM
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.
Title: Re: Huge amounts of non-recourse leverage possible?
Post by: bizaro86 on December 06, 2018, 08:29:26 AM
Way out of the money options are the biggest amount of non-recourse leverage possible, I think.

Whether that is a good idea....
Title: Re: Huge amounts of non-recourse leverage possible?
Post by: BG2008 on December 06, 2018, 08:38:44 AM
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. 
Title: Re: Huge amounts of non-recourse leverage possible?
Post by: KJP on December 06, 2018, 08:48:47 AM
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.
Title: Re: Huge amounts of non-recourse leverage possible?
Post by: Uccmal on December 06, 2018, 09:21:31 AM
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. 
Title: Re: Huge amounts of non-recourse leverage possible?
Post by: Gregmal on December 06, 2018, 09:30:13 AM
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...
Title: Re: Huge amounts of non-recourse leverage possible?
Post by: TwoCitiesCapital on December 06, 2018, 09:50:52 AM
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
Title: Re: Huge amounts of non-recourse leverage possible?
Post by: oddballstocks on December 06, 2018, 10:03:30 AM
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.
Title: Re: Huge amounts of non-recourse leverage possible?
Post by: Jurgis on December 06, 2018, 10:30:42 AM
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)
Title: Re: Huge amounts of non-recourse leverage possible?
Post by: SHDL on December 06, 2018, 10:59:54 AM
ERICOPOLY made a brilliant post (or maybe it was a sequence of posts, I canít remember) years ago on how to do this by combining margin debt with married puts.  Itís 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.  Iím too lazy to find the link now, but Iím sure you can dig it up if youíre determined. 
Title: Re: Huge amounts of non-recourse leverage possible?
Post by: rkbabang on December 06, 2018, 11:06:51 AM
ERICOPOLY made a brilliant post (or maybe it was a sequence of posts, I canít remember) years ago on how to do this by combining margin debt with married puts.  Itís 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.  Iím too lazy to find the link now, but Iím sure you can dig it up if youíre 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. 
Title: Re: Huge amounts of non-recourse leverage possible?
Post by: LongHaul on December 06, 2018, 11:47:57 AM
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.


Title: Re: Huge amounts of non-recourse leverage possible?
Post by: ERICOPOLY on December 06, 2018, 11:54:21 AM
Here:
http://www.cornerofberkshireandfairfax.ca/forum/strategies/bac-leverage/msg245797/#msg245797

and

It was talked about a bit here:
http://www.cornerofberkshireandfairfax.ca/forum/strategies/warrants-for-leveraged-garp-investing/50/

It's all strung out because it generated a lot of questions and doubts.
Title: Re: Huge amounts of non-recourse leverage possible?
Post by: Orchard on December 06, 2018, 12:00:34 PM
Equities of highly levered companies act like warrants without an expiration.   

All the highly levered companies I ever invested in eventually expired.
Title: Re: Huge amounts of non-recourse leverage possible?
Post by: ERICOPOLY on December 06, 2018, 12:03:03 PM
I was going to say that.  The equity values of highly-levered companies acted like unhedged margin portfolios in 2008-2009.
Title: Re: Huge amounts of non-recourse leverage possible?
Post by: stahleyp on December 06, 2018, 12:14:37 PM
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. ;)
Title: Re: Huge amounts of non-recourse leverage possible?
Post by: sleepydragon on December 06, 2018, 12:22:04 PM
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. ;)
Title: Re: Huge amounts of non-recourse leverage possible?
Post by: stahleyp on December 06, 2018, 12:28:04 PM
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!
Title: Re: Huge amounts of non-recourse leverage possible?
Post by: Jurgis on December 06, 2018, 12:30:41 PM
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)
Title: Re: Huge amounts of non-recourse leverage possible?
Post by: flesh on December 06, 2018, 12:40:12 PM
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.

Title: Re: Huge amounts of non-recourse leverage possible?
Post by: oddballstocks on December 06, 2018, 12:44:46 PM
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.
Title: Re: Huge amounts of non-recourse leverage possible?
Post by: Rod on December 06, 2018, 12:59:25 PM
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)
Title: Re: Huge amounts of non-recourse leverage possible?
Post by: John Hjorth on December 06, 2018, 02:03:32 PM
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.
Title: Re: Huge amounts of non-recourse leverage possible?
Post by: LongHaul on December 07, 2018, 08:29:32 AM
Here:
http://www.cornerofberkshireandfairfax.ca/forum/strategies/bac-leverage/msg245797/#msg245797

and

It was talked about a bit here:
http://www.cornerofberkshireandfairfax.ca/forum/strategies/warrants-for-leveraged-garp-investing/50/

It's all strung out because it generated a lot of questions and doubts.

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. 




Title: Re: Huge amounts of non-recourse leverage possible?
Post by: ERICOPOLY on December 07, 2018, 09:14:06 AM
Here:
http://www.cornerofberkshireandfairfax.ca/forum/strategies/bac-leverage/msg245797/#msg245797

and

It was talked about a bit here:
http://www.cornerofberkshireandfairfax.ca/forum/strategies/warrants-for-leveraged-garp-investing/50/

It's all strung out because it generated a lot of questions and doubts.

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.

Yes, 100% invested in calls has wipeout risk. 

The 2006 FFH trade was to buy the calls in May/June and to deleverage after the hurricane season passed.  Hurricane seasons don't last past November and the 2008 calls didn't expire for yet another 14 months after that.

The theory was that their extrinsic value was artificially low due to the crowded short trade with short sellers using the options market maker exemption because there were not enough physical shares to borrow.  Additionally, the time value component of the extrinsic value decays relatively slowly so this was the safest window of the holding period.

Title: Re: Huge amounts of non-recourse leverage possible?
Post by: cashisking on December 07, 2018, 10:09:12 AM
Sell long dated in the money puts (on companies you expect to increase in value) and calls (on etfs and companies expected to decrease in value). Use that to buy long dated warrants - ones where the implicit cost of borrowing is low. Look for warrants that just start to trade - some experience a spin off effect and get dumped. Post reorg warrants are the sweet spot IMO - all the benefits of post reorg valuation, fresh start accounting etc for the underlying company, and the holders are usually former retail equity holders and debt holders (neither are too interested in holding the warrants that represent pennies on the dollar of their original capital)...

For selling naked puts and calls you are going to need margin. In canada we have TFSA account types (similar to Roth IRA in US) and Questrade has a feature that allows you to use your tfsa assets as collateral for your margin account at no cost. So there is no cash cost for borrowing the margin needed to hold short option positions if you set it up that way.

I guess buying CEFs at a discount to NAV is a form of borrowing. You get the discount at no cost and its non recourse to you. The discount can multiply if the CEF holds assets that themselves are discounted (I'm thinking of a bond CEF at a discount and the underlying bonds are trading at a discount to par for some technical reason).
Title: Re: Huge amounts of non-recourse leverage possible?
Post by: bizaro86 on December 08, 2018, 02:26:26 PM
Another potential way to add a bunch of leverage is through split shares. Basically, these are retail yield pig vehicles. They start with a $25 NAV, split between a $10 preferred share and a $15 common share. The prefs get a preferred dividend, and the common gets a levered play on the underlying portfolio. They tend to overdistribute on the common, so the NAV often decreases. But that just makes them even more levered.

As an example: TSX:FFN is a portfolio of 15 US/Canadian financials. Largest positions are BofA, JPM, WFC, and GS (in order) so potentially attractive valuations.

The NAV in total is ~$16, so the NAV to the common is ~$6. The common trades at $6.26 CAD, so you're paying something for the leverage. They distribute $1.20 to the common per year (until they bottom out at whatever the NAV minimum is). This is close to 3 to 1 leverage on a diversified portfolio of financials at relatively low cost.