Corner of Berkshire & Fairfax Message Board

General Category => Strategies => Topic started by: Shooter MacGavin on May 18, 2016, 08:14:08 AM

Title: Getting leverage
Post by: Shooter MacGavin on May 18, 2016, 08:14:08 AM
It pains me that we have nearly zero interest rates, yet I can't figure out how to borrow long-term (in the US) to buy public market securities.  I know I can margin for really cheap with IB but I consider that unsafe since we are prone to have moments of madness in the markets. Is there another way to try to get longer term, safer leverage?  I guess one could buy put options to ensure one doesn't get a margin call in a market panic, but that has been generally costly. 

Any other way to get longer term leverage?  I don't have a house so I can't take a second mortgage.

I've tried to short corporate bonds, but to no avail.  I tried to short the UST ETF but it is not available to short.

I would love to buy some (what i consider) safe stocks with long-term, cheap financing. anyone figure this out?  Is there a derivative way to do it, or a broker that will allow me to short bonds? Thanks for your thoughts and apologizes if there's another thread like this.
Title: Re: Getting leverage
Post by: gg on May 18, 2016, 08:18:42 AM
I haven't tried to do this, and know nothing about it, but could you possibly short US govt bonds? It's more liquid than any individual corporate bond
Title: Re: Getting leverage
Post by: PatientCheetah on May 18, 2016, 09:22:29 AM
If you have a hard time making money without leverage, it would be a bad idea to use more leverage. Leverage takes far more trading skill and great timing. If your account is above certain size, you can apply for portfolio margining. It gives you more margin than I would ever feel comfortable fully utilizing.
Title: Re: Getting leverage
Post by: glorysk87 on May 18, 2016, 09:25:05 AM
It pains me that we have nearly zero interest rates, yet I can't figure out how to borrow long-term (in the US) to buy public market securities.  I know I can margin for really cheap with IB but I consider that unsafe since we are prone to have moments of madness in the markets. Is there another way to try to get longer term, safer leverage?  I guess one could buy put options to ensure one doesn't get a margin call in a market panic, but that has been generally costly. 

Any other way to get longer term leverage?  I don't have a house so I can't take a second mortgage.

I've tried to short corporate bonds, but to no avail.  I tried to short the UST ETF but it is not available to short.

I would love to buy some (what i consider) safe stocks with long-term, cheap financing. anyone figure this out?  Is there a derivative way to do it, or a broker that will allow me to short bonds? Thanks for your thoughts and apologizes if there's another thread like this.

You want to lever up in order to buy equities at significantly higher-than-average valuation levels?

Well boys, I think we've found our indicator that we're at the market peak...
Title: Re: Getting leverage
Post by: fareastwarriors on May 18, 2016, 09:26:40 AM
Take the small margin loan at IB. If the loan is small enough, even if there is madness you should be able to ride it out.
Title: Re: Getting leverage
Post by: Shooter MacGavin on May 18, 2016, 11:08:16 AM
I haven't tried to do this, and know nothing about it, but could you possibly short US govt bonds? It's more liquid than any individual corporate bond

I wish I could.  they don't let you!
Title: Re: Getting leverage
Post by: Shooter MacGavin on May 18, 2016, 11:11:19 AM
If you have a hard time making money without leverage, it would be a bad idea to use more leverage. Leverage takes far more trading skill and great timing. If your account is above certain size, you can apply for portfolio margining. It gives you more margin than I would ever feel comfortable fully utilizing.

Well no one is saying I'm not making money.  I am so far (thankfully), but  in theory, if you can borrow safely (long-term, non-recourse) at 1-2% and put it in an asset that has a 12-15% return, and you can do that safely, well I would do that all day long up to a point where I felt that the assets coverage ratio would be comfortable. 
Title: Re: Getting leverage
Post by: Jurgis on May 18, 2016, 11:28:22 AM
Mortgage or HELOC is the closest you can get to non-recourse (possibly not) and long term and still not 1-2%.

For small percentages of portfolio, yeah, I guess IB margin.
Title: Re: Getting leverage
Post by: Shooter MacGavin on May 18, 2016, 11:28:39 AM
It pains me that we have nearly zero interest rates, yet I can't figure out how to borrow long-term (in the US) to buy public market securities.  I know I can margin for really cheap with IB but I consider that unsafe since we are prone to have moments of madness in the markets. Is there another way to try to get longer term, safer leverage?  I guess one could buy put options to ensure one doesn't get a margin call in a market panic, but that has been generally costly. 

Any other way to get longer term leverage?  I don't have a house so I can't take a second mortgage.

I've tried to short corporate bonds, but to no avail.  I tried to short the UST ETF but it is not available to short.

I would love to buy some (what i consider) safe stocks with long-term, cheap financing. anyone figure this out?  Is there a derivative way to do it, or a broker that will allow me to short bonds? Thanks for your thoughts and apologizes if there's another thread like this.

You want to lever up in order to buy equities at significantly higher-than-average valuation levels?

Well boys, I think we've found our indicator that we're at the market peak...

I'm flattered you call a market top based on my behavior.  Since you're so convinced, you should probably short the market.

I don't really care much about market levels.  I'm so insignificant, I can always find stuff to buy, with 20-25%+ IRRs. Never had much trouble with that in any market environment.

If you look at the best performing stocks of all time, the fortunes were made on low-cost, non recourse leverage. 

Berkshire, Fairfax, Danaher, Middleby, Capital Cities, everything John Malone does etc etc.

They all behave like private equity in some way..they get a cheap, long-term source of financing (in berkshire's case, negative) and plow it into assets that earn relatively high rates of return.  Of course, some things aren't leveragable and some are.  Some structures are riskier for the borrower, some aren't.  (covenant lite, great for borrowers, dumb for lenders). 

I'm not advocating for margin....because that is marked-to-market, and recourse.  the worst kind.  I'll repeat that. MARGIN BAD.

I would love however to issue 10 year term bonds at 2% and plow it into berkshire which may earn 10-15% for example.  in 10 years my cost of financing would cummulatively be 21% (1.02^10), while Berkshrie may have appreciated 159% (1.1^10)....or a 138% spread, no equity down.

If I could short US treasuries, that's effectively borrowing at the yield, today at 1.76%.  I'll take as much of that as you'll give me.
Title: Re: Getting leverage
Post by: Jurgis on May 18, 2016, 11:33:37 AM
I would love however to issue 10 year term bonds at 2%

Won't we all.  ;D
I'd prefer to issue 99 year bonds at 0%. But that's just me.  8)
Title: Re: Getting leverage
Post by: Shooter MacGavin on May 18, 2016, 11:52:26 AM
I would love however to issue 10 year term bonds at 2%

Won't we all.  ;D
I'd prefer to issue 99 year bonds at 0%. But that's just me.  8)

right?  I'll take that all day long.  the previous poster's Pavlovian negative response to leverage is a bit amateurish, in my opinion.  Credit structures, legal structures are incredibly important , as are the underlying assets being financed.

The current rate environment is amazing for investors.  Corporations are all taking advantage of it, either by re-capping or going on acquisition sprees.  Now this is a good idea for some, but not a good idea for some (cyclical companies).

it's funny, banks in the US will let you collateralize your publicly traded equities to let you buy private stakes in other partnerships or houses, but they won't let you buy publicly traded partnerships known as stocks.

there's gotta be a way to exploit the embedded low interest in options or futures or something!!  I'm too dumb to figure it out.
Title: Re: Getting leverage
Post by: BG2008 on May 18, 2016, 11:56:11 AM
Mortgage or HELOC is the closest you can get to non-recourse (possibly not) and long term and still not 1-2%.

For small percentages of portfolio, yeah, I guess IB margin.

Home mortgages are probably the best way to go about this.  They do not care what your securities trade at.  The dumbest things that I've heard are "MLPs yield 6%,let's borrow at 1% and lever it 2-3x." 

If you think you're sitting on companies trading at 50-60 cents on the dollar, then yeah, it makes sense to lock into 30 years fixed with no mark to market risk.  The overall concept of leverage just doesn't sit well with me.  So, I try to avoid it in general. 
Title: Re: Getting leverage
Post by: TwoCitiesCapital on May 18, 2016, 12:17:53 PM
There are 3 ways that I generally get leveraged exposure:

Quote
1) Margin loans through IB.

IB generally has cheap margin rates and I limit the amount that I borrow through this mechanism to like 5% of my total assets so that I could easily cover a margin call without forced liquidation. Also, the assets in that account tend to be incredibly volatile (BBRY, FNMA, short TSLA, put options, etc.) which limits the amount of margin I'm willing to take against them.

Quote
2) Deep-in-the-money calls
Buying deep-in-the-money calls that have a delta near 1 typically gives you leveraged exposure to the underlying name and they're deep in the money so you don't have to worry about a zero valuation at expiry barring a massive decline. You obviously won't get the dividends so this is a better candidate for capital appreciation type stocks AND it needs to be very deep in the money before 95-99% of the call's value is fundamental value with nearly no time value attached. This is how you lower the "cost" of borrow while getting nearly 1.5-2x leverage on your cash. Also, with this strategy, if stocks do crater 50-60%, you actually end up better off than if you owned the stock, because once it passes your strike price on the way down the delta drops below 1 and you lose less than what the market loses.

Quote
3) Loan consolidation offers from credit cards
I regularly receive offers from credit cards (like the Slate from Chase) where they give me 12-18 months interest free on any amount rolled for "loan consolidation." I take the checks they give me, cash them into my investment accounts, and use that money interest free for 12-18 months. There's typically a 1-2% balance transfer fee so that's your annual rate paid. When the money comes due, either liquidate the investments and cover it or roll to another card with a similar offer and pay the 1-2% again. 

This is definitely the riskiest of the 3 so extreme caution should be taken with the amount borrowed unless if you want to end up as a horror story/bankrupt. I do #3 regularly because I have no other outstanding debt and I keep the amount borrowed to something I could cover with my income in less than 6 months just in case there's a situation where I'm unable to roll to another card or repay the loan before accruals of interest. I've done for the last 3 years and it's worked relatively well in providing additional cash that is non-recourse, is independent of market movements, and is of low interest.

Lastly, I've been looking into getting an unsecured credit line so I can be more opportunistic with my leveraged exposure (i.e. have a lot more cash at 2009 low-type levels), but the rates I've seen on many of them haven't really made much sense and many I have looked at carry regular fees to maintain which is something I'd rather avoid. If anyone else has had luck with decent rates and low fees, please direct me to your bank :)

Title: Re: Getting leverage
Post by: Jurgis on May 18, 2016, 12:26:34 PM
Mortgage or HELOC is the closest you can get to non-recourse (possibly not) and long term and still not 1-2%.

For small percentages of portfolio, yeah, I guess IB margin.

Home mortgages are probably the best way to go about this.  They do not care what your securities trade at.  The dumbest things that I've heard are "MLPs yield 6%,let's borrow at 1% and lever it 2-3x." 

If you think you're sitting on companies trading at 50-60 cents on the dollar, then yeah, it makes sense to lock into 30 years fixed with no mark to market risk.  The overall concept of leverage just doesn't sit well with me.  So, I try to avoid it in general.

Yeah, I'm not gaga about leverage either. But ... if someone offered me 10-100 year 2% with no collateral adjustments, I'd take as much as I could. :) For some reason, nobody does. ;)

Mortgages: 30 year fixed at 3.5% is still an option on inflation. If we get inflation and rates adjust way higher, then it's an asset and not a liability.

Now, 30 year at 3.5% is not at 2%, so I'm less interested to take as much as I could. Plus it also comes with a house attached to it, so ...

FWIW and all that.
Title: Re: Getting leverage
Post by: Shooter MacGavin on May 18, 2016, 12:35:08 PM
There are 3 ways that I generally get leveraged exposure:

Quote
1) Margin loans through IB.

IB generally has cheap margin rates and I limit the amount that I borrow through this mechanism to like 5% of my total assets so that I could easily cover a margin call without forced liquidation. Also, the assets in that account tend to be incredibly volatile (BBRY, FNMA, short TSLA, put options, etc.) which limits the amount of margin I'm willing to take against them.

Quote
2) Deep-in-the-money calls
Buying deep-in-the-money calls that have a delta near 1 typically gives you leveraged exposure to the underlying name and they're deep in the money so you don't have to worry about a zero valuation at expiry barring a massive decline. You obviously won't get the dividends so this is a better candidate for capital appreciation type stocks AND it needs to be very deep in the money before 95-99% of the call's value is fundamental value with nearly no time value attached. This is how you lower the "cost" of borrow while getting nearly 1.5-2x leverage on your cash. Also, with this strategy, if stocks do crater 50-60%, you actually end up better off than if you owned the stock, because once it passes your strike price on the way down the delta drops below 1 and you lose less than what the market loses.

Quote
3) Loan consolidation offers from credit cards
I regularly receive offers from credit cards (like the Slate from Chase) where they give me 12-18 months interest free on any amount rolled for "loan consolidation." I take the checks they give me, cash them into my investment accounts, and use that money interest free for 12-18 months. There's typically a 1-2% balance transfer fee so that's your annual rate paid. When the money comes due, either liquidate the investments and cover it or roll to another card with a similar offer and pay the 1-2% again. 

This is definitely the riskiest of the 3 so extreme caution should be taken with the amount borrowed unless if you want to end up as a horror story/bankrupt. I do #3 regularly because I have no other outstanding debt and I keep the amount borrowed to something I could cover with my income in less than 6 months just in case there's a situation where I'm unable to roll to another card or repay the loan before accruals of interest. I've done for the last 3 years and it's worked relatively well in providing additional cash that is non-recourse, is independent of market movements, and is of low interest.

Lastly, I've been looking into getting an unsecured credit line so I can be more opportunistic with my leveraged exposure (i.e. have a lot more cash at 2009 low-type levels), but the rates I've seen on many of them haven't really made much sense and many I have looked at carry regular fees to maintain which is something I'd rather avoid. If anyone else has had luck with decent rates and low fees, please direct me to your bank :)

TwoCitiesCapital.

I agree with you on calls.  I always think about a call as a cost of borrow plus protection.  This is definitely a good way to get non recourse leverage if the put premium + borrow is relatively cheap (although it rarely is).  In fact, in another thread I think I postulated that the Berkshire puts /and or calls are pretty cheap right now. something like 4%+ annualized cost on a stock that could easily do 10%+ annualized or more (in my view)... ..that's one to keep rolling over for a while.

never thought about the 3rd.  Interesting!  I'll think on it.  thanks for the feedback.
Title: Re: Getting leverage
Post by: Jurgis on May 18, 2016, 12:37:32 PM
Credit card offers 12 month @ 2% - I did that in the past, but no longer do it. I only get offers that amount to less than 1% of my investments and you have to be sure not to use that card for anything else, since payments go to the "0% cash advance" first, so you'll be paying interest on purchases if you use the card for something else.

BTW, I also keep in bank (cash) way more than 1% of my investable amount. So I could "borrow" from myself more than 1% than the credit cards offer and not pay 2% at all. ;) So in short cc offers not worth it for me anymore.
Title: Re: Getting leverage
Post by: thepupil on May 18, 2016, 12:47:51 PM
my credit union gave me a 100% LTV 5 yr loan on my 6 yr old car w/ 60,000 miles for 2%...not super long term and it was only $20K but if you own your car outright that's not a bad way to get some cheap cash.*

*if you already have insurance coverage that lender will require you to have, if you don't have that, then it can be an expensive form of financing because auto lenders require certain coverage
Title: Re: Getting leverage
Post by: LC on May 18, 2016, 01:10:41 PM
I agree with you on calls.  I always think about a call as a cost of borrow plus protection.  This is definitely a good way to get non recourse leverage if the put premium + borrow is relatively cheap (although it rarely is).  In fact, in another thread I think I postulated that the Berkshire puts /and or calls are pretty cheap right now. something like 4%+ annualized cost on a stock that could easily do 10%+ annualized or more (in my view)... ..that's one to keep rolling over for a while.

But with the calls, you only get 2 years of leverage at most, right? Then you need to roll them over at a different annualized % cost.

Is there a way to use futures/options to extend this fixed-rate cost?
Title: Re: Getting leverage
Post by: Shooter MacGavin on May 18, 2016, 01:58:59 PM
I agree with you on calls.  I always think about a call as a cost of borrow plus protection.  This is definitely a good way to get non recourse leverage if the put premium + borrow is relatively cheap (although it rarely is).  In fact, in another thread I think I postulated that the Berkshire puts /and or calls are pretty cheap right now. something like 4%+ annualized cost on a stock that could easily do 10%+ annualized or more (in my view)... ..that's one to keep rolling over for a while.

But with the calls, you only get 2 years of leverage at most, right? Then you need to roll them over at a different annualized % cost.

Is there a way to use futures/options to extend this fixed-rate cost?


right..there isn't a way to lock it in with options, but it may not be that big a deal.  I can't talk to futures, I don't know how they work, but I would love for someone to educate me.

 Berkshire is generally a low volatility stock since its investors aren't manically exchanging their stock.  So hopefully the option pricing ("borrow plus put" or "call") stays at that rough under 5%. For purposes of thinking about the roll forward, it's better to margin and buy a put than buy a call.

if you margined at IB, and bought a just out of the money put to protect your loan, and if berkshire went up, then at expiration you could roll your put for less...you only need to roll it for right below your cost in order to protect from a margin call.....so your overall cost of premium (put plus interest) is lower.

if berkshire stays flat, then hopefully the put premium, which is largely  priced on vol, stays low too..but the intrinsic value is most likely to be higher two years later ...in which case the intrinsic value of the option (not the extrinsic value) is higher..or said differently, the spread between your upside and the put premium plus interest is higher...so you can afford to take up your put premium percentage if it ends up being a bit higher

if berkshire goes down..you're still fine, you're put protected you from a margin call.  and then you can pay a higher put premium on the then stock price (of let's say 8%) and that's ok, because from this level you now have a higher upside.

this exercise assumes that your interest costs stay flattish..but hopefully they don't go from under 2% at IB pre-tax at IB to like 5%..chances are they rise in 25 bps - 50 bps increments

In fact, I'm tempted to just sell everything else and just run a levered, protected berkshire portfolio in IB.  I said this on the other thread too, looking for people to give me a reason why I was an idiot to do that.  I'm sure I'll get an answer soon :)
Title: Re: Getting leverage
Post by: PatientCheetah on May 18, 2016, 06:11:50 PM
What if Buffet dies, the put protects your downside so the real cost is opportunity cost. To be honest, I am not impressed with Buffet's successors' pick. How other conglomerates performed after their key persons passed are also telling.
Title: Re: Getting leverage
Post by: glorysk87 on May 19, 2016, 09:10:38 AM

I'm flattered you call a market top based on my behavior.  Since you're so convinced, you should probably short the market.

I don't really care much about market levels.  I'm so insignificant, I can always find stuff to buy, with 20-25%+ IRRs. Never had much trouble with that in any market environment.

If you look at the best performing stocks of all time, the fortunes were made on low-cost, non recourse leverage. 

Berkshire, Fairfax, Danaher, Middleby, Capital Cities, everything John Malone does etc etc.

They all behave like private equity in some way..they get a cheap, long-term source of financing (in berkshire's case, negative) and plow it into assets that earn relatively high rates of return.  Of course, some things aren't leveragable and some are.  Some structures are riskier for the borrower, some aren't.  (covenant lite, great for borrowers, dumb for lenders). 

I'm not advocating for margin....because that is marked-to-market, and recourse.  the worst kind.  I'll repeat that. MARGIN BAD.

I would love however to issue 10 year term bonds at 2% and plow it into berkshire which may earn 10-15% for example.  in 10 years my cost of financing would cummulatively be 21% (1.02^10), while Berkshrie may have appreciated 159% (1.1^10)....or a 138% spread, no equity down.

If I could short US treasuries, that's effectively borrowing at the yield, today at 1.76%.  I'll take as much of that as you'll give me.

Not calling a market top just being sarcastic. I'm just saying it's bad portfolio management to lever up on the long side with stretched valuations. 
Title: Re: Getting leverage
Post by: LC on May 19, 2016, 11:17:08 AM
Not calling a market top just being sarcastic. I'm just saying it's bad portfolio management to lever up on the long side with stretched valuations.

Well, they go hand in hand, righ?

It's easy to lever up because rates are low. And valuations are stretched because rates are low.

When rates are high, it is harder to lever up, but valuations will be cheaper.

So really you want to look at the spread, right? Use leverage when the spread is high and delever when the spread comes down.

Title: Re: Getting leverage
Post by: Shooter MacGavin on May 20, 2016, 03:41:27 AM
Not calling a market top just being sarcastic. I'm just saying it's bad portfolio management to lever up on the long side with stretched valuations.

Well, they go hand in hand, righ?

It's easy to lever up because rates are low. And valuations are stretched because rates are low.

When rates are high, it is harder to lever up, but valuations will be cheaper.

So really you want to look at the spread, right? Use leverage when the spread is high and delever when the spread comes down.

LC,

really well put.

every company uses leverage.  No retailer would be in business without trade financing.  they pay nothing for it.   no bank would be in business without leverage.  They use cheap deposits as a cost of financing.  Most companies pay their employees every two weeks to a month.  That's free leverage.  leverage isn't necessarily bad for companies or investors.  badly structured leverage is bad. duration mismatch is bad. Margin is bad.
Title: Re: Getting leverage
Post by: wachtwoord on May 20, 2016, 04:03:47 AM
I think margin is good as long as you keep it low relative to colletoral (your portfolio).
Title: Re: Getting leverage
Post by: scorpioncapital on May 23, 2016, 08:36:20 PM
And add in a buffer for potential market drops. A 1.3x margin ratio can quickly jump to 2x in a recession.
Title: Re: Getting leverage
Post by: wachtwoord on May 24, 2016, 02:15:22 AM
And add in a buffer for potential market drops. A 1.3x margin ratio can quickly jump to 2x in a recession.

I'm at 1.1 now and dont feel comfortable with any higher. In fact I prefer around 1.05 because I hold quite a few illiquid stocks. I'll surely lower it through this year.
Title: Re: Getting leverage
Post by: Schwab711 on May 28, 2016, 01:29:53 PM
And add in a buffer for potential market drops. A 1.3x margin ratio can quickly jump to 2x in a recession.

I'm at 1.1 now and dont feel comfortable with any higher. In fact I prefer around 1.05 because I hold quite a few illiquid stocks. I'll surely lower it through this year.

What is the purpose of 1.05x - 1.10x leverage? What are your expected returns right now that is worth the costs/risks (I'm assuming no margin call)?
Title: Re: Getting leverage
Post by: wachtwoord on May 29, 2016, 05:39:11 AM
And add in a buffer for potential market drops. A 1.3x margin ratio can quickly jump to 2x in a recession.

I'm at 1.1 now and dont feel comfortable with any higher. In fact I prefer around 1.05 because I hold quite a few illiquid stocks. I'll surely lower it through this year.

What is the purpose of 1.05x - 1.10x leverage? What are your expected returns right now that is worth the costs/risks (I'm assuming no margin call)?

Costs are very low with current margin rates and by keeping the leverage low, risk is also very limited in my opinion. I want the risk of being margin called to be almost zero while still taking advantage of the low margin rates.

What's your opinion?
Title: Re: Getting leverage
Post by: scorpioncapital on May 29, 2016, 09:32:06 AM
Leverage should be matched with suitable assets when the rate cannot be locked in (most margin investors have a variable rate). So for example, a good use of leverage is a diversified arbitrage portfolio that runs off over a period of 1 year, or some special situations in fixed income maturing or convertible shortly. Slightly less suitable is a solid, very large company with a 25% maintenance requirement - maybe like Berkshire. The least suitable is pretty much every stock that you may have to hold for many years as a long term investment if rates rise or the business does not perform as expected or you misjudge.
Title: Re: Getting leverage
Post by: hillfronter83 on February 26, 2018, 08:01:54 AM
Has anyone here used loan from 401k plan as leverage? It seems to be a good strategy to get some leverage. Since my personal portfolio is all stock, I'm pretty conservative in 401k, most of the fund are invested in short term bond/money market type of funds which returns around 3.5% annually. I can loan money for about 4.5% from 401k.
Title: Re: Getting leverage
Post by: stahleyp on February 26, 2018, 10:25:33 AM
I wouldn't bother with a 401k loan for a few reasons. 

1) it's not tax deductible (though to be fair most of the loan is paid back to yourself - you'll want to see the fees the plan keeper chargers). 

2) loans are usually pretty small (maxes out at the lesser $50,000 or 50% of account value).

3) I'm pretty sure you don't keep the investments in the plan. So you're not even getting the money from the bonds in this case.
Title: Re: Getting leverage
Post by: Shooter MacGavin on February 26, 2018, 12:37:55 PM
Has anyone here used loan from 401k plan as leverage? It seems to be a good strategy to get some leverage. Since my personal portfolio is all stock, I'm pretty conservative in 401k, most of the fund are invested in short term bond/money market type of funds which returns around 3.5% annually. I can loan money for about 4.5% from 401k.

hillfronter83, out of curiosity, do you keep your 401k in money market type funds because you are close to retirement age?  You don't have to answer this question if you don't want to but to me I'm not sure why anyone not close to retirement age wouldn't want to tax advantage of tax deferral within their 401k, so just wondering...
Title: Re: Getting leverage
Post by: thepupil on February 26, 2018, 12:52:24 PM
Leverage should be matched with suitable assets when the rate cannot be locked in (most margin investors have a variable rate). So for example, a good use of leverage is a diversified arbitrage portfolio that runs off over a period of 1 year, or some special situations in fixed income maturing or convertible shortly. Slightly less suitable is a solid, very large company with a 25% maintenance requirement - maybe like Berkshire. The least suitable is pretty much every stock that you may have to hold for many years as a long term investment if rates rise or the business does not perform as expected or you misjudge.

EDIT: I quoted scorpion from May 2016 but meant to quote hillfronters question about using a 401k loan from Feb 2018.

Nope, because they come due if/when you leave your employer for voluntary/involuntary reasons. I think the tax bill changed this to delay it a bit, but the point still stands. It can go from a 5 year amoritizing loan to a 0-1 year loan really quickly. This creates a bad scenario where  you can lose your job (which may be correlated to the economy/stock market) AND effectively be forced seller of whatever you are levering to buy.

Also some plans prevent new contributions while there is a loan, making the foregone tax savings equal to a very high interest rate for a small loan.
Title: Re: Getting leverage
Post by: hillfronter83 on February 26, 2018, 01:32:42 PM
Leverage should be matched with suitable assets when the rate cannot be locked in (most margin investors have a variable rate). So for example, a good use of leverage is a diversified arbitrage portfolio that runs off over a period of 1 year, or some special situations in fixed income maturing or convertible shortly. Slightly less suitable is a solid, very large company with a 25% maintenance requirement - maybe like Berkshire. The least suitable is pretty much every stock that you may have to hold for many years as a long term investment if rates rise or the business does not perform as expected or you misjudge.

Nope, because they come due if/when you leave your employer for voluntary/involuntary reasons. I think the tax bill changed this to delay it a bit, but the point still stands. It can go from a 5 year amoritizing loan to a 0-1 year loan really quickly. This creates a bad scenario where  you can lose your job (which may be correlated to the economy/stock market) AND effectively be forced seller of whatever you are levering to buy.

Also some plans prevent new contributions while there is a loan, making the foregone tax savings equal to a very high interest rate for a small loan.

[/quote]

hillfronter83, out of curiosity, do you keep your 401k in money market type funds because you are close to retirement age?  You don't have to answer this question if you don't want to but to me I'm not sure why anyone not close to retirement age wouldn't want to tax advantage of tax deferral within their 401k, so just wondering...
[/quote]

Thanks everyone. It's always nice to listen to wisdom of this board! The reason I'm asking is that a recent investment opportunity requires me to come up with a big chunk of cash. The expected return is about 15-30% within a couple of months period. I'm thinking about borrowing against the 401k with the intention of pay back within a couple of months. Then I thought about using this loan for some short term MA arbitrage opportunity, etc.

And I'm not close to retirement age yet. The reason I keep 401k in safe investments is that I'm pretty aggressive in personal accounts and IRA. And my 401k doesn't provide many attractive options other than index funds.
Title: Re: Getting leverage
Post by: james22 on February 26, 2018, 07:01:40 PM
With direct deposit of my paycheck, a local bank will loan me a year's salary at ~3.5% (they then recover 25% of every paycheck until paid off).

I'll probably take advantage of in any significant correction, BRK falls to 1.2 P/B, etc.
Title: Re: Getting leverage
Post by: LR1400 on April 13, 2018, 08:19:51 AM
What are thoughts on just buying a levered ETF if you want to use leverage?

Disclaimer. I have only seen this recommended I have not researched in depth. Initial research points to them being poor.

Title: Re: Getting leverage
Post by: Shooter MacGavin on April 13, 2018, 08:53:21 AM
What are thoughts on just buying a levered ETF if you want to use leverage?

Disclaimer. I have only seen this recommended I have not researched in depth. Initial research points to them being poor.

There is really no reason to do this if you are managing your own money and purchasing securities you like in an IB account.  You can get the same or custom leverage with IB (if you want) and you don't need to buy a basket of securities.  You can even hedge somewhat by buying puts.  The hit to your equity is basically the same.  You stand the same chance of getting impaired. 

Levered Funds also have higher expenses and fees and if they're taking their cut once a month or once a quarter, and the assets are down (so down even more due to the leverage), it's going to be a bigger dollar bite out of your principal.

I'm all for as much cheap, long-dated, non callable leverage as possible. The same way private equity does it.  Keep all the upside, pass on the downside.  pat themselves on the back for their high IRRs.  But i haven't found a great way to do it (besides owning good companies that know how to issue that kind of debt.) 
Title: Re: Getting leverage
Post by: bennycx on May 08, 2018, 08:59:46 AM
Say I have a very concentrated portfolio of stocks in IB. What are the pros and cons of these 2 options of getting leverage?
1. Portfolio Margin at IB -- i'm not sure what the typical initial and maintenance margin is needed for say a basket of 3 stocks
2. 5 year personal loan i can obtain at low 3% -- i'm pretty sure i can beat 3% p.a. for the next 5 years
Title: Re: Getting leverage
Post by: Mondegreen on May 08, 2018, 09:35:51 AM
The margin loan from IB will be cheaper but margin is a terrible way to borrow money.

A longer term loan is a better way to borrow, but make sure you run the maths on it (as you are paying off principle throughout, the potential return wasn't that appealing in my case). You will also likely have to lie about why you want the loan.

IMO the best way to borrow cheaply on a relatively small scale is through 0% interest credit cards. If you are intelligent and spread it across multiple cards you can borrow a reasonably significant amount of money for free.

Most importantly, make sure any borrowed money is comfortably covered by earnings/equity in your portfolio. It's not worth getting into financial trouble over
Title: Re: Getting leverage
Post by: Dynamic on May 10, 2018, 01:50:50 AM
Margin is something to be cautious about because of the possibility of a margin call at the worst possible moment.

I believe Interactive Brokers will lend 25% of your portfolio overnight (and up to 400% temporarily during trading hours).

If you borrow 25%, a small decline in prices will cause a margin call.
If you borrow 10% you can presumably withstand a 50% decline in your portfolio market prices without a margin call. Even a flash crash on top caused by algorithmic traders is likely to be OK if they pull the plug and the market recovers before the next trading day.

It is possible that a market panic could be compounded by greatly increased long term risk-free interest rates and that stock prices for many firms could drop more than 50% quite rationally taking perhaps 10 years to recover via growth in fundamentals. Try to think about these unlikely scenarios and whether you could avoid a forced sale at the worst time.

Personally, I'd be very wary of exceeding 10% margin in normal times for fear of having to make panic decisions to satisfy the lending criteria (and even then I'd like to have other resources available to cover the margin loan). A margin call only has to happen once in a lifetime to wipe out a significant chunk of your portfolio or even put you at zero. Non-callable long-term leverage is far safer.
Title: Re: Getting leverage
Post by: scorpioncapital on May 13, 2018, 03:13:44 AM
You can easily get very high and fixed rate leverage. Buy a highly indebted company on cash:)
 The look through leverage can be much higher than you can achieve on your own. However, one should ask if a company has to use vast amounts of leverage, perhaps a utility, or a bank to get a regular return to you of 10-12%, is it a really great business? And would you want to double leverage a company like that? My rule is if the company has high look through leverage I buy it on cash, if it has no leverage, I will use a little bit of leverage on the portfolio end. That's why I think Berkshire is so powerful. It has long term fixed rate leverage via float and on top of that it invests in companies expecting to get a 10% unlevered return. I wouldn't necessarily double leverage a stock like that, but Berkshire is a strong exception.
Title: Re: Getting leverage
Post by: Shooter MacGavin on July 03, 2018, 03:55:30 PM
to revisit this topic, has anyone ever traded CFDs?

I think they're not allowed on US exchanges but IB will let you trade them (i believe) on non us exchanges. 

I'm thinking of maybe partitioning an account and having 1% of my networth in there as a speculative account and buying some CFDs on some deeply undervalued stocks.  You can get seriously high leverage using CFDs (which also means you can blow up easily of course, hence the partition).
Title: Re: Getting leverage
Post by: Dynamic on July 03, 2018, 11:10:59 PM
I tried a demo account with cityindex.co.uk recently - it has just expired. I tried some CFD and DFT trading and more than doubled the notional £10,000 within the 12 week trial using about 15* leverage while keeping the "margin" indicator below 200%. These contacts are interesting to UK traders because they're betting and are exempt from UK Capital Gains Tax.

They also accept payment by debit or credit card to fund the account, I read.

With a 36 month interest free purchase period on a credit card there's the potential to obtain ridiculous leverage on a limited initial deposit. It's also easy to blow up.

The CFD seems to show near real time market prices for the underlying with tight spread that might mirror the bid ask spread. I found it difficult to follow the overnight interest charges there, though I didn't persevere. DFT seems to bake in time value interest until expiry and have a wider spread and represent 100 stocks (at least on some US securities) so perhaps it's based on underlying options prices lasting up to 3-6 months or the stock price plus effective interest to expiry.

There seem to be many other similar platforms I see advertised on YouTube too.

I might consider opening a real account when I'm very sure about the downside and keep checking of my leverage to reduce the chances of blowing up in the short term.
Title: Re: Getting leverage
Post by: Shooter MacGavin on July 05, 2018, 07:43:22 AM
I tried a demo account with cityindex.co.uk recently - it has just expired. I tried some CFD and DFT trading and more than doubled the notional £10,000 within the 12 week trial using about 15* leverage while keeping the "margin" indicator below 200%. These contacts are interesting to UK traders because they're betting and are exempt from UK Capital Gains Tax.

They also accept payment by debit or credit card to fund the account, I read.

With a 36 month interest free purchase period on a credit card there's the potential to obtain ridiculous leverage on a limited initial deposit. It's also easy to blow up.

The CFD seems to show near real time market prices for the underlying with tight spread that might mirror the bid ask spread. I found it difficult to follow the overnight interest charges there, though I didn't persevere. DFT seems to bake in time value interest until expiry and have a wider spread and represent 100 stocks (at least on some US securities) so perhaps it's based on underlying options prices lasting up to 3-6 months or the stock price plus effective interest to expiry.

There seem to be many other similar platforms I see advertised on YouTube too.

I might consider opening a real account when I'm very sure about the downside and keep checking of my leverage to reduce the chances of blowing up in the short term.

Interesting.  Thank you.  Never heard of DFT before. Never used a virtual account before.  But maybe iíll Give it a try
Title: Re: Getting leverage
Post by: Dynamic on July 05, 2018, 09:14:04 AM
Ah, I could be wrong and that CFD profits ARE taxable (see this 2011 article (https://moneyweek.com/are-cfds-better-than-spread-bets-11506/)).

It's Spread Bets (DFTs = Daily Funded Trade) that aren't taxable (see here for the types of trades (https://www.cityindex.co.uk/trading-academy/trading-with-city-index/types-of-trades/))

This CMC Markets page (https://www.cmcmarkets.com/en-gb/learn-spread-betting/spread-betting-vs-cfd) indicates that Spread Bets are only available to customers in the UK or Ireland, and are exempt from Capital Gains Tax and stamp duty. CFDs are available to customers globally are exempt from stamp duty but subject to CGT. Maybe I'll try a dummy account with them at some point too.

Here are some dummy trades I made in Berkshire Hathaway, just because I hold it in real life and follow it closely, during my dummy trial account with CityIndex:

1st May: BRK.B DFT, bought 3 at 19,407.0 each (presume currency=GBP). At time BRK.B was about $194.070.
11th May: current price = 20,101.5, P&L = 2083.50 GBP (=3 x 694.50 = 300 x 6.945). At time BRK.B was about $201.080 (within a minute or two). Initial exposure to about 58,221 GBP as currency of P&L seems to be GBP for an underlying in USD.

1st May: BRK.B Jun18 Spread, bought 3 at 19,478.0 each (presume currency=GBP). At time BRK.B was about $194.070.
11th May: current price = 20,166.3, P&L = 2064.90 GBP (=3 x 688.30 = 300 x 6.883). At time BRK.B was about $201.080 (within a minute or two). Initial exposure to about 58,221 GBP as currency of P&L seems to be GBP for an underlying in USD.

1st May: BRK.B Sep18 Spread, bought 3 at 19,641.6 each (presume currency=GBP). At time BRK.B was about $194.070.
11th May: current price = 20,351.2, P&L = 2,128.80 GBP (=3 x 709.60 = 300 x 7.096). At time BRK.B was about $201.080 (within a minute or two). Initial exposure to about 58,221 GBP as currency of P&L seems to be GBP for an underlying in USD.

1st May: BRK.B CFD, bought 150 at 194.070 each (currency=USD). At time BRK.B was about $194.070.
11th May: current price = 201.08. x150 = 30,162, P&L = 1051.50 USD (=150 x 7.01). At time BRK.B was about $201.080 (within a minute or two). Initial exposure to about 29,110.50 USD as in USD as underlying.

I had gone into these four trades with a notional 13,010.17 GBP in the dummy account (I'd made 30% gain already) then closed all positions before doing this trial.
From there I took exposure to £175,579.80 GBP Sterling, plus a further $29,110.50 in USD, which was about £197,03.33 of GBP equivalent exposure. That total exposure is 15.14 x £13,010.17 cash. That is some enormous leverage.

If I ever use such an account for real, I'll be certain to rely on my own calculations of effective leverage as I simply don't understand their margin calculation.

My Margin indicator showed 197%, and the Total Margin shown was £10,204.54 in GBP. Because these seem to be difference bets, the margin seems to bear no relation to the total effective exposure to the underlying security.

My total unrealised gain on those 4 positions was £7,048.40 in GBP and I soon realised that sort of gain in the dummy account, to show over £20,000 with some sporadic trading when I felt the price was a little bit low over about a 12 week trial.

I was fortunate to miss out on the major decline in BRK.B to around 186-188 which could easily have wiped me out, I imagine, but I was glad to put on a variety of available positions and see what effect they had to really gauge how it works.

I hope this helps anyone interested to understand how it works. The help desk and the person who called me a few times to ask how I was getting on, can apparently reset your dummy account if you wipe out during the trial period.

BTW, the CFD prices seemed to be very close to live prices for BRK.B and AAPL, probably with a similar spread, though I didn't have a live pricing subscription active to be sure. I did some real buying an selling in my ISA account (which only allows me to hold cash in GBP) and noticed that "At Market" quoted prices I achieved (or was offered and declined), give or take my estimate of GBP:USD exchange rate, seemed to match quite closely the prices I calculated from the CFD pricing. I think the Market Open prices I saw later in the day, were also very close to the CFD price when the market opened.

All in all the power of the leverage is quite dramatic, even a little scary. A $7.01 shift in BRK.B's price is only 3.6% on the starting stock price of $194.07, but was about 54% change on £13,010.

They mention that losses can exceed your deposits. You are actually required to pay the debt to them if you go seriously negative (especially a problem that can occur out-of-hours), but they can also close your positions as they decline and your live balance is not enough to meet the margin requirements (e.g. 5% of the trade value, meaning 20x leverage).

This page on the risks (https://www.cmcmarkets.com/en-gb/learn-cfd-trading/risks-of-cfds) could be a helpful read for anyone considering it. The risks you can take on are enormous.
Title: Re: Getting leverage
Post by: Jurgis on July 05, 2018, 09:22:28 AM
I was fortunate to miss out on the major decline in BRK.B to around 186-188 which could easily have wiped me out, I imagine

Kids, don't do this at home.  8)  ;D
Title: Re: Getting leverage
Post by: Shooter MacGavin on July 05, 2018, 09:36:12 AM
I was fortunate to miss out on the major decline in BRK.B to around 186-188 which could easily have wiped me out, I imagine

Kids, don't do this at home.  8)  ;D


Dynamic,

Thanks for the trading diary. 

Jurgis,

Don't worry, he did it with a virtual account!

It could be fun for like a tiny percentage of your net worth though to really see how much upside you could get.  The CFDs basically remind me of the bucket shops in Reminiscence of a Stock Operator. Ha.  No economic purpose besides ridiculous speculation.
Title: Re: Getting leverage
Post by: Jurgis on July 05, 2018, 09:44:48 AM
I was fortunate to miss out on the major decline in BRK.B to around 186-188 which could easily have wiped me out, I imagine

Kids, don't do this at home.  8)  ;D
.... 

Jurgis,

Don't worry, he did it with a virtual account!

...

I know, I know.

I just find it extremely funny that you can get wiped out by ... hold it ... hold it ... a major decline of BRK ... which is one of the most stable stocks ... and not in bubble ... and the decline was less than 10%...

Sorry I'm just  ;D  ;D  ;D ROFL.
Title: Re: Getting leverage
Post by: Dynamic on July 05, 2018, 10:40:28 AM
When I worked out my effective exposure in the dummy account I was shocked at how easily it was possible to take such risks. A real taste of the day trader's experience too with the flashing prices and the short term charts.

If I ever used this type of product when I thought the downside was very well protected and the risk-reward balance heavily in my favour I would be very careful to calculate my effective exposure and perhaps to institute a stop loss to prevent losses in excess of my original deposit.

I think I would only use it in a very extreme favourable circumstances and with a lot of careful thought about leverage and downside risk.
Title: Re: Getting leverage
Post by: CorpRaider on August 02, 2018, 10:59:10 AM
Here's something maybe for you guys to check out a 1.5 levered 60/40 portfolio via an etf using laddered treasury futures (seems pretty interesting, but maybe will get gored if bonds crater):

https://www.wisdomtree.com/etfs/asset-allocation/ntsx

Expense ratio is .20%.  Not sure what the trading costs in the futures would be.  You guys probably know better than I but I think they are pretty small (maybe offset by cash interest on collateral?).  Right?

Seems kind of like some of the PIMCO Index plus funds, but the ETF is better for equity holdings in taxable and is 60/40.  And of course the ER is .20%.

Disclosure: long a token/stub position in $WETF (and planning to take a look if stupidity from Fido non-announcement continues in asset manager space).
Title: Re: Getting leverage
Post by: Dynamic on August 13, 2018, 05:48:21 AM
I was just looking into CFD trades again, and it seems that EU rules have been tightened to point out the risks to retail investors and protect them rather more against owing sums in excess of the amount deposited. I believe professional investors can still use CFDs in the original way, obtaining enormous leverage. I imagine the same rules may well apply to DFT (Spread Bets) in the UK and Ireland too, but I haven't looked into it.

The new rules brought in by ESMA (https://www.esma.europa.eu/press-news/esma-news/esma-agrees-prohibit-binary-options-and-restrict-cfds-protect-retail-investors), which an Interactive Brokers overview article (https://ibkr.info/article/3241) explains have just come into force, and ESMA has a FAQ (PDF) (https://www.esma.europa.eu/sites/default/files/library/esma71-98-125_faq_esmas_product_intervention_measures.pdf) which explains that these rules apply for an initial period of 3 months that may be renewed later and also go into what happens under Brexit.

In summary:
Title: Re: Getting leverage
Post by: Shooter MacGavin on August 17, 2018, 01:52:17 PM
I was just looking into CFD trades again, and it seems that EU rules have been tightened to point out the risks to retail investors and protect them rather more against owing sums in excess of the amount deposited. I believe professional investors can still use CFDs in the original way, obtaining enormous leverage. I imagine the same rules may well apply to DFT (Spread Bets) in the UK and Ireland too, but I haven't looked into it.

The new rules brought in by ESMA (https://www.esma.europa.eu/press-news/esma-news/esma-agrees-prohibit-binary-options-and-restrict-cfds-protect-retail-investors), which an Interactive Brokers overview article (https://ibkr.info/article/3241) explains have just come into force, and ESMA has a FAQ (PDF) (https://www.esma.europa.eu/sites/default/files/library/esma71-98-125_faq_esmas_product_intervention_measures.pdf) which explains that these rules apply for an initial period of 3 months that may be renewed later and also go into what happens under Brexit.

In summary:
  • CFD brokers have to prominently display the percentage of customers who lose money on CFDs, often between 60 and 80% from a few sites I've seen, IBKR being 62% at time of writing, which is among the lowest losing rates.
  • Initial effective leverage seems to be limited to 5x for stock CFDs, 10x for minor index CFDs, and 20x for major index CFDs and minor forex pairs, 30x for major forex pairs and just 2x for cryptocurrencies. Maintenance margin is half of initial margin, so I guess it won't force automatic liquidation until half the money put up has been lost. So the days of over 15x leverage on BRK.B as I outlined in my dummy account experience with CityIndex are gone and the risks are much reduced!
  • This refers to maximum leverage. The broker may apply their own limit based on historic volatility or similar factors of their choosing.
  • Negative Equity Protection. If you have a brokerage account like at IBKR, funds based on your initial margin will be transferred to a segregated account for CFD trading. Your other portfolio assets will not be liquidated to satisfy a CFD margin deficit, though your CFD positions may be liquidated to satisfy a regular margin deficit. Due to this change increasing their risks, especially in rare market conditions, IBKR charges a 1% higher financing spread on CFDs than they used to. It is possible to top up your margin, at least with some providers.

thanks a lot for posting here.