Getting leverage

[glorysk87]

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. 

[LC]

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.

[Shooter MacGavin]

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.

[wachtwoord]

I think margin is good as long as you keep it low relative to colletoral (your portfolio).

[scorpioncapital]

And add in a buffer for potential market drops. A 1.3x margin ratio can quickly jump to 2x in a recession.

[wachtwoord]

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.

[Schwab711]

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)?

[wachtwoord]

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?

[scorpioncapital]

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.

[hillfronter83]

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.