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I have been using Margin Lending for I guess maybe a dozen years but right now do not have one cent on my margin borrowing account as I have a view that cash is going to be handy to take advantage of opportunities in the markets over the coming year. I remain a fan of margin accounts – used judicially.
To use ML the timing of your entry into the market must be very sound. Let’s use BHP as an example. If you bought BHP on ML say in July this year – well done you picked the bottom – do you sell now? Let’s say you were 50% geared for ease of illustration ( as most lenders lend much more on blue chips like BHP) then the 33% gain on BHP gives you a profit of say about 60% after taking into account costs. Not bad money, but let’s say that BHP eventually follows the ANZ path that I describe below?
Assume you bought a 1,000 ANZ a week earlier and paid $19.00 with gearing of 50%. Contrast that with buying 1,000 with no gearing as outlined in the table below:
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MARGIN LENDING |
NO MARGIN LENDING |
| BUY 100O ANZ SHARES @ $19.00 |
$19,000 |
$19,000 |
| CASH OUTLAY (based 50% gearing) |
$9,500 |
$19,000 |
| VALUE IF ANZ PRICE FALLS TO $16.00 |
$16,000 |
$16,000 |
| REPAY LOAN |
$9,500 |
$0 |
| NET POSITION |
$6,500 |
$16,000 |
| CASH LOSS |
$3,000 |
$3,000 |
| PERCENTAGE LOSS |
32% |
16% |
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The percent of capital lost compounds with gearing. Where you outlaid your own cash (and I agree there is a “cost” for that but I want to keep the example really simple) you lost 16% where as were you geared you lost 32%. Theoretical? Well yes, but also very real – there are numerous investors who have done just that and will hold on even when ANZ hits $16.00 because their broker or fund manager have told them that you need to give stocks time in the market.
Bollocks it is all about market timing when it comes to Margin Lending. How do I know – the school of hard knocks!
Enjoy the ride.
Tom Scollon
Editor
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