Thoughts on Leverage

| March 15, 2018
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According to the US Financial Industry Regulatory Authority, investors have borrowed a record $642.8 billion against investment portfolios. The leverage from this margin debt is a bid to increase returns. However, it leaves investors vulnerable if asset prices decline. And they may have to sell into a falling market. You never want to be in a position when you are FORCED to sell. Maintain your ability to sell when you WANT to.

Even Warren Buffett chimed in with timely comments on using leverage to buy stocks, even his stock in Berkshire Hathaway:

“This table (referencing four 35%+ declines in Berkshire stock) offers the strongest argument I can muster against ever using borrowed money to own stocks. There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.”

The large volume of margin debt is clear evidence that many speculative borrowers are still vulnerable. Either way, this is where the Federal Reserve will have concern about financial stability.

 

Stay Tuned, Disciplined & Patient! {TJM}

The Investor & Character Equation (ICE) | S + R = O

 

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