What Is Your Cost Of Capital? How Much Margin Do You Use?
Q: Another question is what is your highest over night, over week, margin you ever use? For me I only use up to 100% margin. Since I can borrow up to 200% of my net worth, I have to decide if I want this long term loan or not. All will be invested in trading stocks.
A:
When I was a little tyke first starting out trading stocks (more
than four decades ago), I did some of my trading on 1% margin,
i.e. 9900% of my trading capital was borrowed. Since those bad
old days, I've rarely gone as much as 20% borrowed money. In the
past 25 years or so, I've never gone into margin at all (unless
you consider the t
money overnight to cover extra purchases long before T+3 settlement
to be "on margin", in which case there was one day in the past six
years when I was technically on margin overnight to the extent of
less than 1% of my total portfolio value).
Understanding the risks involved in owning stocks at all, as
I do after more than 42 years of trading them, there is no way in
hell, nor in pair of dice, that I would be willing to borrow money
or use margin for holding or maintaining such ownership.
It is still pretty hard for me to calculate the projected return. I do expect
a minial 10% per 6 months. I would say I can have, on average, 20% per 6
months, but that is just my past history, both in bull and bear. I was tempted
for a 10% loan back then, even 15%, but I let it go. A 5% loan really looks
cheap for me. I do need leverage in the stock market. I tend to manage the risk
OK by frequent trading etc... I don't know. You got 42 years trading. Do you
trade actively, or just buy and hold for long term? I am both a value
investor, and a (extremely) short term technical trader. I have
programming skills, so I am able to do what 4 traders can do all by myself. I
want to double my fund this summer by getting more capital. My target is, I
can manager $5M to $10M within a few years. Beyond that number, I have to
work in a team.
An alternative to getting involved in a team is recognizing your
own time limitations, and doing only the kind of trading that you
actually have the TIME to do. Remember, no matter how much
capital you have, your supply of time is both severely limited,
and quite specific. That is, the reason why I currently use a
trading horizon of 3-5 YEARS and do nothing whatsoever in the way
of short term technical trading (anymore). Well okay, "very little"
would be a more accurate response since under extreme market
conditions, such as the crash of the Nasty Duck, I was doing some
things intended to help ease the slide and make it less destructive
on the rest of the world than it otherwise might have been (within
my own means, of course). I have strict limitations set in advance
of no more than 5% of my total portfolio ever to be involved in
those things. So I did some such things BRIEFLY for a year or so
during the crash of the NASDAQ. No such situations are currently
relevant, so there are no such activities on my part. The reason I
generally don't do any such short term technical trading is that the
ROT (return on time) is waaaaayyy too low, even if many newbies get all
caught up with the illusion of spectacular ROIs.