Alright, let’s be honest. Have you ever borrowed money to invest? All the investing rules say not to, but hey, isn’t that what buying investment property is effectively doing? Although we’ve been told that it’s okay to borrow for real estate because prices only go up and are more stable, I’m not so sure that principle will apply over the next five to ten years.
I’ll be honest, after the stock market crash of 2000 I lost everything. I had just paid a huge tax bill from my investment account and didn’t want to sell stock to pay the taxes. So, I was on margin and invested in tech stocks (I was living in San Francisco and worked as a stock analyst for Internet stocks) when the market crashed and tech stocks fell by 90%. When I was down to my last few dollars and tech stocks were trading for only a few dollars (down from several hundred), I couldn’t take it anymore and couldn’t face selling my portfolio with no chance to make it back. I took out a home equity line of credit for $190,000 and, yes, put it in the market. My timing wasn’t perfect and I lost a lot of it before I made any back, but I held onto some of my positions for the next 10 years and ended up making multiples more on my investment than the price I paid on my loan.
Since then, I’ve used margin, or borrowed, to invest in stocks on several occasions. Usually when I feel strongly that we are close to a bottom. In fact, I’ve gotten so used to using margin that it doesn’t really bother me. Would I recommend this approach for a normal investor? Heck no! But for me, it’s hard to differentiate between borrowing to buy stocks and borrowing to buy anything else. I’d rather not do it, but leverage can magnify your returns. Unfortunately, it usually magnifies them to the downside, as one can never really call the next market bottom.
So, if you are thinking about using margin debt for your stock account, be careful! It is a slippery slope between using it once and using it a lot!