Folly or fortitude?

[BIRMANBOY]

How do other investors view a strategy of borrowing from the bank to fund share purchases? On another thread I read someone had borrowed several hundred thousand (mortgage on their home) )to buy shares. To me this just seems so foolhardy and risky. The purchase was for a relatively new entrant but is not a speculative share and does pay a decent dividend so I can see why they have done it but I don't see that this strategy as being something I would ever try myself or recommend as being part of an investment regime. How many others have had success (or failure) doing this? I/m not expecting many to fess up but somewhat curious.. I mean the margin of profit cannot be much between mortgage and returns from dividends so I can see how you could be consequently left very exposed in a downward or sluggish market. Seems very close to gambling to me?

[zb3]

Borrowing to invest at nz mortgage rates isn't wise, esp for individual stocks. However while young, borrowing at better rates and investing in widely diversified etfs actually reduces risk over time.

[BIRMANBOY]

I'm not sure I agree with you however I suppose it depends on what rates you can borrow at, what returns you get and of course whether the margin of difference is worth the risk. I suppose a mathematical study could do a theoretical sample of its effectiveness but I just don't believe that borrowing to invest is what they had in mind when the term "investment" was coined. Somehow seems contradictory in concept. But then I aint young..maybe that's my problem.
Borrowing to invest at nz mortgage rates isn't wise, esp for individual stocks. However while young, borrowing at better rates and investing in widely diversified etfs actually reduces risk over time.

[zb3]

I'm not sure I agree with you however I suppose it depends on what rates you can borrow at, what returns you get and of course whether the margin of difference is worth the risk. I suppose a mathematical study could do a theoretical sample of its effectiveness but I just don't believe that borrowing to invest is what they had in mind when the term "investment" was coined. Somehow seems contradictory in concept. But then I aint young..maybe that's my problem.

There has been research done that shows that low levels of leverage are prudent even into your early 50s. There is a correlation between returns on asset classes but no correlation between returns of different years. In order to achieve the best chance of success basic probability says you want to have the same amount invested in the stock market every year, otherwise the years where you have larger amounts invested (ie when you're older) will dominate your payoff. If the stock market performs badly in these years your return will end up far lower. Through leveraging while young you better spread your risk over time, and can ramp down your equity exposure closer to retirement. Employing such a strategy actually reduces volatility of expected outcomes. Check out the book lifecycle investing by Ian ayres and Barry nalebuff if you are interested. It's a very interesting read and will totally change your perspective on leverage.

[BIRMANBOY]

Totally change my perspective huh...I shall certainly look forward to that ..not. :) However always like a good read so will check it out. Thanks.
There has been research done that shows that low levels of leverage are prudent even into your early 50s. There is a correlation between returns on asset classes but no correlation between returns of different years. In order to achieve the best chance of success basic probability says you want to have the same amount invested in the stock market every year, otherwise the years where you have larger amounts invested (ie when you're older) will dominate your payoff. If the stock market performs badly in these years your return will end up far lower. Through leveraging while young you better spread your risk over time, and can ramp down your equity exposure closer to retirement. Employing such a strategy actually reduces volatility of expected outcomes. Check out the book lifecycle investing by Ian ayres and Barry nalebuff if you are interested. It's a very interesting read and will totally change your perspective on leverage.

[Harvey Specter]

I have a margin lending account from ASB (less than 20% of investments) which varies from 0-100% drawn down, and also a small loan secured over my PPOR (less than 20% of investments) which is fully drawn (this is a legacy loan from a rental property which I sold but didn't have to repay as the security was over the PPOR, not the rental). I am happy with less than 30% gearing.

The margin lending account is floating rate +50bp and the small loan is floating rate -75bp. By having the margin account, I do get a free nominee service from ASB (not sure if it is more hassle than doing it myself). Due to the difference in interest rates, I keep the margin account as low as possible.

I have a lot of stable yield stocks (power co's etc) and a bit of growth. I monitor to ensure my return on the portfolio is greater than the interest rate.

[Biscuit]

I think for most people, you cannot get rich without borrowing. Most of us initially borrow for property and get ahead that way as there is probably less volatility in property and you are less likely to end up jumping out the 8th floor window in despair when everything goes South. I've bought shares effectively on debt using property as collateral, when the opportunity was too good to miss, but don't need or want to now. I wouldn't borrow anything I couldn't easily afford to lose.

[Harvey Specter]

I think for most people, you cannot get rich without borrowing. Most of us initially borrow for property and get ahead that way as there is probably less volatility in property and you are less likely to end up jumping out the 8th floor window in despair when everything goes South. I've bought shares effectively on debt using property as collateral, when the opportunity was too good to miss, but don't need or want to now. I wouldn't borrow anything I couldn't easily afford to lose.Agree.

I wouldn't say property has less volatility, just less visibility. Property is very illiquid so I'd say its volatility is much higher, you just cant see it.

Thats one think I am trying to do with my investing. In the past, I wouldn't cut my losses early. If you are borrowing money to invest, you cant afford to hold on waiting for a stock to recover. Even if you have to buy back a year later at (say) 5% higher than what you can sell it for today, you are still in the money due to the interest saved.

[Biscuit]

Agree.

I wouldn't say property has less volatility, just less visibility. Property is very illiquid so I'd say its volatility is much higher, you just cant see it.



There may be truth in that. A diversified portfolio of shares may have less volatility than an undiversified property investment. The bank would probably see the later as less risky than the former, so borrowing may be easier and cheaper.

[fungus pudding]

Agree.

I wouldn't say property has less volatility, just less visibility. Property is very illiquid so I'd say its volatility is much higher, you just cant see it.



Sort of. With property when things are tight listings dry up, so less supply keeps prices up to some extent. Would be sellers wait for better times. When the market recovers - boom - along come the vendors. The same thing happens of course with stocks, but to a far lesser degree. Many novice investors just bail according to a broker I know, and that compounds or heightens drops. That rush to all get out at once is far less likely with real estate.

[BIRMANBOY]

How appropriate that your avatar is Satan..LOL (in a hearty and slightly bemused manner, of course) From the medieval story of Faust who made a pact with the devil promising worldly goods and riches in return for signing away his soul. That's a huge leap to maintain that "most people cannot get rich without borrowing". Whatever happened to get well educated/trained and work hard?. Oh no, no no that is just so old hat...surely its so much easier just to borrow? However glad that you have outgrown your earlier position...you must be over 30 now:)
I think for most people, you cannot get rich without borrowing. Most of us initially borrow for property and get ahead that way as there is probably less volatility in property and you are less likely to end up jumping out the 8th floor window in despair when everything goes South. I've bought shares effectively on debt using property as collateral, when the opportunity was too good to miss, but don't need or want to now. I wouldn't borrow anything I couldn't easily afford to lose.

[Aaron]

Only time will tell if s/he is wise or foolish.
I have a margin facility with ASB Securities currently unused as I await the next big crash as well as a revolving mortgage which is currently paid off but I would draw down on this first as mortgage interest rates are better than margin loan rates.

I would be worried about borrowing to invest in only one company but people borrow to buy businesses all the time sometimes it is the only way to get ahead. It has been pointed out many times how leverage can boost your profits as well as wipe you out if it goes bad.

For example take Spark, say you purchased shares in this company in January at $2.10 and sold in October for say $3. If you had $50,000cash to invest you could have made $21,428 ((.9/2.1)*50,000) capital gain as well as $5,434 in dividends ($50,000/2.10=23,800shares times Mar & Sep Div .22833)
Profit $26,862
Had you utilised your margin loan to its fullest you could have bought $166,667 of Spark ($50,000/.7) $50,000 equity $116,667 debt. That is a capital gain of $71,429 and dividends of $18,107 (79,300shares * .22833) Interest on margin loan 7.2%per annum Jan to Oct $7,000.
Profit $82,536
(better check my figures they are only rough but are hopefully close)
Now add another $200,000 more shares from your revolving mortgage and I have almost convinced myself to go all in. It is just that I have held Telecom shares since they were over $6 and with dividends I may just be breaking even. I haven’t tried working it out. If I had used leverage I would have been wiped out.
If you have done some research it starts to change from gambling/speculating to high risk investing.
I don’t trust my own research or that of professional analysts no one can see the future but without some risks you aren’t going to get ahead significantly. The more you know and understand the less risk you are taking. Anyway it is almost mandatory to invest with debt in this day and age as the world central banks are suppressing interest rates while trying to boost inflation so that those pesky debts disappear over time. We wouldn’t want the savers to get ahead in life.

[BIRMANBOY]

May God have mercy on all those poor sailors who set foot on this ship:scared:
Only time will tell if s/he is wise or foolish.
I have a margin facility with ASB Securities currently unused as I await the next big crash as well as a revolving mortgage which is currently paid off but I would draw down on this first as mortgage interest rates are better than margin loan rates.

I would be worried about borrowing to invest in only one company but people borrow to buy businesses all the time sometimes it is the only way to get ahead. It has been pointed out many times how leverage can boost your profits as well as wipe you out if it goes bad.

For example take Spark, say you purchased shares in this company in January at $2.10 and sold in October for say $3. If you had $50,000cash to invest you could have made $21,428 ((.9/2.1)*50,000) capital gain as well as $5,434 in dividends ($50,000/2.10=23,800shares times Mar & Sep Div .22833)
Profit $26,862
Had you utilised your margin loan to its fullest you could have bought $166,667 of Spark ($50,000/.7) $50,000 equity $116,667 debt. That is a capital gain of $71,429 and dividends of $18,107 (79,300shares * .22833) Interest on margin loan 7.2%per annum Jan to Oct $7,000.
Profit $82,536
(better check my figures they are only rough but are hopefully close)
Now add another $200,000 more shares from your revolving mortgage and I have almost convinced myself to go all in. It is just that I have held Telecom shares since they were over $6 and with dividends I may just be breaking even. I haven’t tried working it out. If I had used leverage I would have been wiped out.
If you have done some research it starts to change from gambling/speculating to high risk investing.
I don’t trust my own research or that of professional analysts no one can see the future but without some risks you aren’t going to get ahead significantly. The more you know and understand the less risk you are taking. Anyway it is almost mandatory to invest with debt in this day and age as the world central banks are suppressing interest rates while trying to boost inflation so that those pesky debts disappear over time. We wouldn’t want the savers to get ahead in life.

[Aaron]

May God have mercy on all those poor sailors who set foot on this ship:scared:
What is the maths wrong? It is not an endorsement for borrowing to invest but if you get it right leverage can boost your returns.

Or are you still upset because I think national superannuation should be means tested like any other welfare payment. Build a bridge get over it. National won the election anyway so it isn't an issue for the next three years. National won on a policy of ignoring the affordability of national superannuation. John Key doesn't care he won't be relying on national super when he retires. Me neither after I leverage up after the next big crash. I'll keep you posted on how I get on.

[Biscuit]

...you must be over 30 now:)

Sadly, yes I am over 30. I bought my first share when I was 18 and lost more than I made in my early twenties through a couple of companies that went belly up - both with crooked management, in my opinion. I am glad I did not borrow to invest back then, and I am not advocating it as an easy way to riches! I'm very well educated and have a great job, but I'm realistic enough to know that unless you earn way more than I ever have, or are a much better investor than me, saving on its own won't make you rich. You need to borrow. A simple truth I think.

[BIRMANBOY]

I agree that saving by itself wont make anyone rich unless you happen to have a high earning capacity and low expenditures. The chances of those two components being found in the same place at the same time are so small as to be probably discounted. I just don't believe that borrowing is the answer however. I'm sure it works for many people but I would guess that more people get in trouble because of it than are saved by it. Compounding growth is the answer to how do we get rich and has the added benefit of not requiring large amounts all at once as well as not leaving behind the borrowers who made poor choices or bad decisions or just got unlucky with bad timing. Have a look at this site for some very interesting calculators http://www.thecalculatorsite.com/ However the TRUTH is such a subjective concept that I don't believe it can ever be "simple".
Sadly, yes I am over 30. I bought my first share when I was 18 and lost more than I made in my early twenties through a couple of companies that went belly up - both with crooked management, in my opinion. I am glad I did not borrow to invest back then, and I am not advocating it as an easy way to riches! I'm very well educated and have a great job, but I'm realistic enough to know that unless you earn way more than I ever have, or are a much better investor than me, saving on its own won't make you rich. You need to borrow. A simple truth I think.

[kiora]

How do other investors view a strategy of borrowing from the bank to fund share purchases? On another thread I read someone had borrowed several hundred thousand (mortgage on their home) )to buy shares. To me this just seems so foolhardy and risky. The purchase was for a relatively new entrant but is not a speculative share and does pay a decent dividend so I can see why they have done it but I don't see that this strategy as being something I would ever try myself or recommend as being part of an investment regime. How many others have had success (or failure) doing this? I/m not expecting many to fess up but somewhat curious.. I mean the margin of profit cannot be much between mortgage and returns from dividends so I can see how you could be consequently left very exposed in a downward or sluggish market. Seems very close to gambling to me?

Margin Facilities in my experience are folly particularly when the market turns.They severely impact the volatility of your portfolio and puts the decision making of your investments in the hands of the money lenders.Be very very wary.It can turn a profit into a severe loss very quickly & put you off investing for life !
On the other hand I have found a revolving credit facility over property to be very useful & profitable for the right investment.It allows your investment portfolio to benefit from rent and capital gain of property (low risk???)while benefiting from the investment in a higher risk,higher return investment such as shares.In my example, I have posted in other posts,in Infratil.Over long term increased in value at 17 % a year while paying down the drawn down facility with income.Its a win win compounding gains on gains IMHO

[BIRMANBOY]

Glad its positive for you but what happens if the market turns on you? We have had a sustained share market appreciation and most things are positive...at the moment. Shares can go south very quickly. In a recession s**t can occur in many shapes and forms...and having loaded up on debt may not be a healthy place to be.
Margin Facilities in my experience are folly particularly when the market turns.They severely impact the volatility of your portfolio and puts the decision making of your investments in the hands of the money lenders.Be very very wary.It can turn a profit into a severe loss very quickly & put you off investing for life !
On the other hand I have found a revolving credit facility over property to be very useful & profitable for the right investment.It allows your investment portfolio to benefit from rent and capital gain of property (low risk???)while benefiting from the investment in a higher risk,higher return investment such as shares.In my example, I have posted in other posts,in Infratil.Over long term increased in value at 17 % a year while paying down the drawn down facility with income.Its a win win compounding gains on gains IMHO

[Biscuit]

I just don't believe that borrowing is the answer however. I'm sure it works for many people but I would guess that more people get in trouble because of it than are saved by it.

"Saved by it"? Sounding a little religious there Birmanboy? You know you want to try it...everyone does, you could be rich...go on, just a little bite.

[kiora]

Glad its positive for you but what happens if the market turns on you? We have had a sustained share market appreciation and most things are positive...at the moment. Shares can go south very quickly. In a recession s**t can occur in many shapes and forms...and having loaded up on debt may not be a healthy place to be.

Yes if loaded up to hilt on high risk & highly volatile share/investments but for the right investments revolving credit just part of the 'business of investing'.
I was caught in the 80,s with margin lending facilities and it was not pleasant & don't plan to go there again !
Over time by using revolving credit with patience my investments value is now 10 times value of revolving credit facility over 30 years of investing plus the value of the property..Its better than having cash in the bank waiting for the next investment to come along.
I would imagine a lot of old timers on ST would operate the same way.

[Vaygor1]

Warning. The following may cause some of you to swallow your chewing gum. :ohmy:

In a nutshell, I have borrowed HUGELY to fund my share purchases in the past. This included mortgaging the house, then mortgaging it more, then mortgaging it to the hilt.

Further than that, it has then involved taking my resulting shareholdings and using it to secure large borrowing (via margin lending) to buy more shares, then putting those newly bought purchases into security to buy more shares to borrow more to buy more to borrow more etc etc etc.

If that wasn't enough, I borrowed even more (than one would normally be allowed) to get more shares in a company I now had a large shareholding in who were issuing bonds to existing shareholders, whereby my lender wanted the bonds and the more shares I had before the cut-off date, the more bonds I got. I had to commit to giving my lender the bonds to pay off this 'extra' loan as soon as they were issued to me of course.

There is more behind-the-scenes info that needs to put the above into a more understandable context but the upshot is that the results were nothing short of a dream come true. Was it stressful?… absolutely, indescribably stressful at times.

The thing is this, if you know you will get 20%+ return per annum (made up of capital gain + post-tax dividends) then why not borrow as much as you can at 8%? The more you borrow the more you make (within the limits of not overdoing it should a Black Swan event occur) …. and yes the risks are a lot lot bigger… get it wrong and you end up with no money, no shares, and serious serious debt.

But with risk comes reward. You can't make it 'big' if you don't have volume. To buy volume you need money. If you don't have the money you have no choice but to borrow it. I have yet to hear of another way to do it.

……….

The above scenario occurred (in general terms) around the turn of the century. These days, for the above reasons, I happily maintain significant debt to fund my shareholding/share-purchases but I only need to sell 10% of my holdings to pay it all off. And I would have a lot more 'in the bank' if I wash't so conservatively geared (by comparison) these days. My approach has never let me down (yet), and I can afford a mistake or two now.

I am not saying my approach is either right or wrong… but it worked for me given my style. It's not a style that would (or probably should) work for anyone or everyone. Disclosure: I am not a trader.

Please do your own research in these matters. It is your money and prosperity at stake.

[kiora]

Nei nei VG
I didn't swallow my gum !Just concur & smiled.All too true !

[Aaron]

The above scenario occurred (in general terms) around the turn of the century. These days, for the above reasons, I happily maintain significant debt to fund my shareholding/share-purchases but I only need to sell 10% of my holdings to pay it all off. And I would have a lot more 'in the bank' if I wash't so conservatively geared (by comparison) these days. My approach has never let me down (yet), and I can afford a mistake or two now.
Turn of the century. I am guessing it wasn't an internet start up on the Nasdaq. That could have gone horribly wrong.

[BIRMANBOY]

I shouldn't have been surprised at the level of willingness to accept debt. I am a result of my upbringing, as we all are, and my parents went through the depression and never, ever purchased anything until the money was saved and available. In saying that however, that doesn't mean a subsequent (my) generation, (the baby boomers) ,couldn't and didn't gradually drop that philosophy and embrace credit as the obvious means to getting what they wanted as quickly as possible. All of you above posters all are seemingly relaxed about funding share purchases with debt so I have to accept that these generations, the children and grandchildren of the B.B's, are even more relaxed about credit. What's missing however are any reports of "things going bad". Now I can understand that because no-one likes to be seen or perceived as the idiot who c****d it up. So the lack of bad reports is not necessarily because they didn't happen. Lets face it, its human nature at its most basic to bury the bad stuff and remember the good...and it would be a rare human who doesn't embrace that behaviour. Otherwise we would all be grouching around like Victor Meldew in "One foot in the Grave". One of the underlying thoughts that has surfaced in my mind, in most of the above posts, was the need or desire to achieve success faster. In order to satisfy this "need for speed" investors want to pack as much punch in as can be managed...so 10000 shares times x profit is good but 200000 is much more effective because it concentrates and multiplies the result. This is of course highly rewarding when it succeeds so the perceived risk becomes smaller every time it works...and before you know it there's hardly any risk at all. The boy who called wolf has been silenced. Debt is now the norm for all of us..from the RB below
Fig 1 — Household debt
http://www.rbnz.govt.nz/images/key-graphs/Fig5_large.jpg Last updated: 11 September 2014
In the 20 years to 2011, total housing and consumer loan debt increased around six-fold in dollar terms. As a ratio of household disposable income, the percentage at June 2011 of 147% is about two and a half times that of 58% at March 1991. Through the mid-2000s, household debt grew strongly, at an average annual rate of over 14% in the five years to June 2007. The rate of growth slowed sharply from 2007, averaging well under 4% per annum in the four years to June 2011. This deceleration in the rate of growth of household debt arrested the growth in the debt to income ratio from 2007. Falling interest rates have been the main driver of falling interest servicing as a percentage of disposable income from 2008.
So interesting that servicing debt is almost 9% of disposable household income according to the RB. So extrapolating from that if you don't have any debt you have just saved an extra 9% of your disposable income. I'm not an economist or a mathematician or even a highly educated individual but that says to me that the first thing anyone should do is pay off all of their debts. Making fast money is good as long as one doesn't forget the underlying issue of debt compounding faster.

[zb3]

I'll never understand why ppl borrow in nz at 8 percent when you can borrow overseas at a fraction of the cost

[fungus pudding]

I'll never understand why ppl borrow in nz at 8 percent when you can borrow overseas at a fraction of the cost

You might one day.

[zb3]

You might one day.

Doubtful. It's nonsensical.

[zb3]

Because a 20% depreciation in the value of the $ tends to really **** your return. The Australian dollar was worth $1.10 US$ 3 years ago, now its worth 85c.

It works both ways. At least get a margin loan from IB at 5 percent rather than 8 from asb

[zb3]

It does. But you are held hostage to the whims of the forex market. I'd only borrow offshore in order to buy offshore assets, keeping everything in the same currency.

If your portfolio was large enough you could easily hedge your currency exposure. Even if you didn't, a 20% currency loss would be made back in a few years from the difference in borrowing rates. The only other issue to consider is taxation, which slightly reduces the benefit of the lower borrowing rates.

[BIRMANBOY]

You obviously are trying to live up to the reputation of your avatar Mr. S:), however I am immune to your amateurish efforts. Promise me the voice of Placido Domingo and I might be swayed but riches wont work since I'm already very comfortable thank you. Also I might add that they didn't come by way of the Sharemarket but 40 years of hard slog in a trade. I've only been investing in the Sharemarket since 2011. Also my returns and strategy revolve around modest returns of circa 10% PA and of course no debt.
"Saved by it"? Sounding a little religious there Birmanboy? You know you want to try it...everyone does, you could be rich...go on, just a little bite.

[Biscuit]

I don't disagree with your approach, I also was taught at an early age to avoid debt. My parents worked very hard all their lives. They bought just one house in their life which they obtained with a govt mortgage fixed (effectively forever) at 3%. Later in life when dad was close to retirement, he worked hard to get rid of that debt even though the market interest rate was something like three times the rate he had. They were always financially secure but always struggling. I don't work so hard as dad, I don't have to - I am a little more savvy with money.

[kiora]

Glad its positive for you but what happens if the market turns on you? We have had a sustained share market appreciation and most things are positive...at the moment. Shares can go south very quickly. In a recession s**t can occur in many shapes and forms...and having loaded up on debt may not be a healthy place to be.
.
I,ve been there done that in 87 !Share Portfolio financed using shares as security lost 60 % of its value.Definiately not pleasant but made all back up within 2 years by buying better Q shares so I now just use revolving credit on property.It is more pleasant & profitable

[Aaron]

What's missing however are any reports of "things going bad". Now I can understand that because no-one likes to be seen or perceived as the idiot who c****d it up. So the lack of bad reports is not necessarily because they didn't happen. Lets face it, its human nature at its most basic to bury the bad stuff and remember the good...and it would be a rare human who doesn't embrace that behaviour.
I wrote about my experiences in March 2009 with Aussie banks somewhere else on this site. I had allowed for plenty of margin but that rapidly disappeared I had to go into emergency savings to buy into all the share purchase plans and things rebounded and I got my money back out but worse yet, frightened by recent events and wanting to clear my debts I sold most things instead of investing for the long term. Since 2009 I imagine dividends and capital appreciation on CBA and NAB shares would have more than covered margin loan interest.
In hindsight I should have been leveraging up big time back in my twenties. Inflation would have taken care of the debt. I shouldn't be borrowing now as an old man taking big risks in the hope of accumulating a bit of wealth before retirement. My parents were good savers and cleared debt as soon as possible and they are comfortable in retirement. I followed their advice but now in hindsight I see they were wrong if you want to get ahead you need to take some risks. People should be rewarded if they are right but don't whinge if your wrong.

[kiora]

I wrote about my experiences in March 2009 with Aussie banks somewhere else on this site. I had allowed for plenty of margin but that rapidly disappeared I had to go into emergency savings to buy into all the share purchase plans and things rebounded and I got my money back out but worse yet, frightened by recent events and wanting to clear my debts I sold most things instead of investing for the long term. Since 2009 I imagine dividends and capital appreciation on CBA and NAB shares would have more than covered margin loan interest.
In hindsight I should have been leveraging up big time back in my twenties. Inflation would have taken care of the debt. I shouldn't be borrowing now as an old man taking big risks in the hope of accumulating a bit of wealth before retirement. My parents were good savers and cleared debt as soon as possible and they are comfortable in retirement. I followed their advice but now in hindsight I see they were wrong if you want to get ahead you need to take some risks. People should be rewarded if they are right but don't whinge if your wrong.

Ok if you evaluate Risk/Return

[BIRMANBOY]

Sometimes the smartest thing we can do is recognise that we are out of our depth and get professional help by way of a consultation with a good A.F.A. How do you know when you are out of your depth? No clear plan of action, uncertainty about what to do, mixed results and or poor results, stress from trying to find your way through what seems a constantly shifting set of circumstances. Not everybody can be competent at everything so the smart person looks to work and focus on their strengths and get professional help in other areas.
I wrote about my experiences in March 2009 with Aussie banks somewhere else on this site. I had allowed for plenty of margin but that rapidly disappeared I had to go into emergency savings to buy into all the share purchase plans and things rebounded and I got my money back out but worse yet, frightened by recent events and wanting to clear my debts I sold most things instead of investing for the long term. Since 2009 I imagine dividends and capital appreciation on CBA and NAB shares would have more than covered margin loan interest.
In hindsight I should have been leveraging up big time back in my twenties. Inflation would have taken care of the debt. I shouldn't be borrowing now as an old man taking big risks in the hope of accumulating a bit of wealth before retirement. My parents were good savers and cleared debt as soon as possible and they are comfortable in retirement. I followed their advice but now in hindsight I see they were wrong if you want to get ahead you need to take some risks. People should be rewarded if they are right but don't whinge if your wrong.

[BIRMANBOY]

OH, oh oh " I don't work so hard as dad, I don't have to - I am a little more savvy with money" well my old man and maybe yours, would have said..."well get off you bum, work hard (even though you don't have to) and you'll be channelling Bill Gates before you know it. Lazy git:)
I don't disagree with your approach, I also was taught at an early age to avoid debt. My parents worked very hard all their lives. They bought just one house in their life which they obtained with a govt mortgage fixed (effectively forever) at 3%. Later in life when dad was close to retirement, he worked hard to get rid of that debt even though the market interest rate was something like three times the rate he had. They were always financially secure but always struggling. I don't work so hard as dad, I don't have to - I am a little more savvy with money.

[BIRMANBOY]

What a truly seductive concept that is....sure as hell will sell a lot of books to all of those looking for an easier, faster pathway. I mean come on ...who wouldn't want to find the short cut. And yes 5% of the population will achieve this...and the other poor suckers who believe that this should apply to them will certainly be no worse off for reading it but unfortunately there will be the far greater number of casualties who don't get it, cant get it and keep wanting it when they would have been better off putting in a few extra hours of work, upping their employment skills or education or getting a second job. The fact that a few people achieve the "easy way" should also be accompanied by a list of warnings such as "however most people actually have to work hard". "Being good with money" is just a meaningless phrase designed to appeal to the innocent.
This is the point of the "Rich Dad Poor Dad" series of books - No you don't need to "go to school, get a good job, work hard" to be successful. Its easier, and faster, to just be good with money. And that is my experience too.

[Biscuit]

well my old man and maybe yours, would have said..."well get off you bum, work hard (even though you don't have to) and you'll be channelling Bill Gates before you know it. Lazy git:)

LOL, I've just come in from cleaning troughs and watering the new trees!

[Biscuit]

In my experience, most people find it extremely difficult to get their head around the concepts required to "be good with money". They are psychologically averse to the concept the book is promoting. But its an attitude thing not an intellect thing. So yes, in reality they will have to work hard at their job until they retire at 70 in order to fund their lifestyle because they are not the type of people who can delay gratification. But for those who are prepared to put the effort and sacrifice in to learn how to invest their money, the pathway to wealth is certainly much easier and you will be retired a lot earlier than 70.

Yes, its a book of simple truths and its a mystery to me why people don't get it.

[BIRMANBOY]

Ok its a start but to move to the next level here is how it should have transpired.. get your wife/husband/teenager to do the house work and go down the road to Mr. and Mrs. elderly and do their work for $100 cash. Or go back to work and write an app that you can sell for $3 a pop. But good work and I hope you used a watering can and water on the trees.
LOL, I've just come in from cleaning troughs and watering the new trees!

[Biscuit]

Ok its a start but to move to the next level here is how it should have transpired.. get your wife/husband/teenager to do the house work and go down the road to Mr. and Mrs. elderly and do their work for $100 cash. Or go back to work and write an app that you can sell for $3 a pop. But good work and I hope you used a watering can and water on the trees.

The wife was helping with the watering (buckets); I don't have a teenager available; I would not enjoy doing someone else's housework; and I have never knowingly used an app, let alone written one.

[BIRMANBOY]

The problem I have with your posts is that they convey the concept that if you "put in the effort and sacrifice" "the pathway to wealth is certainly much easier and you will be retired a lot earlier than 70". Now you maybe the archetypal individual this concept is based upon but common sense tells me that individual situations should not be used as blanket pronouncements on what is or is not possible. Just because you say it is possible doesn't necessarily mean that the concept should be thrust out there as a reasonable and achievable goal. Even if they follow your exhortations of effort and sacrifice...most people will not "make it"....so why keep pumping it out as it is. Why not a more warts and all with the disclaimer that "customer satisfaction is not guaranteed". By all means give people hope but have it be accompanied by realism.
In my experience, most people find it extremely difficult to get their head around the concepts required to "be good with money". They are psychologically averse to the concept the book is promoting. But its an attitude thing not an intellect thing. So yes, in reality they will have to work hard at their job until they retire at 70 in order to fund their lifestyle because they are not the type of people who can delay gratification. But for those who are prepared to put the effort and sacrifice in to learn how to invest their money, the pathway to wealth is certainly much easier and you will be retired a lot earlier than 70.

[BIRMANBOY]

OK the Devil (sorry Satan) is in the details but you get my whimsical idea.
The wife was helping with the watering (buckets); I don't have a teenager available; I would not enjoy doing someone else's housework; and I have never knowingly used an app, let alone written one.

[Vaygor1]

I'll never understand why ppl borrow in nz at 8 percent when you can borrow overseas at a fraction of the cost
It does. But you are held hostage to the whims of the forex market. I'd only borrow offshore in order to buy offshore assets, keeping everything in the same currency.

ZB3.

If you are saying that you can borrow NZD at cheaper interest rates (maybe available in Australia?) to buy NZ domiciled shares then I agree with you.

But if you are talking about borrowing in a different currency than in which the shares are domiciled, as you appear to be saying, then I disagree. KW's reasoning is sound.

When one goes into heavy debt to fund share purchases, then one can't afford to get it wrong. There is just too much at stake. It is a situation where it is highly imprudent to take any more risk than necessary. And Forex is one such risk that can easily be removed even if a higher interest rate results.

If one was to borrow overseas in the above scenario, then I would consider them unwise.

Swapping out a known risk carrying a high potential variance (ie Forex) for a risk-free quantifiable cost is a concept most people seem to grasp.

[zb3]

ZB3.

If you are saying that you can borrow NZD at cheaper interest rates (maybe available in Australia?) to buy NZ domiciled shares then I agree with you.

But if you are talking about borrowing in a different currency than in which the shares are domiciled, as you appear to be saying, then I disagree. KW's reasoning is sound.

When one goes into heavy debt to fund share purchases, then one can't afford to get it wrong. There is just too much at stake. It is a situation where it is highly imprudent to take any more risk than necessary. And Forex is one such risk that can easily be removed even if a higher interest rate results.

If one was to borrow overseas in the above scenario, then I would consider them unwise.

Swapping out a known risk carrying a high potential variance (ie Forex) for a risk-free quantifiable cost is a concept most people seem to grasp.

You can borrow in nzd at cheaper rates through interactive brokers, but my main proposition was to borrow USD and invest in US domiciled stocks. I disagree that it is more risky, in fact the lower interest rates make it less risky. You need to consider that stock purchases are for the long term. Currently the nzd is relatively strong historically against the usd. Even if the nzd were to strengthen another 20% (unlikely given the gov will go to hell and back to prevent this) this would only result in a 20% forex loss for an investor investing in US domiciled stocks. Nzd margin rates are around 8% from asb, however you can leverage using s&p emini futures on the US market for an implied interest rate of 0.4%. This is highly diversified - much better than borrowing in nzd for individual stocks, and is 7.6% lower interest per year. You do the math and see how long it takes to make up the worst case scenario of a 20% forex loss. To be honest, chances are you'd receive a forex gain as the nzd is strong at the moment and is likely to drop, as it has been recently. The futures example is an extreme example and not advisable due to taxes. The most efficient tax wise method of leveraging for an nz investor is through leveraged etfs, these have a management fee of .9 % plus an implied interest rate similar to futures so 1.4% total. Add on the tax disadvantage and you are still easily saving 4% net a year. Seems like an easy choice if you ask me. If you are so worried about forex just hedge it, instead of paying ridiculous nz borrowing rates.

[Vaygor1]

You can borrow in nzd at cheaper rates through interactive brokers, but my main proposition was to borrow USD and invest in US domiciled stocks. I disagree that it is more risky, in fact the lower interest rates make it less risky. You need to consider that stock purchases are for the long term. Currently the nzd is relatively strong historically against the usd. Even if the nzd were to strengthen another 20% (unlikely given the gov will go to hell and back to prevent this) this would only result in a 20% forex loss for an investor investing in US domiciled stocks. Nzd margin rates are around 8% from asb, however you can leverage using s&p emini futures on the US market for an implied interest rate of 0.4%. This is highly diversified - much better than borrowing in nzd for individual stocks, and is 7.6% lower interest per year. You do the math and see how long it takes to make up the worst case scenario of a 20% forex loss. To be honest, chances are you'd receive a forex gain as the nzd is strong at the moment and is likely to drop, as it has been recently. The futures example is an extreme example and not advisable due to taxes. The most efficient tax wise method of leveraging for an nz investor is through leveraged etfs, these have a management fee of .9 % plus an implied interest rate similar to futures so 1.4% total. Add on the tax disadvantage and you are still easily saving 4% net a year. Seems like an easy choice if you ask me. If you are so worried about forex just hedge it, instead of paying ridiculous nz borrowing rates.

Thanks ZB.
I appreciate your response and info which I will digest/absorb and look into further. :)
It does sound like we are aligned insofar that as long as the forex risk is managed in achieving lower carrying costs then it can be taken on board.
Certainly doesn't look like a problem when the portfolio is sizeable enough and there's reasonable equity in both it and the family home.

[BIRMANBOY]

We appear to be talking at cross purposes. Either your post was lacking in sufficient detail or I misinterpreted it...either way, my apology if you are "not quite sure what I'm saying" Your post #42 said...[This is the point of the "Rich Dad Poor Dad" series of books - No you don't need to "go to school, get a good job, work hard" to be successful. Its easier, and faster, to just be good with money. And that is my experience too. My interpretation of that was that you were championing the theory that it was sufficient to be "good with money" and that "go to school, get a job, work hard was a relatively unimportant issue. Trying to encapsulate a series of books in a couple of sentences can have its problems. In saying that I do certainly agree with what you say in your last post.:)
I'm not quite sure what you are saying. Do you really think that people who save their money and invest it will end up worse off than people who don't save their money and spend it all? I am pretty sure that "customer satisfaction" is indeed guaranteed for the former in that they will be immeasurably wealthier at the end of their lives than the latter. Saving money is a reasonable and achievable goal for everyone, its not some special talent reserved for those on six figure incomes.

[BIRMANBOY]

So refocussing here on the most crucial element which to my mind still has not been sufficiently proved. Does the gain realised from borrowing to fund the purchase of shares outweigh the counterbalancing negative effect of compounding debt. Remembering that compounding magnifies the debt beyond its initial impact. Further also a recognition that a single event borrowing is visible and measurable but long term debt usage becomes much harder to measure. Also some recognition that there is no such thing as a "sure bet" and it would be unreasonable to expect that every excursion into this type of investing is going to be successful. Several successes do not guarantee continuity into the future.

[Biscuit]

So refocussing here on the most crucial element which to my mind still has not been sufficiently proved. Does the gain realised from borrowing to fund the purchase of shares outweigh the counterbalancing negative effect of compounding debt. Remembering that compounding magnifies the debt beyond its initial impact. Further also a recognition that a single event borrowing is visible and measurable but long term debt usage becomes much harder to measure. Also some recognition that there is no such thing as a "sure bet" and it would be unreasonable to expect that every excursion into this type of investing is going to be successful. Several successes do not guarantee continuity into the future.

In my more whimsical moments, I've viewed investing as being much like building a boat. The hull is your equity and the sails are your debt. The object of the exercise is to optimize the design over time and trim the sails for maximum velocity without capsizing.

[Vaygor1]

So refocussing here on the most crucial element which to my mind still has not been sufficiently proved. Does the gain realised from borrowing to fund the purchase of shares outweigh the counterbalancing negative effect of compounding debt. Remembering that compounding magnifies the debt beyond its initial impact.

It sounds like you have almost answered your own question. Borrowing to invest will simply magnify/amplify the end result be it positive or negative.


Several successes do not guarantee continuity into the future.

Agreed. There are never any guarantees. But which surgeon would you choose to improve your odds? The one with a good track-record or the one without? :)

[percy]

Very clear to me KW.
Great post.

[Vaygor1]

.... Over time, your investments will a deliver passive income, which relieves you of the obligation to work hard.

I agree.

One can borrow (or not), be wealthy, and do a hard day's work. It's just nicer to have a choice in the matter.

[BIRMANBOY]

How does "rich dad" view borrowing to invest? I don't have any issue with his basic concept of saving and investing and not spending excessively although I do question the lack of importance you (he) have attached to education and good job. However that may be just in the details missing and is not really central to my original point.
I am. That is what the Rich Dad Poor Dad books are about. The author is saying that it does not take an education or a good job to be financially successful in life. All you need to do is save as much of your income as possible, and then invest it in either building your own business, investing in property, or the share market. Over time, your investments will a deliver passive income, which relieves you of the obligation to work hard. Its about building passive cashflow and using it to purchase more cash generating assets. He compares this to the average middle class consumer, who follows the normal path in life of "getting an education" (and a huge student debt) and then a "good job", but who then spends all their income so they can look successful and keep up with their friends/neighbours/colleagues (buying a big house with a huge mortgage, expensive cars, fancy holidays etc). These people blow all their money, so he sees the whole middle class as being poor rather than being wealthy (wealthy being defined as financially independent and not tied to working for a living). Very similar outlook and theory as espoused by the Mr Money Mustache blog.

With the exception of those who are living on a subsistence wage, everyone has room to make sacrifices and save money which they can use to invest in some manner, and so become a "Rich Dad". Even if you know nothing about investing you can save up to buy a rental property or put your money into a mutual fund, so its definitely not beyond the abilities of the average Joe. But the hard part, the part that takes effort - is the saving money bit. Most people on this planet prefer to spend it.

Hope that is clearer :-)

[Aaron]

Does the gain realised from borrowing to fund the purchase of shares outweigh the counterbalancing negative effect of compounding debt. Remembering that compounding magnifies the debt beyond its initial impact.

Simplistically, Yes if your share investment goes up no if it goes down.
Dividend income should hopefully cover interest costs so the debt doesn't compound.
Assume you borrow $500,000 to invest in shares assume also that dividend yields are the same as interest costs. All else being equal assume inflation stays at it’s recent average of 2.5%. Prices will rise with inflation so we could assume earnings rise at the rate of inflation and capitalisation rates and yields stay the same.

Investment 500,000
Loan 500,000
Dividend Income 35,000
Interest Cost 35,000
Investment Return 7.0%
Inflation Rate 2.5%
Number of Years From Now 20

Investment 819,308
Loan 500,000
Dividend Income 57,352
Interest Cost 35,000

Had this in a nice table but can't seem to get it to show right here.
In twenty years your investment has grown but your loan hasn’t, investment returns have grown so you are better off. Although if you have deflation your right in the crap and it is the reckless people who have borrowed too much that world central bankers are trying to save for some reason.
Save and invest in assets that generate a passive income. juice your returns with leverage but weigh up the risks first.
For that matter Birmanboy what level of debt will you put up with in the companys you are investing in. Return on Equity can be greatly enhanced by debt. It can also drive a company to bankruptcy when times get tough.

[BIRMANBOY]

What you mean like Team NZ? Seems to me that didn't go so well however I like to see some poetic analogies being used so good one...keep your lifejackets handy would be my only comment.
In my more whimsical moments, I've viewed investing as being much like building a boat. The hull is your equity and the sails are your debt. The object of the exercise is to optimize the design over time and trim the sails for maximum velocity without capsizing.

[BIRMANBOY]

So here comes the crucial question...what is investing...is it putting money into a product and or project that may or may not deliver a positive outcome? Is it investing when the positive outcome is not certain? Is there room for Murphy's law to influence your "certain" outcome? I don't consider any endeavour where the possible results are unknown or possibly a magnified disaster as being an "investment". It should realistically be called speculation. An investment should also have in its structure a limited downside...i.e. you can only lose what you put in. If I lose my own money that's one thing however if I lose the banks money not only do they want it back but they want interest on its use. So the downside is magnified excessively in my opinion. If one uses ones house as collateral and the "bad" occurs in an unusual or unlucky event then the repercussions can be catastrophic. "Works for some people", or "has worked for me previously" wont be much of a consolation.
It sounds like you have almost answered your own question. Borrowing to invest will simply magnify/amplify the end result be it positive or negative.



Agreed. There are never any guarantees. But which surgeon would you choose to improve your odds? The one with a good track-record or the one without? :)

[Biscuit]

...keep your lifejackets handy would be my only comment.

It's the people who don't learn to invest when they are young who end up all at sea without a lifejacket when they are old. In my view, appropriately managed debt can be an important part of investing. "Appropriately managed" may very well mean no debt at times, depending on many factors including your experience, situation and tolerance to risk. When things go South, you can easily drown in inappropriately managed debt.

[Aaron]

BBoy you want certainty in an uncertain world. I wouldn't mind betting there were a fair few from your generation who having cleared the mortgage and having saved some money took a conservative approach rather than the risks and speculation of the sharemarket and invested in finance company debentures as many would have been recommended to do by their financial advisors.

[BIRMANBOY]

Yes you absolutely correct Aaron...on both counts. Firstly as you get older the relative attachment one places on things like security, housing, medical issues and future ability to provide the necessary's when one is losing the capacity to generate income shifts. So as strange as it seems to younger people the certainty of a TD is a very attractive proposition. Imagine yourself in a situation where you cannot make a living and suddenly the whole outlook is shifted. As for those unfortunate folk who got burnt in sundry finance co's and Ponzi schemes you can see how they will appeal to those looking and or needing a few more dollars on their returns. So what is the common denominator of these failures? Financial innocence or naivety or just normal old human greed. All promising (and delivering in some cases) abnormally high returns. The higher the return, the greater the risk....simple but recurring theme in any and every financial endeavour.
BBoy you want certainty in an uncertain world. I wouldn't mind betting there were a fair few from your generation who having cleared the mortgage and having saved some money took a conservative approach rather than the risks and speculation of the sharemarket and invested in finance company debentures as many would have been recommended to do by their financial advisors.

[Biscuit]

So here comes the crucial question...what is investing...

Investing is realizing that there are no risk-free options and that everything is relative. Money in the bank carries a risk of losing value versus money in the stock market. You always have to manage risk.

[BIRMANBOY]

Excellent point Mephistopheles ..should be compulsory part of education system...would prepare us more efficiently for life's monetary moments.
It's the people who don't learn to invest when they are young who end up all at sea without a lifejacket when they are old. In my view, appropriately managed debt can be an important part of investing. "Appropriately managed" may very well mean no debt at times, depending on many factors including your experience, situation and tolerance to risk. When things go South, you can easily drown in inappropriately managed debt.

[Aaron]

So as strange as it seems to younger people the certainty of a TD is a very attractive proposition. Imagine yourself in a situation where you cannot make a living and suddenly the whole outlook is shifted. As for those unfortunate folk who got burnt in sundry finance co's and Ponzi schemes you can see how they will appeal to those looking and or needing a few more dollars on their returns. So what is the common denominator of these failures? Financial innocence or naivety or just normal old human greed. All promising (and delivering in some cases) abnormally high returns. The higher the return, the greater the risk....simple but recurring theme in any and every financial endeavour.
Keep in mind that your term deposits show as an unsecured creditor on the banks Balance Sheet and a term deposit if interest rates are suppressed and inflation boosted aren't that good long term. Also covered bonds mean that those bondholders are ahead of you if the **** hits the fan. I do imagine myself in a situation where I cannot make a living and due to my lack of investing when I was younger I am willing to take some smaller risks now to try and make up for it. I feel sorry for the people who relied on financial professionals(commission agents) when investing in finance companies but you have to wonder about people like the retired couple in Whangarei who bought a Blue Chip apartment. After their own lawyer said it looked risky Blue Chip suggested they talk to their lawyer who said it was a good idea. They do need to take some responsibility for their decisions and they found out the hard way what happens when you borrow to invest and it goes bad.

[Biscuit]

Its funny isn't it - at school its mandatory to learn calculus and physics, which 99.9% of us will never ever use in the real world yet they don't teach kids how to save money, budget, and the basic principles of investing.
I think back in horror at the amount of time I spent "learning" Latin :eek2:

[BIRMANBOY]

Noli ire in debitum...does that make you feel any better?
I think back in horror at the amount of time I spent "learning" Latin :eek2:

[BIRMANBOY]

Under the current system....every teacher would need to be an A.F.A. which would in turn mean that the FMA would be larger than WINZ. And one more acronym to keep them company....WTF. How hard would it be to incorporate your basics into existing curriculum. Needs some political push...John Key should take it on having seen the financial world at its most basic and its most vicious.
Its funny isn't it - at school its mandatory to learn calculus and physics, which 99.9% of us will never ever use in the real world yet they don't teach kids how to save money, budget, and the basic principles of investing.

[Biscuit]

Noli ire in debitum...does that make you feel any better?

Significantly worse as I have no idea what it means, but thanks

[Biscuit]

Noli ire in debitum...does that make you feel any better?

lol: debitum gustat optimum cum fructus scientiae

[BIRMANBOY]

Surely the devil has a computer? Is he/she lacking in google vision...I know you have a firewall, or so rumour has it anyway... Google translate can help you translate anything (mostly)...Afrikaans to Zulu or even Maori to Mongolian. However to save you time, (best spent on reducing debt), it translates to "Don't go into debt"....as you would/may have remembered if you had been paying attention.
Significantly worse as I have no idea what it means, but thanks

[BIRMANBOY]

I see you found it....ok Alii fructus in arbore, optime reliquit
lol: debitum gustat optimum cum fructus scientiae

[Schrodinger]

I have a line of credit on my house which I use for share purchases. Have used it since 2009. I use it to buy high growth, high dividend shares, so get the benefit of both dividends and capital gains. Because I buy dividend paying shares the interest is fully tax deductible against other income. At the moment I don't have any other income, and the Australian market is looking a bit sick, so its been fully repaid. But its there in case I find something I want to purchase, and that way I dont have to sell something to buy something else.

There is "good" debt and "bad" debt. Borrowing to buy positive cashflow producing, capital appreciating assets is good debt. Borrowing to buy loss-making and/or depreciating assets is bad debt. Be sensible about it and leverage gives you the firepower when you need it.

Yes borrowing is not bad if you invest in good things. My old economics professor spelled out to me why this was the case. On the other hand bad borrowing is equally as bad. If you are a particularly good investor I can't see any issue with leveraging what you can and keeping a sensible LVR.

[h2so4]

Yes borrowing is not bad if you invest in good things. My old economics professor spelled out to me why this was the case. On the other hand bad borrowing is equally as bad. If you are a particularly good investor I can't see any issue with leveraging what you can and keeping a sensible LVR.

I wish it was that simple.

A good thing one day may not be so good the next, but with contingencies in place "all good", well maybe.

[Vaygor1]

Obsido potes aliis populis pecuniam usura pecuniam. :cool::cool:

[BIRMANBOY]

So sayeth Vaygor the Vulgarian (just kidding...I'm sure you are a cultured Roman:p) After unclenching my buttocks (resulting from your previous posts), I have to say if it works for you then any dissenting opinion from myself is bound to be treated with assorted pooh poohs and ba humbugs. Faint voices in the financial wilderness getting fainter as time passes. My guess is you may be one of the few who manages to beat the odds however a charitable and humble Roman would be circumspect in recommending others to follow in his/her footsteps. Others may not be quite so lucky, experienced and financially literate and be persuaded into the dark void of dastardly debt at inappropriate times. Those easily lead by promises of wealth, riches and "easy money". And as we all know one of the most problematic of the human condition is resisting temptation when the prize is the one we yearn for the most.
Obsido potes aliis populis pecuniam usura pecuniam. :cool::cool:

[Aaron]

Warning. The following may cause some of you to swallow your chewing gum. :ohmy:

The above scenario occurred (in general terms) around the turn of the century. These days, for the above reasons, I happily maintain significant debt to fund my shareholding/share-purchases but I only need to sell 10% of my holdings to pay it all off. And I would have a lot more 'in the bank' if I wash't so conservatively geared (by comparison) these days. My approach has never let me down (yet), and I can afford a mistake or two now.

I am not saying my approach is either right or wrong… but it worked for me given my style. It's not a style that would (or probably should) work for anyone or everyone. Disclosure: I am not a trader.

Please do your own research in these matters. It is your money and prosperity at stake.
Mortgage debt and margin debt on this as well as the debt the company held which was obviously publicly listed or you wouldn't have got a margin loan.
Can you tell us the company Vaygor as I can't imagine any situation where you could be so confident as to put it all on one company. That company doesn't even know what the future holds.

[Vaygor1]

Warning. The following may cause some of you to swallow your chewing gum. :ohmy:

The above scenario occurred (in general terms) around the turn of the century. These days, for the above reasons, I happily maintain significant debt to fund my shareholding/share-purchases but I only need to sell 10% of my holdings to pay it all off. And I would have a lot more 'in the bank' if I wash't so conservatively geared (by comparison) these days. My approach has never let me down (yet), and I can afford a mistake or two now.

I am not saying my approach is either right or wrong… but it worked for me given my style. It's not a style that would (or probably should) work for anyone or everyone. Disclosure: I am not a trader.

Please do your own research in these matters. It is your money and prosperity at stake.Mortgage debt and margin debt on this as well as the debt the company held which was obviously publicly listed or you wouldn't have got a margin loan.
Can you tell us the company Vaygor as I can't imagine any situation where you could be so confident as to put it all on one company. That company doesn't even know what the future holds.


Hi Aaron.

Been a few days since I had time to contribute as have been moving house.

Regarding your question and referring to my original post at http://www.sharetrader.co.nz/showthread.php?10029-Folly-or-fortitude&p=518726&viewfull=1#post518726

The company was PWC (PowerCo).

Back when they were NZ listed, I took interest around late 1997 when the main 2 shareholders owned I think over 90% of the company. They were the New Plymouth District Council and Egmont Electricity who worked very closely with each other. PWC were very active acquiring other electricity and gas distribution companies with brilliant results in efficiency gains through consolidation of board, management, staff, systems, compliance costs, maintenance depots, mobile plant etc etc as well as greatly improved efficiency gains and economies-of-scale. Refer http://en.wikipedia.org/wiki/Powerco#Key_dates

When I began purchasing PWC they were about to (or just had) announced a merger with CentralPower based in Palmerston North, an exercise that would almost double their network size. The announcement lifted the SP quite a bit (but not too much). Then, after I had purchased a sizeable holding, they announced that the merger would not go through for another year and market sentiment sent the SP plummeting as negative news so typically does on the bourse. At that point, carrying what was now a sizeable loss on paper, I knew I had a year to acquire as much as I could, and I duly dived in… mortgages, margin lending… the lot… and every time I bought, the price would unbelievably drop a bit more so I just kept buying.

A year later they announced the merger (involving a share split with a 5 & 7 year bond offer to existing shareholders). It was all go. After this announcement but prior to the record date for the merger I arranged to sell ALL my forthcoming PWC bonds to a bank who wanted them for 99.5% of their face value and would happily lend me the money before the record date. I realised I could to use that money to buy more shares (again, before the record date) which entitled me to more bonds which I could also 'sell-in-advance' to the bank for more money to buy more shares to get more bonds to sell to the bank to ……etc etc. After about 30 odd iterations the final amount to borrow from the bank settled out and it was A LOT, but the loan period was less than week as full payment was by way of bonds issued to me within a few days of drawing down the loan, all of which of course had to go into PWC shares.

The merger, share split, bond issue, and loan repayment all went through like clockwork. The end result was amazing (even though it was so predictable), it took months to register in my brain that the gains were real. Those who were close to me would ask "How did you know?" to which I would reply that it was all in the paper a year ago.

Another anomaly was that a year after the merger, but before the results were out reflecting all the efficiency gains, September 11 hit. Like every other share, the SP plummeted again. For the life of me I couldn't figure out how 9/11 could impact the cost/profit of distributing electricity in NZ so I dived in again for all I was worth.

The rest is history.

I never intended to sell any PWC shares and I never did, not a single one, until it was forced upon me in 2004 when the two big PWC shareholders unbelievably sold out to Prime Infrastructure Networks (New Zealand) Limited (Owned by Australia and yes, Australia still own PowerCo). http://www.takeovers.govt.nz/enforcement/panel-decisions/determination-on-powerco-limited-15-october-2004/ I recall how sad I was at being forced to sell this wonderful goose that lay golden eggs (by way of acquisitions, efficiency gains, and dividends) but I must admit it was a GREAT relief to eliminate all that mortgage and margin lending debt… for a while at least :)

Folly or fortitude? Maybe a bit of both, but in my view, very little folly when the results were so predictable.

[Aaron]

Dear Vaygor
Thanks for the reply a heart warming story of investment success. At first I thought your lack of reply was because you might have been too embarrassed to tell us what crazy risks you took. Infrastructure companies would be a reasonably safe investment. Well done.
I owned my own small part of PowerCo for awhile around about 2009(I think) when it was part owned by Babcock & Brown Infrastructure. Needless to say another speculative disaster on my part. No leverage personally but s**tloads for Babcock's and a fair chunk of money(for me) lost. Hopefully one day I will be able to tell everyone about a successful investment.

[cyclist]

Vaygor. Great story. I mentioned on the CNU thread that I am still developing my investing cojones, but I don't think they will ever be that impressive. I am learning to be more bold where there is an obvious mis-pricing. Lots of recent examples - I am now keeping a closer eye out for the future ones.

[Vaygor1]

Thanks for your kind words Cyclist & Aaron.

It was a hell of a ride really. Quite amazing to appear (briefly) on the top 20 shareholders list towards the end, but not under my name of course as all shares were held by my margin lender.
Since PWC I have three more interesting tales to tell… one day maybe.:)

Also thanks to you Birmanboy for kicking off the thread which I have found an interesting read. In response to your earlier enquiry to me regarding the question "What is an investment?". Refer http://www.sharetrader.co.nz/showthread.php?10029-Folly-or-fortitude&p=519223&viewfull=1#post519223

The answer is of course subjective. The word 'investment' is bandied around so much.
Even the TAB tells their punters to "Invest now".

For me, I quite like the first part of Investopedia's definition…
Investment: "An asset or item that is purchased with the hope that it will generate income or appreciate in the future".

But I much prefer to replace the word 'hope' with 'expectation', or even 'true expectation'.

I would be kidding myself if I truly expected to generate income and wealth by visiting the casino or TAB. To me that is gambling, not investing.

The subjective part is the enormous grey area between a random throw of the dice and a dead cert. At what point does a gamble, bet, or wager become a predictable outcome based on a qualified informed decision?

I like to look at all the known risks, and try and weigh up the unknowns too. But regarding the known risks, the likely outcome is that not all of them will turn out for the better and not all for the worse. By all means work out the extremes but count on the middle ground as the outcome.

My fundamental rule when it comes to buying a stock is "Do I trust the board?". If the answer is no, then all information emanating from them or their company is worthless to me and I will steer clear.

If I can trust the board and hence the company data and info then I will happily look at the financials and gain a feel for my level of confidence in the business, and begin to weigh up risk.

Risk is a function of probability and consequence. Sometimes the probability of a perceived risk occurring is practically zero and sometimes the consequence(s) is/are negligible and sometimes even both. Working out the difference between risk and perceived risk based on trusted data will help provide the confidence (and cojones…. I like that word) to invest.

[Aaron]

Talking about leverage. Other than ASB Securities does any other organisation offer margin lending for shares. I know I have seen a thread on this but nothing coming up in my searches.

[Harvey Specter]

Talking about leverage. Other than ASB Securities does any other organisation offer margin lending for shares. I know I have seen a thread on this but nothing coming up in my searches.
This might help ;) http://lmgtfy.com/?q=margin+lending+nz

[Aaron]

This might help ;) http://lmgtfy.com/?q=margin+lending+nz
Cheers Harvey, simple solution.
Back to the margin lending question.
Would anyone have an opinion on a preference between Forsyth Barr and J B Were for research and margin loans?

I have googled this question but haven't got a good response.