• Luis G. ha respondido al debate Ted SeeksQuality en el foro Estrategia hace 8 meses, 2 semanas

    «Yes, I believe that CEF leverage is buying on margin. It can be a low-cost way of securing loans. UTG is listed by Morningstar as having a -30% cash position, which I believe means that they have borrowed $30 for every $100 of investor principal — i.e. $100 of investor principal controls $130 of investments (and $30 of debt).

    Margin leverage is on top of the leverage employed by the underlying companies. Moreover, it happens closer to the investor. If you invest on margin, you can get wiped out by a marginal call. Wiped Out. The broker sells off your assets and (maybe) gives you a little back after the loan is paid off. Unless you are very young, you cannot ever recover from that kind of a loss.

    If a company borrows too much, that position might get wiped out. But the impact on the investor is presumably much less.

    Margin leverage is commonly used by overconfident professionals to boost the returns on investment schemes that are guaranteed not to lose money. Then along comes a «black swan» that their models didn’t anticipate, and they are wiped out. Wiped Out. LTCM was run by Nobel prize winners. Hard to find anybody more experienced, knowledgeable, and professional than that. Wiped Out.

    Speaking for myself, if I want a risky investment, I would rather invest in something a bit more speculative and/or volatile. I don’t need to take a safe investment and turn it into a risky investment through the use of leverage.

    By the way, I know two family members who have been wiped out by margin calls. (Happily young enough that they can recover from that.) I have absolutely no interest in traveling down that road. I’m an idiot, and thus I like to keep my investing REALLY simple. I will let those who think they have a «sure thing» get wiped out.»