Margin debt ratio

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
tymishu
Posts: 24
Joined: Thu Feb 01, 2018 10:49 pm
Location: NJ

Margin debt ratio

Post by tymishu » Sun May 13, 2018 11:22 am

I know this is something frowned upon by many. So this is a question for those who have it. What do you consider a safe margin debt ratio of the debt to your total asset value?

My current margin debt to asset value ratio in my portfolio is 40%. I have only two positions. Stock A/B split 95%/5%. Both are doing great and held since the early 2000's (2002 I think). The price appreciations of stock A are: 5 year 1,700%, 2 year 575%, 1 year 170%, YTD 28%. This stock is where I started to accumulate my margin debt two years ago when it took off. I am now paying an effective margin debt interest of 1.47% per annum. The appreciation of stock B over the years is 1,300% I don't even pay attention to its up and downs any longer.

As you know the margin debt ratio is a moving number. During the market loll last two, three months my margin debt ratio climbed to as high as 46% which got me worried. It drops back down to 40%. I think I am loaded to the gills. I'd like to lower the debt ratio so if and when bargains come up I can jump in.

User avatar
oldcomputerguy
Posts: 3130
Joined: Sun Nov 22, 2015 6:50 am
Location: In the middle of five acres of woods

Re: Margin debt ratio

Post by oldcomputerguy » Sun May 13, 2018 8:43 pm

tymishu wrote:
Sun May 13, 2018 11:22 am
What do you consider a safe margin debt ratio of the debt to your total asset value?
What do I consider a "safe" amount of margin?

Zero.

In my world view, trading on margin is by definition risky.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

User avatar
Pajamas
Posts: 6015
Joined: Sun Jun 03, 2012 6:32 pm

Re: Margin debt ratio

Post by Pajamas » Sun May 13, 2018 8:50 pm

I don't see how your margin debt could be 40% of your account value given the huge appreciation in the stocks you hold over the last two years. Seems like there is some missing information. Have you been drawing cash out of the account or buying more of stock A & B?

Also the most efficient way to lower margin utilization is by depositing cash. When you sell securities, the total value of your equities goes down, too, so you are decreasing both the numerator and denominator rather than just the numerator.

AlohaJoe
Posts: 3573
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Margin debt ratio

Post by AlohaJoe » Sun May 13, 2018 9:40 pm

tymishu wrote:
Sun May 13, 2018 11:22 am
I know this is something frowned upon by many. So this is a question for those who have it. What do you consider a safe margin debt ratio of the debt to your total asset value?
25%. At that level even if the market drops substantially I don't have to interrupt my life to worry about margin. It also means I still have a lot of liquidity if I need it suddenly for some reason. I'm currently at 7.6% margin debt but expect that go up to maybe 15% by the end of the year.

User avatar
whodidntante
Posts: 3740
Joined: Thu Jan 21, 2016 11:11 pm

Re: Margin debt ratio

Post by whodidntante » Mon May 14, 2018 12:37 am

I agree with the above poster that 25% provides a good buffer, at least with a diversified portfolio. However, your portfolio is highly concentrated in stock A. If stock A takes a serious beating, you will have an issue. Great companies can and do blow up.

User avatar
JoMoney
Posts: 5379
Joined: Tue Jul 23, 2013 5:31 am

Re: Margin debt ratio

Post by JoMoney » Mon May 14, 2018 1:46 am

Edward Thorp in one of his papers looked at the 59 year period from 1929-1984 and came up with 117% invested in S&P500 as being Kelly optimal growth, and at 170% being pretty certain of hitting a ruinous sequence of returns at some point..
http://www.edwardothorp.com/wp-content/ ... Market.pdf
"...maximal average real growth will occurr (should margin at the T-bill rate be available) if one invests 117%..."
"...a hypothetical immortal investor continually wagering an amount greater than 1.7 times current resources, ruin is certain..."
"...somewhat artificially constructed probability distributions may not be fully taking into account ... numerical results we have obtained must be interpreted in light of the limitations inherent in any applied probabilistic model."
I wonder how many people that utilize leverage actually "rebalance" it to keep it targeted at a specific ratio, as opposed to going in big at a particular point in time, and gradually reducing it over time (like a mortgage).
Another interesting example, while this particular scenario is contrived, it does demonstrate potentially real scenarios. The picture demonstrates the outcomes of several portfolios of different Cash/Stock positions. Under this simulation, the "optimized" portfolio of 18% Cash / 82% Stock has nearly the same return as the 100% stock position, whereas the levered -100 Cash /200% Stock position was an utter failure despite the overall positive results for stocks.
Image
http://www.cfapubs.org/doi/pdf/10.2469/cp.v2004.n2.3379
...the leveraged portfolio performs dismally. Why? Although it does have the highest monthly expected return, it has such high variability that the likelihood of losing a substantial proportion of capital is so high that it likely will cause the investor to rebuild from a low base and never really recoup losses...
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

tymishu
Posts: 24
Joined: Thu Feb 01, 2018 10:49 pm
Location: NJ

Re: Margin debt ratio

Post by tymishu » Mon May 14, 2018 6:12 am

Pajamas wrote:
Sun May 13, 2018 8:50 pm
I don't see how your margin debt could be 40% of your account value given the huge appreciation in the stocks you hold over the last two years. Seems like there is some missing information. Have you been drawing cash out of the account or buying more of stock A & B?

Also the most efficient way to lower margin utilization is by depositing cash. When you sell securities, the total value of your equities goes down, too, so you are decreasing both the numerator and denominator rather than just the numerator.
Let’s say i have $4 margin debt with $10 TAV. I sell $1 stock. I will have $3 marging debt with $9 TAV. If I sell $2 i will have $2 margin debt with $8 TAV. The margin debt to TAV ratio decreases from 40% to 33% to 25%.

User avatar
Pajamas
Posts: 6015
Joined: Sun Jun 03, 2012 6:32 pm

Re: Margin debt ratio

Post by Pajamas » Mon May 14, 2018 6:56 am

tymishu wrote:
Mon May 14, 2018 6:12 am
Pajamas wrote:
Sun May 13, 2018 8:50 pm
I don't see how your margin debt could be 40% of your account value given the huge appreciation in the stocks you hold over the last two years. Seems like there is some missing information. Have you been drawing cash out of the account or buying more of stock A & B?

Also the most efficient way to lower margin utilization is by depositing cash. When you sell securities, the total value of your equities goes down, too, so you are decreasing both the numerator and denominator rather than just the numerator.
Let’s say i have $4 margin debt with $10 TAV. I sell $1 stock. I will have $3 marging debt with $9 TAV. If I sell $2 i will have $2 margin debt with $8 TAV. The margin debt to TAV ratio decreases from 40% to 33% to 25%.
Yes, and if you deposit $1 or $2 your ratio goes from 40% to 30% to 20%.

I still don't see how your margin debt could be 40% (much less 46%) of your account value given the huge appreciation in the stocks you hold over the last two years. Seems like there is some missing information. Have you been drawing cash out of the account or buying more of stock A & B?

What do you mean exactly by "safe"? Low odds of a margin call?

"Safe" margin debt ratio is a matter of context and preference. You could have a much higher use of margin if your account held U.S. treasury bonds only vs. high-flying equities such as your account holds and be "safer". If you have plenty of cash available outside of the account, it would be "safer". It's simply leverage. The safety or lack of "safety" ultimately is based on the investment. Leverage just magnifies it and increases volatility. That's why brokers have different allowances and requirements depending on what is in the account. If you have a risk-free investment, you can leverage as much as you want without increasing risk. Of course, no investment is truly risk-free.
oldcomputerguy wrote:
Sun May 13, 2018 8:43 pm

What do I consider a "safe" amount of margin?

Zero.

In my world view, trading on margin is by definition risky.
Why is trading using margin considered risky but leverage is considered positive when investing in real estate? Why do many people consider it safer to borrow to buy a house vs. paying cash but think it is riskier when buying equities, especially since houses are more concentrated and much less liquid than equities?

I'll take the margin loan over a mortgage any day. You can repay a margin loan quickly and easily without selling all of the underlying assets. Can't do that with a house.

tymishu
Posts: 24
Joined: Thu Feb 01, 2018 10:49 pm
Location: NJ

Re: Margin debt ratio

Post by tymishu » Mon May 14, 2018 8:16 am

Pajamas wrote:
Mon May 14, 2018 6:56 am
tymishu wrote:
Mon May 14, 2018 6:12 am
Pajamas wrote:
Sun May 13, 2018 8:50 pm
I don't see how your margin debt could be 40% of your account value given the huge appreciation in the stocks you hold over the last two years. Seems like there is some missing information. Have you been drawing cash out of the account or buying more of stock A & B?

Also the most efficient way to lower margin utilization is by depositing cash. When you sell securities, the total value of your equities goes down, too, so you are decreasing both the numerator and denominator rather than just the numerator.
Let’s say i have $4 margin debt with $10 TAV. I sell $1 stock. I will have $3 marging debt with $9 TAV. If I sell $2 i will have $2 margin debt with $8 TAV. The margin debt to TAV ratio decreases from 40% to 33% to 25%.
Yes, and if you deposit $1 or $2 your ratio goes from 40% to 30% to 20%.

I still don't see how your margin debt could be 40% (much less 46%) of your account value given the huge appreciation in the stocks you hold over the last two years. Seems like there is some missing information. Have you been drawing cash out of the account or buying more of stock A & B?

Another way to reduce the leverage, and this is what I am hoping for given the still very good outlook of stock B, is the $10 TAV climbs to $16. Since my margin interest rate is negligible, my leverage is reduced to 25%.

tymishu
Posts: 24
Joined: Thu Feb 01, 2018 10:49 pm
Location: NJ

Re: Margin debt ratio

Post by tymishu » Mon May 14, 2018 8:21 am

whodidntante wrote:
Mon May 14, 2018 12:37 am
I agree with the above poster that 25% provides a good buffer, at least with a diversified portfolio. However, your portfolio is highly concentrated in stock A. If stock A takes a serious beating, you will have an issue. Great companies can and do blow up.
My portfolio used to be diversified. I dumped all other lower performing stocks to bet on the lone horse (stock B) at the same time I started to take on margin debt.

25% is a target I'd like to reach.

tymishu
Posts: 24
Joined: Thu Feb 01, 2018 10:49 pm
Location: NJ

Re: Margin debt ratio

Post by tymishu » Mon May 14, 2018 8:25 am

oldcomputerguy wrote:
Sun May 13, 2018 8:43 pm
tymishu wrote:
Sun May 13, 2018 11:22 am
What do you consider a safe margin debt ratio of the debt to your total asset value?
What do I consider a "safe" amount of margin?

Zero.

In my world view, trading on margin is by definition risky.
Every investment vehicle has its own risk. Risk is associated with reward. Trading stock is risky, Margin trading is riskIER.

tymishu
Posts: 24
Joined: Thu Feb 01, 2018 10:49 pm
Location: NJ

Re: Margin debt ratio

Post by tymishu » Mon May 14, 2018 1:13 pm

Pajamas wrote:
Mon May 14, 2018 6:56 am
tymishu wrote:
Mon May 14, 2018 6:12 am
Pajamas wrote:
Sun May 13, 2018 8:50 pm
I don't see how your margin debt could be 40% of your account value given the huge appreciation in the stocks you hold over the last two years. Seems like there is some missing information. Have you been drawing cash out of the account or buying more of stock A & B?

Also the most efficient way to lower margin utilization is by depositing cash. When you sell securities, the total value of your equities goes down, too, so you are decreasing both the numerator and denominator rather than just the numerator.
Let’s say i have $4 margin debt with $10 TAV. I sell $1 stock. I will have $3 marging debt with $9 TAV. If I sell $2 i will have $2 margin debt with $8 TAV. The margin debt to TAV ratio decreases from 40% to 33% to 25%.
Yes, and if you deposit $1 or $2 your ratio goes from 40% to 30% to 20%.

I still don't see how your margin debt could be 40% (much less 46%) of your account value given the huge appreciation in the stocks you hold over the last two years. Seems like there is some missing information. Have you been drawing cash out of the account or buying more of stock A & B?

What do you mean exactly by "safe"? Low odds of a margin call?

"Safe" margin debt ratio is a matter of context and preference. You could have a much higher use of margin if your account held U.S. treasury bonds only vs. high-flying equities such as your account holds and be "safer". If you have plenty of cash available outside of the account, it would be "safer". It's simply leverage. The safety or lack of "safety" ultimately is based on the investment. Leverage just magnifies it and increases volatility. That's why brokers have different allowances and requirements depending on what is in the account. If you have a risk-free investment, you can leverage as much as you want without increasing risk. Of course, no investment is truly risk-free.
oldcomputerguy wrote:
Sun May 13, 2018 8:43 pm

What do I consider a "safe" amount of margin?

Zero.

In my world view, trading on margin is by definition risky.
Why is trading using margin considered risky but leverage is considered positive when investing in real estate? Why do many people consider it safer to borrow to buy a house vs. paying cash but think it is riskier when buying equities, especially since houses are more concentrated and much less liquid than equities?

I'll take the margin loan over a mortgage any day. You can repay a margin loan quickly and easily without selling all of the underlying assets. Can't do that with a house.
Not meant to nitpick, the reason I went into margin debt was I was already cash strapped betting on the lone horse, so I do not have $1, or $2 to offset the $4 margin debt. And yes. A safe margin debt to me is a lowER odds of a margin call. I think 25% leverage would be reasonably safe sans a 2008 like crash.

The market volatility in 2018 leading up to now had me thinking to lower my exposure to this 40% leveraging. I also have tax implications to consider. If I sell too quickly even with long term capital gains I'll have to pay a tidy sum to Uncle Sam. Now the position seems to regain momentum I am hoping the position share prices rise with little profit taking could reach the target I was hoping to get. Afterall 28% YTD appreciation is nothing to sneeze at.

alex_686
Posts: 3652
Joined: Mon Feb 09, 2015 2:39 pm

Re: Margin debt ratio

Post by alex_686 » Mon May 14, 2018 1:27 pm

AlohaJoe wrote:
Sun May 13, 2018 9:40 pm
25%. At that level even if the market drops substantially I don't have to interrupt my life to worry about margin. It also means I still have a lot of liquidity if I need it suddenly for some reason. I'm currently at 7.6% margin debt but expect that go up to maybe 15% by the end of the year.
I used to work in the margin department. I might go along with the 25% - for a well diversified portfolio. The OP does not have a well diversified portfolio. And then we have this statement:
tymishu wrote:
Mon May 14, 2018 8:21 am
My portfolio used to be diversified. I dumped all other lower performing stocks to bet on the lone horse (stock B) at the same time I started to take on margin debt.
The OP is engaged in active trading on margin. They may not feel like they are but they are. A safe margin account is a little like a safe gun - you can never assume that it is safe. Both need to be actively and continuously monitored to ensure it is safe.

tymishu
Posts: 24
Joined: Thu Feb 01, 2018 10:49 pm
Location: NJ

Re: Margin debt ratio

Post by tymishu » Mon May 14, 2018 1:39 pm

alex_686 wrote:
Mon May 14, 2018 1:27 pm
AlohaJoe wrote:
Sun May 13, 2018 9:40 pm
25%. At that level even if the market drops substantially I don't have to interrupt my life to worry about margin. It also means I still have a lot of liquidity if I need it suddenly for some reason. I'm currently at 7.6% margin debt but expect that go up to maybe 15% by the end of the year.
I used to work in the margin department. I might go along with the 25% - for a well diversified portfolio. The OP does not have a well diversified portfolio. And then we have this statement:
tymishu wrote:
Mon May 14, 2018 8:21 am
My portfolio used to be diversified. I dumped all other lower performing stocks to bet on the lone horse (stock B) at the same time I started to take on margin debt.
The OP is engaged in active trading on margin. They may not feel like they are but they are. A safe margin account is a little like a safe gun - you can never assume that it is safe. Both need to be actively and continuously monitored to ensure it is safe.
You can say that is what I am doing, "actively and continuously monitoring the portfolio". Certainly at the current margin debt to TAV ratio I would not do anything otherwise. Incidentally I have 15% margin requirement in my brokerage account, not the standard 25%. I'd like to actively trade, margin debt or no margin debt. But at the current level of leveraging I am hamstrung. That is one reason why I'd like to reduce it.

alex_686
Posts: 3652
Joined: Mon Feb 09, 2015 2:39 pm

Re: Margin debt ratio

Post by alex_686 » Mon May 14, 2018 1:49 pm

tymishu wrote:
Mon May 14, 2018 1:39 pm
You can say that is what I am doing, "actively and continuously monitoring the portfolio". Certainly at the current margin debt to TAV ratio I would not do anything otherwise. Incidentally I have 15% margin requirement in my brokerage account, not the standard 25%. I'd like to actively trade, margin debt or no margin debt. But at the current level of leveraging I am hamstrung. That is one reason why I'd like to reduce it.
I am confused on 2 points.

First, how are you getting the 15% margin requirement? The standard 25% is the minimum set by regulations. Are you trading futures or options?

Second, why are you hamstrung? Just sell down your positions until you are off margin. Do you have large unrealized gains in your positions?

If you are actively trading and actively monitoring this means you are using cold hard logic to drive your portfolio. When your investment thesis no longer makes sense you will sell off you actively managed portfolio in a heartbeat. Instead, you seem to let your emotions drive you. The fact that A and B have done well and you have sold off the poor performers does not mean much. Yesterday's performance does not mean much for tomorrow.

tymishu
Posts: 24
Joined: Thu Feb 01, 2018 10:49 pm
Location: NJ

Re: Margin debt ratio

Post by tymishu » Mon May 14, 2018 2:07 pm

alex_686 wrote:
Mon May 14, 2018 1:49 pm
tymishu wrote:
Mon May 14, 2018 1:39 pm
You can say that is what I am doing, "actively and continuously monitoring the portfolio". Certainly at the current margin debt to TAV ratio I would not do anything otherwise. Incidentally I have 15% margin requirement in my brokerage account, not the standard 25%. I'd like to actively trade, margin debt or no margin debt. But at the current level of leveraging I am hamstrung. That is one reason why I'd like to reduce it.
I am confused on 2 points.

First, how are you getting the 15% margin requirement? The standard 25% is the minimum set by regulations. Are you trading futures or options?

Second, why are you hamstrung? Just sell down your positions until you are off margin. Do you have large unrealized gains in your positions?

If you are actively trading and actively monitoring this means you are using cold hard logic to drive your portfolio. When your investment thesis no longer makes sense you will sell off you actively managed portfolio in a heartbeat. Instead, you seem to let your emotions drive you. The fact that A and B have done well and you have sold off the poor performers does not mean much. Yesterday's performance does not mean much for tomorrow.
I am with IB on a portfolio account. I never figured out how the margin debt was calculated to the extent if and when I will get a margin call (I never did.). It may still require 25% maintenance margin per Federal regulations despite the account distinction. No. I do not trade in future or options. I also do not want to sell down my position now. The tax consequence is too high in addition to a very bullish outlook on stock B (perhaps even Stock A which I do not much pay attention). And yes. I am sitting on a seven figure unrealized capital gains. Some are long term gains. Others are short term.

I hope I have not allowed my emotion to drive my stock decisions. I also realize past performance does not guarantee future results. I have not traded the last three months because I am hamstrung.

jminv
Posts: 485
Joined: Tue Jan 02, 2018 10:58 pm

Re: Margin debt ratio

Post by jminv » Mon May 14, 2018 2:28 pm

I would feel comfortable with 25% in a diversified portfolio. You don't have a diversified portfolio, though. With a 2 stock portfolio (really 1 since it's 95% of your 'portfolio') and your margin, I would be concerned about a margin call sometime in the future.

If you as you say you used to be more diversified but then sold off those holdings because they weren't doing well and these two were doing well, that's really silly. By random chance you will have a portion of your portfolio that does well ie these two stocks. That doesn't imply that they will continue to do well in the future. Stock pickers can find more than two stocks that they like, I know I do.

It's worrying that you say you don't look at the day to day movements of your portfolio anymore given the risk that you are taking. Since it's essentially a one stock portfolio, I would be glued onto any and all news about that stock or it's industry. I would be very worried about it cratering. One reason diversification is nice is that it allows you to worry less.

It sounds like you might have been using margin for expenses? It seems like you've dug yourself into a bit of a hole by increasing your margin while concentrating your portfolio risk into basically a single stock risk.
Last edited by jminv on Mon May 14, 2018 2:34 pm, edited 1 time in total.

tymishu
Posts: 24
Joined: Thu Feb 01, 2018 10:49 pm
Location: NJ

Re: Margin debt ratio

Post by tymishu » Mon May 14, 2018 2:33 pm

jminv wrote:
Mon May 14, 2018 2:28 pm
I would feel comfortable with 25% in a diversified portfolio. You don't have a diversified portfolio, though. With a 2 stock portfolio (really 1 since it's 95% of your 'portfolio') and your margin, I would be concerned about a margin call sometime in the future.

If you as you say you used to be more diversified but then sold off those holdings because they weren't doing well and these two were doing well, that's really silly. By random chance you will have a portion of your portfolio that does well ie these two stocks. That doesn't imply that they will continue to do well in the future.

It sounds like you might have been using margin for expenses? It seems like you've dug yourself into a bit of a hole by increasing your margin while concentrating your portfolio risk into basically a single stock risk.
Yes I hope the lone horse I bet on is not a one trick pony. I did take out $200k from the margin account to pay Uncle Sam this past tax season. Other than that practically all available cash is in the portfolio.

In the spirit of full (perhaps more is the right word) disclosure, my previously diversified portfolio wasn't so diversified any longer even if I kept them when stock B took off two years ago. 5 year 1,700%, 2 year 575%, 1 year 171% and YTD 28% growth will skew a diversified portfolio very concentrated very quickly, especially if you have it since the early 2000's having paid single digit for a bundle of it.
Last edited by tymishu on Mon May 14, 2018 2:44 pm, edited 1 time in total.

jminv
Posts: 485
Joined: Tue Jan 02, 2018 10:58 pm

Re: Margin debt ratio

Post by jminv » Mon May 14, 2018 2:38 pm

tymishu wrote:
Mon May 14, 2018 2:33 pm

Yes I hope the lone horse I bet on is not a one trick pony. I did take out $200k from the margin account to pay Uncle Sam this past tax season. Other than that practically all available cash is in the portfolio.
Are these regular income taxes or something else that was unexpected? Everytime you increase your margin in a one stock portfolio you are playing with fire. I hope it goes well for you.

tymishu
Posts: 24
Joined: Thu Feb 01, 2018 10:49 pm
Location: NJ

Re: Margin debt ratio

Post by tymishu » Mon May 14, 2018 2:47 pm

jminv wrote:
Mon May 14, 2018 2:38 pm
tymishu wrote:
Mon May 14, 2018 2:33 pm

Yes I hope the lone horse I bet on is not a one trick pony. I did take out $200k from the margin account to pay Uncle Sam this past tax season. Other than that practically all available cash is in the portfolio.
Are these regular income taxes or something else that was unexpected? Everytime you increase your margin in a one stock portfolio you are playing with fire. I hope it goes well for you.
The funds were used to pay regular income tax. Unfortunately (Perhaps fortunately is the correct word) the profit I took on stock B propelled us to the highest tax bracket.

User avatar
Pajamas
Posts: 6015
Joined: Sun Jun 03, 2012 6:32 pm

Re: Margin debt ratio

Post by Pajamas » Mon May 14, 2018 2:47 pm

tymishu wrote:
Mon May 14, 2018 2:33 pm
I did take out $200k from the margin account to pay Uncle Sam this past tax season.
Finally an explanation of how you got to the current 46% margin ratio after I asked twice, and in particular asked if you withdrew cash. :twisted:
tymishu wrote:
Mon May 14, 2018 2:07 pm
I am with IB on a portfolio account. I never figured out how the margin debt was calculated to the extent if and when I will get a margin call (I never did.). It may still require 25% maintenance margin per Federal regulations despite the account distinction. No. I do not trade in future or options. I do not want to sell down my position now. The tax consequence is too high in addition to a very bullish outlook on stock B (perhaps even Stock A which I do not much pay attention). And yes. I am sitting on a seven figure unrealized capital gains. Some are long term gains. Others are short term.

I hope I have not allowed my emotion to drive my stock decisions. I also realize past performance does not guarantee future results. I have not traded the last three months because I am hamstrung.
A few points:

The portfolio margin requirements are dynamic and as alex_686 pointed out, your position is considered "highly concentrated" so the 15% could change if either of your stocks were to start dropping rapidly, for instance. I don't know their current policies and procedures, but Interactive Brokers has had problems with its software inappropriately liquidating positions to meet margin calls due to faulty data. Just be aware that the 15% is not fixed or guaranteed and that they can liquidate your position at the current price at any time without advance notification and will do so.

You should be concerned about something out of the blue such as one of your holdings being halted for trading for whatever reason and then opening significantly lower and triggering a call.

You are at least to some degree letting taxes dictate your investment decisions. Taxes are certainly something to be considered in investment decisions, but if taxes are the deciding factor in selling or not selling, you may come to regret not selling. Understand that taxes are not inherent to the investment. You could have the same portfolio in a tax-deferred account and would not be considering tax implications of selling because there wouldn't be any. So you are influencing your investment decisions by something that has nothing to do with them, which means your decision-making in regards to the investment is suboptimal.

I don't think a margin call is really a risk. It is more of a notice of the severity of a problem, either a sudden, unexpected problem or one that has been allowed to become severe over time through inaction. The fact that you have no cash to meet a margin call means part of your position would have to be liquidated. That means that you should have sold part of your position some time ago. Rather than worrying about a margin call, you should worry about the underlying risks that would cause a margin call. Worrying about a margin call is just a distraction.

Good luck. :beer
Last edited by Pajamas on Mon May 14, 2018 3:00 pm, edited 2 times in total.

Spirit Rider
Posts: 8367
Joined: Fri Mar 02, 2007 2:39 pm

Re: Margin debt ratio

Post by Spirit Rider » Mon May 14, 2018 2:57 pm

Pajamas wrote:
Mon May 14, 2018 6:56 am
Why is trading using margin considered risky but leverage is considered positive when investing in real estate? Why do many people consider it safer to borrow to buy a house vs. paying cash but think it is riskier when buying equities, especially since houses are more concentrated and much less liquid than equities?
Conventional mortgages for owner occupied real estate is not marked to market. The mortgage can not be called because of a drop in the property's value.

On the other hand, margined securities are subject to a margin call by a drop in value.

I suggest the OP grab one of your pajamas, some popcorn and read market timer's "legen...wait for it...dary" thread A different approach to asset allocation

User avatar
Pajamas
Posts: 6015
Joined: Sun Jun 03, 2012 6:32 pm

Re: Margin debt ratio

Post by Pajamas » Mon May 14, 2018 3:02 pm

Spirit Rider wrote:
Mon May 14, 2018 2:57 pm
Conventional mortgages for owner occupied real estate is not marked to market. The mortgage can not be called because of a drop in the property's value.

On the other hand, margined securities are subject to a margin call by a drop in value.
Which has been detrimental to the finances of many homeowners. I see that as increasing the risk of loss on real estate, not decreasing it. Of course, a mortgage can be "called" if you don't make payments.

tymishu
Posts: 24
Joined: Thu Feb 01, 2018 10:49 pm
Location: NJ

Re: Margin debt ratio

Post by tymishu » Mon May 14, 2018 3:14 pm

Pajamas wrote:
Mon May 14, 2018 2:47 pm
tymishu wrote:
Mon May 14, 2018 2:33 pm
I did take out $200k from the margin account to pay Uncle Sam this past tax season.
Finally an explanation of how you got to the current 46% margin ratio after I asked twice, and in particular asked if you withdrew cash. :twisted:
tymishu wrote:
Mon May 14, 2018 2:07 pm
I am with IB on a portfolio account. I never figured out how the margin debt was calculated to the extent if and when I will get a margin call (I never did.). It may still require 25% maintenance margin per Federal regulations despite the account distinction. No. I do not trade in future or options. I do not want to sell down my position now. The tax consequence is too high in addition to a very bullish outlook on stock B (perhaps even Stock A which I do not much pay attention). And yes. I am sitting on a seven figure unrealized capital gains. Some are long term gains. Others are short term.

I hope I have not allowed my emotion to drive my stock decisions. I also realize past performance does not guarantee future results. I have not traded the last three months because I am hamstrung.
A few points:

The portfolio margin requirements are dynamic and as alex_686 pointed out, your position is considered "highly concentrated" so the 15% could change if either of your stocks were to start dropping rapidly, for instance. I don't know their current policies and procedures, but Interactive Brokers has had problems with its software inappropriately liquidating positions to meet margin calls due to faulty data. Just be aware that the 15% is not fixed or guaranteed and that they can liquidate your position at the current price at any time without advance notification and will do so.

You should be concerned about something out of the blue such as one of your holdings being halted for trading for whatever reason and then opening significantly lower and triggering a call.

You are at least to some degree letting taxes dictate your investment decisions. Taxes are certainly something to be considered in investment decisions, but if taxes are the deciding factor in selling or not selling, you may come to regret not selling. Understand that taxes are not inherent to the investment. You could have the same portfolio in a tax-deferred account and would not be considering tax implications of selling because there wouldn't be any. So you are influencing your investment decisions by something that has nothing to do with them, which means your decision-making in regards to the investment is suboptimal.

I don't think a margin call is really a risk. It is more of a notice of the severity of a problem, either a sudden, unexpected problem or one that has been allowed to become severe over time through inaction. The fact that you have no cash to meet a margin call means part of your position would have to be liquidated. That means that you should have sold part of your position some time ago. Rather than worrying about a margin call, you should worry about the underlying risks that would cause a margin call. Worrying about a margin call is just a distraction.

Good luck. :beer
What propelled the margin debt ratio to 46% was not the $200k I took out to pay Uncle Sam. It was the height of one of two corrections we had in 2018 when I saw it spiked to 46%. The current margin debt to TAV ratio is 40%. Also tax payment certainly is a consideration. It will not define or drive my investment strategy.

I should also stress I am not worried that much about a margin call. The question about diversity I have earlier addressed that by virtue of the meteoric rise of stock B diversity is already gone whether I liquidate other stocks or not. The outlook is on stock B is good. No. I should say great. Will it crash? Yes. If the market crashes, it will I presume. Do you see a repeat of 2008 on the horizon? I do not. Do not get me wrong. As much confidence as I have on stock B and its outlook, I do not look beyond the next quarterly earning report. So far it has been stellar. In addition, this stock B I bought a bundle of in single digit (pure luck I should say) more than 15 years ago isn't cheap any longer. With its meteoric rise in share prices the last two years comes very high expectations. I fully realized if and when it fails to meet those high expectations and deliver the next quarter it will be punished. I have very high hopes for this stock that it is one for the future as many long time share holders believe. I will not keep it for any sentimental value. Nor should anyone.

The motivation to lower the leverage is so I can pick up bargains when I see and not so much on the potential of a margin call.

AlohaJoe
Posts: 3573
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Margin debt ratio

Post by AlohaJoe » Mon May 14, 2018 7:52 pm

alex_686 wrote:
Mon May 14, 2018 1:27 pm
AlohaJoe wrote:
Sun May 13, 2018 9:40 pm
25%. At that level even if the market drops substantially I don't have to interrupt my life to worry about margin. It also means I still have a lot of liquidity if I need it suddenly for some reason. I'm currently at 7.6% margin debt but expect that go up to maybe 15% by the end of the year.
I used to work in the margin department. I might go along with the 25% - for a well diversified portfolio. The OP does not have a well diversified portfolio.
This is a good point & I agree. I have a well diversified portfolio and that 25% was based on that assumption. The OP clearly isn't well diversified so "safe" for a single stock is going to be quite a bit lower than "safe" for a well diversified portfolio.

Tanelorn
Posts: 1502
Joined: Thu May 01, 2014 9:35 pm

Re: Margin debt ratio

Post by Tanelorn » Tue May 15, 2018 2:16 am

Congratulations on your NVDA purchases, and especially on holding them this long. A couple of points:

1. IB margin requirements for concentrated positions, even in a PM account, is 30%(*) not 15%
2. Your margin rate is higher now, probably in the 2.00-2.25% range given the Fed hikes (floats with Fed Funds rates)
3. NVDA is a high beta and volatile stock. Ballpark is 1.5x vs the market, 40% annualized vol.
4. NVDA sales may be indirectly related to cryptocurrencies, esp non-BTC ones mined with GPUs

Broadly, the safety of using margin and your debt/asset ratio depends a lot on the volatility of the assets. 300% D/A might be fine if you're holding bonds, especially treasuries, but 40% could be trouble with the wrong downturn in a concentrated stock portfolio. Here's a scenario to consider:

0. Assume $10 stock and $4 debt, so $6 of equity
1. Stock drops 40%. Not out of the question - things that go up 30% YTD can go down 40% about as easily.
2. This leaves you with $6 stock and $4 debt, so $2 of equity. You've lost 2/3 of your wealth at this point.
3. This is a 33% equity ratio, so you're right at the edge of a margin call with the 30% concentration requirement

In short, you have a lot more risk and a lot less buffer than you think given your concentration. If the stock went down by 50%, you'd be in a call ($5 stock, $4 debt, so only $1 / 20% equity) and would need to sell additional shares or IB would. This would trigger large tax bills, since your basis is probably very low, even after a 50% drop, which would require selling even more in a declining market which you might, from your current view on the stock anyway, to be reluctant to do.

I would sell down a big chunk of your margin, by half at least, and make sure to figure out how to sell the older lots with long term gain (see here). I might also write OOTM covered calls against the rest to at least reduce some of the risks.

From a psychological perspective, if you've got millions in a single stock, you no doubt feel very confident in your investment abilities since you've done so much better than everyone else (ala bitcoin millionaires). Remember there may have been a good bit of risk and luck along the way, and depending on your job and other assets, this may represent a significant amount of money for lifestyle considerations - i.e. Sell half and don't have to work again if you won't want to; lose it all on a margin call / downturn / tax mess, and you may have to be punching the clock for the rest of your days.

Good luck and I hope you won't need it!

* preview a buy or sale of $10k worth of stock A in TWS and you'll see how much change there is in your margin requirements. Expect it to be about $3k. Also check out your daily margin report for more details.

ps next time try to pick YRIV for 15,000% in 5 years. Just don't forget to sell since it's a terrible stock ;).

https://www.barchart.com/stocks/perform ... meFrame=5y

tymishu
Posts: 24
Joined: Thu Feb 01, 2018 10:49 pm
Location: NJ

Re: Margin debt ratio

Post by tymishu » Tue May 15, 2018 8:28 am

Tanelorn wrote:
Tue May 15, 2018 2:16 am
Congratulations on your NVDA purchases, and especially on holding them this long. A couple of points:

1. IB margin requirements for concentrated positions, even in a PM account, is 30%(*) not 15%
2. Your margin rate is higher now, probably in the 2.00-2.25% range given the Fed hikes (floats with Fed Funds rates)
3. NVDA is a high beta and volatile stock. Ballpark is 1.5x vs the market, 40% annualized vol.
4. NVDA sales may be indirectly related to cryptocurrencies, esp non-BTC ones mined with GPUs

Broadly, the safety of using margin and your debt/asset ratio depends a lot on the volatility of the assets. 300% D/A might be fine if you're holding bonds, especially treasuries, but 40% could be trouble with the wrong downturn in a concentrated stock portfolio. Here's a scenario to consider:

0. Assume $10 stock and $4 debt, so $6 of equity
1. Stock drops 40%. Not out of the question - things that go up 30% YTD can go down 40% about as easily.
2. This leaves you with $6 stock and $4 debt, so $2 of equity. You've lost 2/3 of your wealth at this point.
3. This is a 33% equity ratio, so you're right at the edge of a margin call with the 30% concentration requirement

In short, you have a lot more risk and a lot less buffer than you think given your concentration. If the stock went down by 50%, you'd be in a call ($5 stock, $4 debt, so only $1 / 20% equity) and would need to sell additional shares or IB would. This would trigger large tax bills, since your basis is probably very low, even after a 50% drop, which would require selling even more in a declining market which you might, from your current view on the stock anyway, to be reluctant to do.

I would sell down a big chunk of your margin, by half at least, and make sure to figure out how to sell the older lots with long term gain (see here). I might also write OOTM covered calls against the rest to at least reduce some of the risks.

From a psychological perspective, if you've got millions in a single stock, you no doubt feel very confident in your investment abilities since you've done so much better than everyone else (ala bitcoin millionaires). Remember there may have been a good bit of risk and luck along the way, and depending on your job and other assets, this may represent a significant amount of money for lifestyle considerations - i.e. Sell half and don't have to work again if you won't want to; lose it all on a margin call / downturn / tax mess, and you may have to be punching the clock for the rest of your days.

Good luck and I hope you won't need it!

* preview a buy or sale of $10k worth of stock A in TWS and you'll see how much change there is in your margin requirements. Expect it to be about $3k. Also check out your daily margin report for more details.

ps next time try to pick YRIV for 15,000% in 5 years. Just don't forget to sell since it's a terrible stock ;).

https://www.barchart.com/stocks/perform ... meFrame=5y
I don't know how you know stock B is $NVDA. It is. Stock A is $AAPL. My current nominal combined margin interest rate is 2.45% per annum. Effectively I am paying 1.47% based on my tax bracket. I disagree a 40% haircut on $NVDA could happen in the near future. Impossible? No. Not impossible but highly unlikely given the bullish outlook it has had, its performance, and track record. How many companies have 12 consecutive quarterly ER beat? It is a good stock to own. However, I do not have any illusion it will continue the winning streak unimpeded. No company does. That is why I do not look beyond the next quarterly earning report.

I also understand the apparent link between Nvidia's GPU and crypto mining. I have come to accept crypto is not a significant part of Nvidia's business. To quell speculations, Nvidia has also taken positive steps to identify and isolate its GPU being used to mine crypto rather than for gaming, which is the bread butter of its income stream. I am also of the opinion crypto will not go away. It is not a bubble. But that is beside the point. In any event I consider Nvidia wise to separate its product being used to mine crypto. What makes Nvidia share holders excited about the company is not in its current business line on gaming and data center which are robust and enjoyed significant lead in industry, but the future such as AI and autonomous driving. They are still nascent. I'd like to think the company has the lead in the new frontier and a promising future.

I do realize the risk involved with the high leveraging of my portfolio. OOTM options are something completely foreign to me. I will likely talk to a financial adviser on how to reduce the exposure. I am not an experience trader by any means having looked at stock trading only since 2014 or so. My wife managed the account prior. I attribute our good fortune in the explosive portfolio growth to luck.

User avatar
whodidntante
Posts: 3740
Joined: Thu Jan 21, 2016 11:11 pm

Re: Margin debt ratio

Post by whodidntante » Tue May 15, 2018 12:33 pm

Tanelorn knew it was NVDA because Tanelorn is The One.

Tanelorn
Posts: 1502
Joined: Thu May 01, 2014 9:35 pm

Re: Margin debt ratio

Post by Tanelorn » Tue May 15, 2018 6:40 pm

tymishu wrote:
Tue May 15, 2018 8:28 am
I don't know how you know stock B is $NVDA. It is. Stock A is $AAPL.
Am I understanding you correctly that your portfolio is 95% AAPL / 5% NVDA, or is it the other way around?

Nate79
Posts: 3056
Joined: Thu Aug 11, 2016 6:24 pm
Location: Portland, OR

Re: Margin debt ratio

Post by Nate79 » Tue May 15, 2018 8:54 pm

tymishu wrote:
Tue May 15, 2018 8:28 am
Tanelorn wrote:
Tue May 15, 2018 2:16 am
Congratulations on your NVDA purchases, and especially on holding them this long. A couple of points:

1. IB margin requirements for concentrated positions, even in a PM account, is 30%(*) not 15%
2. Your margin rate is higher now, probably in the 2.00-2.25% range given the Fed hikes (floats with Fed Funds rates)
3. NVDA is a high beta and volatile stock. Ballpark is 1.5x vs the market, 40% annualized vol.
4. NVDA sales may be indirectly related to cryptocurrencies, esp non-BTC ones mined with GPUs

Broadly, the safety of using margin and your debt/asset ratio depends a lot on the volatility of the assets. 300% D/A might be fine if you're holding bonds, especially treasuries, but 40% could be trouble with the wrong downturn in a concentrated stock portfolio. Here's a scenario to consider:

0. Assume $10 stock and $4 debt, so $6 of equity
1. Stock drops 40%. Not out of the question - things that go up 30% YTD can go down 40% about as easily.
2. This leaves you with $6 stock and $4 debt, so $2 of equity. You've lost 2/3 of your wealth at this point.
3. This is a 33% equity ratio, so you're right at the edge of a margin call with the 30% concentration requirement

In short, you have a lot more risk and a lot less buffer than you think given your concentration. If the stock went down by 50%, you'd be in a call ($5 stock, $4 debt, so only $1 / 20% equity) and would need to sell additional shares or IB would. This would trigger large tax bills, since your basis is probably very low, even after a 50% drop, which would require selling even more in a declining market which you might, from your current view on the stock anyway, to be reluctant to do.

I would sell down a big chunk of your margin, by half at least, and make sure to figure out how to sell the older lots with long term gain (see here). I might also write OOTM covered calls against the rest to at least reduce some of the risks.

From a psychological perspective, if you've got millions in a single stock, you no doubt feel very confident in your investment abilities since you've done so much better than everyone else (ala bitcoin millionaires). Remember there may have been a good bit of risk and luck along the way, and depending on your job and other assets, this may represent a significant amount of money for lifestyle considerations - i.e. Sell half and don't have to work again if you won't want to; lose it all on a margin call / downturn / tax mess, and you may have to be punching the clock for the rest of your days.

Good luck and I hope you won't need it!

* preview a buy or sale of $10k worth of stock A in TWS and you'll see how much change there is in your margin requirements. Expect it to be about $3k. Also check out your daily margin report for more details.

ps next time try to pick YRIV for 15,000% in 5 years. Just don't forget to sell since it's a terrible stock ;).

https://www.barchart.com/stocks/perform ... meFrame=5y
I don't know how you know stock B is $NVDA. It is. Stock A is $AAPL. My current nominal combined margin interest rate is 2.45% per annum. Effectively I am paying 1.47% based on my tax bracket. I disagree a 40% haircut on $NVDA could happen in the near future. Impossible? No. Not impossible but highly unlikely given the bullish outlook it has had, its performance, and track record. How many companies have 12 consecutive quarterly ER beat? It is a good stock to own. However, I do not have any illusion it will continue the winning streak unimpeded. No company does. That is why I do not look beyond the next quarterly earning report.

I also understand the apparent link between Nvidia's GPU and crypto mining. I have come to accept crypto is not a significant part of Nvidia's business. To quell speculations, Nvidia has also taken positive steps to identify and isolate its GPU being used to mine crypto rather than for gaming, which is the bread butter of its income stream. I am also of the opinion crypto will not go away. It is not a bubble. But that is beside the point. In any event I consider Nvidia wise to separate its product being used to mine crypto. What makes Nvidia share holders excited about the company is not in its current business line on gaming and data center which are robust and enjoyed significant lead in industry, but the future such as AI and autonomous driving. They are still nascent. I'd like to think the company has the lead in the new frontier and a promising future.

I do realize the risk involved with the high leveraging of my portfolio. OOTM options are something completely foreign to me. I will likely talk to a financial adviser on how to reduce the exposure. I am not an experience trader by any means having looked at stock trading only since 2014 or so. My wife managed the account prior. I attribute our good fortune in the explosive portfolio growth to luck.
How much did NVDA drop from its peak in 2008?

tymishu
Posts: 24
Joined: Thu Feb 01, 2018 10:49 pm
Location: NJ

Re: Margin debt ratio

Post by tymishu » Tue May 15, 2018 9:31 pm

I don’t know how much did $NVDA drop in 2008. I did not pay attention to the portfolio until 2014.

You are implying another downturn like 2008 May be down the road I presume. I do not dispute it will not happen. I just hope the fact I am watching the portfolio from one quarterly earning report to another will not allow the share prices to fall to the extent no action will be taken to dispose of the equity.

I can only tell you we did not touch any share of $NVDA we own in 2008. They did not worth much so not much was at stake. But after the explosive growth the last two years and a half the stake has become much, much bigger.

tymishu
Posts: 24
Joined: Thu Feb 01, 2018 10:49 pm
Location: NJ

Re: Margin debt ratio

Post by tymishu » Tue May 15, 2018 9:38 pm

Tanelorn wrote:
Tue May 15, 2018 6:40 pm
tymishu wrote:
Tue May 15, 2018 8:28 am
I don't know how you know stock B is $NVDA. It is. Stock A is $AAPL.
Am I understanding you correctly that your portfolio is 95% AAPL / 5% NVDA, or is it the other way around?
95% $NVDA/5% $AAPL. We have $AAPL before the 1:7 split. The cost basis was in the teens. But compared to $NVDA it is minuscule I don’t pay attention to its ups and downs.

Nate79
Posts: 3056
Joined: Thu Aug 11, 2016 6:24 pm
Location: Portland, OR

Re: Margin debt ratio

Post by Nate79 » Tue May 15, 2018 11:37 pm

tymishu wrote:
Tue May 15, 2018 9:31 pm
I don’t know how much did $NVDA drop in 2008. I did not pay attention to the portfolio until 2014.

You are implying another downturn like 2008 May be down the road I presume. I do not dispute it will not happen. I just hope the fact I am watching the portfolio from one quarterly earning report to another will not allow the share prices to fall to the extent no action will be taken to dispose of the equity.

I can only tell you we did not touch any share of $NVDA we own in 2008. They did not worth much so not much was at stake. But after the explosive growth the last two years and a half the stake has become much, much bigger.
If I read the charts correctly it dropped 75%. I was just throwing it out there that a single stock can drop a significant amount in a short period of time. A 40% drop that you mentioned is nothing for a single stock to drop in a potential serious financial downturn.

Tanelorn
Posts: 1502
Joined: Thu May 01, 2014 9:35 pm

Re: Margin debt ratio

Post by Tanelorn » Wed May 16, 2018 9:28 pm

Thanks for clarifying your portfolio is mostly NVDA as I had assumed.
I do realize the risk involved with the high leveraging of my portfolio.
I'm going to be honest with you. You don't understand the risks. Margin is risky and best left to professionals and experienced traders. I am not an Anti-Margin Zealot, a popular viewpoint around here. I use margin myself and attribute a large amount of my wealth to judicious use of margin, and let me tell you - to use even 1.4x leverage in a portfolio as risky and concentrated as yours is insane. I would never put more than ~1/3 of my portfolio in anything, no matter how good it looked, because there's always some way for things to go bad, no matter how unlikely, and you don't live to fight another day if you're leveraged up on margin when your luck goes bad.

I took the liberty of setting up a portfolio backtest for you that shows how your portfolio, roughly 135% NVDA / 5% AAPL / -40% cash (margin) would have done in the 18 years since 2000. Check out the link below:

https://www.portfoliovisualizer.com/bac ... ion3_1=-40

Of particular note here are two things:

1. The Drawdown tab (just below the blue bar, half way across) that shows what % of your holdings you would have lost at any given time during this period, and

2. The Rebalance rule (one of the settings half way down the top section), which says whether to sell or buy more when prices change.

This period includes the dot com bubble / crash in 2002-3, as well as the housing bubble / crash in 2008-9. The drawdowns for your portfolio were very large. Depending on the settings, you would have lost 70-95% of your assets along the way, twice. This is not some 100 year or 0.01% event - it has happened twice in the past 18 years. That's an 11% chance per year of losing nearly everything the way you are going and using all the available history we have for NVDA. Past performance is no guarantee, etc, but it's a very real risk and a very big one.

If you don't rebalance, you start with $10k in assets, $4k in debt, and end up with $2M. The debt becomes a tiny fraction of the portfolio. Change the rebalance rule to keep it at the same ratio, i.e. 1.4x NDVA basically, so buying more stock as it rises and selling some when it falls to keep your leverage at 40%. There are half a dozen rebalancing rules, none clearly better than the others. Select a rebalance rule and then push the Analyze Portfolio button to update for how things go. In some cases you make $1.5M instead of $2M; in some you make only $500k, and in a couple, you go completely broke.

Maybe you think keeping a close eye on your stock will help, as you suggest below:
tymishu wrote:
Tue May 15, 2018 8:28 am
I disagree a 40% haircut on $NVDA could happen in the near future. Impossible? No. Not impossible but highly unlikely given the bullish outlook it has had, its performance, and track record. How many companies have 12 consecutive quarterly ER beat? It is a good stock to own. However, I do not have any illusion it will continue the winning streak unimpeded. No company does. That is why I do not look beyond the next quarterly earning report.
Every quarter there are dozens of companies that have terrible earnings that sounded very promising up until their announcement and their stocks get hammered. PRPL is an example from today, -30% (wasn't short much, sadly). Just watching for the next earnings and hoping things look good will NOT protect you if something bad happens. Sure, they've beat their earnings for a couple years now, but how much of that is priced in now and expected? It's not unusual for high flying stocks to fall after an earnings report where they merely met their expected earnings targets. The market is an anticipation machine and is unforgiving when those expectations aren't met and the market's expectations are often different / higher than the analyst forecasts, and when that happens, it's already too late to sell.
I am not an experience trader by any means having looked at stock trading only since 2014 or so. My wife managed the account prior. I attribute our good fortune in the explosive portfolio growth to luck.
You have the self reflection to realize your good fortune and your lack of experience - this is commendable especially for someone who has done as well as you have with your investments. This means you have a chance to keep the proceeds of your good fortune. Take your profits and put them into something much more diversified. Keep 1/3 in NVDA if you really want, but put the other 2/3 in some index funds or buy your house or something.
OOTM options are something completely foreign to me. I will likely talk to a financial adviser on how to reduce the exposure.
Forget I said anything about options. The best way to reduce your exposure is to sell stock and pay off all or most of your margin debt. If you sell 1/3 of your NDVA now, you'll reduce your margin significantly and no longer be at a serious risk of going completely bust. You have millions of dollars and your basically playing craps or slot machines for double or nothing the way you're going. You might keep winning for a while, but it only takes one zero and you're entirely wiped out. When you go to Vegas and win big, walk away - cash out while you're ahead, instead of continuing to gamble.

Think about how your life would change if you lost all your investments. How would you feel, knowing you could have avoided this with the advice you were given. What would you tell your wife? How much better would things be if you doubled your money instead? Is it really worth that risk? It might be to you, but it would not be to most people. Risk tolerance is a very personal thing, and hopefully now you understand the risks you are taking.

Choose wisely.
Last edited by Tanelorn on Thu May 17, 2018 11:03 am, edited 1 time in total.

User avatar
unclescrooge
Posts: 2288
Joined: Thu Jun 07, 2012 7:00 pm

Re: Margin debt ratio

Post by unclescrooge » Wed May 16, 2018 10:24 pm

JoMoney wrote:
Mon May 14, 2018 1:46 am
Edward Thorp in one of his papers looked at the 59 year period from 1929-1984 and came up with 117% invested in S&P500 as being Kelly optimal growth, and at 170% being pretty certain of hitting a ruinous sequence of returns at some point..
http://www.edwardothorp.com/wp-content/ ... Market.pdf
"...maximal average real growth will occurr (should margin at the T-bill rate be available) if one invests 117%..."
"...a hypothetical immortal investor continually wagering an amount greater than 1.7 times current resources, ruin is certain..."
"...somewhat artificially constructed probability distributions may not be fully taking into account ... numerical results we have obtained must be interpreted in light of the limitations inherent in any applied probabilistic model."
I wonder how many people that utilize leverage actually "rebalance" it to keep it targeted at a specific ratio, as opposed to going in big at a particular point in time, and gradually reducing it over time (like a mortgage).
Another interesting example, while this particular scenario is contrived, it does demonstrate potentially real scenarios. The picture demonstrates the outcomes of several portfolios of different Cash/Stock positions. Under this simulation, the "optimized" portfolio of 18% Cash / 82% Stock has nearly the same return as the 100% stock position, whereas the levered -100 Cash /200% Stock position was an utter failure despite the overall positive results for stocks.
Image
http://www.cfapubs.org/doi/pdf/10.2469/cp.v2004.n2.3379
...the leveraged portfolio performs dismally. Why? Although it does have the highest monthly expected return, it has such high variability that the likelihood of losing a substantial proportion of capital is so high that it likely will cause the investor to rebuild from a low base and never really recoup losses...
Is there any reach about a leveraged bond fund and a leveraged stock fund? Say 60% bonds and 40% stocks, both funds leveraged 2x?

alex_686
Posts: 3652
Joined: Mon Feb 09, 2015 2:39 pm

Re: Margin debt ratio

Post by alex_686 » Thu May 17, 2018 7:14 am

unclescrooge wrote:
Wed May 16, 2018 10:24 pm
Is there any reach about a leveraged bond fund and a leveraged stock fund? Say 60% bonds and 40% stocks, both funds leveraged 2x?
Yes.

For bond funds look under "Banks" You are basically taking on duration risk just like a bank.

For stocks look under "Hedge Funds". HF have historically earned above average returns with leverage. Until they don't.

The problem with leverage is that 95% of the time you get above average returns. However you also get "fat tails", black swans that rave rage your portfolio in unexpected ways. Fat tails make studies very hard to run. Things look good until they unexpectedly don't. as they say, markets climb up stairs but fall out of windows.

There is a rather long thread here on Bogleheads. Search under "margin balance fund" or something.

To the OP, II would strongly encourage you to reduce you margin debt quickly. IIf it takes some pain I firmly believe the pain is worth the risk reduction. There were lots of great stocks until they weren't. Enron, Worldcom, CountryWide, Lehman Brothers, AIG, etc. Heck, even Apple filtered with bankcurtcy at one point. Just last week ZTE basically collopablesed because of.a single White House decision. All of these companies were fine until they were not.

Valuethinker
Posts: 35355
Joined: Fri May 11, 2007 11:07 am

Re: Margin debt ratio

Post by Valuethinker » Thu May 17, 2018 7:35 am

alex_686 wrote:
Thu May 17, 2018 7:14 am
unclescrooge wrote:
Wed May 16, 2018 10:24 pm
Is there any reach about a leveraged bond fund and a leveraged stock fund? Say 60% bonds and 40% stocks, both funds leveraged 2x?
Yes.

For bond funds look under "Banks" You are basically taking on duration risk just like a bank.

For stocks look under "Hedge Funds". HF have historically earned above average returns with leverage. Until they don't.

The problem with leverage is that 95% of the time you get above average returns. However you also get "fat tails", black swans that rave rage your portfolio in unexpected ways. Fat tails make studies very hard to run. Things look good until they unexpectedly don't. as they say, markets climb up stairs but fall out of windows.
It's been called "picking up nickels from in front of bulldozers" - it's an apt description and you probably read Andrew Lo's "Capital Decimation Partners" paper? About a fund that makes a nice living for its managers for 9 years, then wipes out its entire investment capital in the 10th, investors thus average 0 return over the 10 years.

The essence of the Agency Problem in Hedge Funds is that it is "other peoples' money"-- managers do not have as large a stake in the success of the fund as investors do.
There is a rather long thread here on Bogleheads. Search under "margin balance fund" or something.

To the OP, II would strongly encourage you to reduce you margin debt quickly. IIf it takes some pain I firmly believe the pain is worth the risk reduction. There were lots of great stocks until they weren't. Enron, Worldcom, CountryWide, Lehman Brothers, AIG, etc. Heck, even Apple filtered with bankcurtcy at one point. Just last week ZTE basically collopablesed because of.a single White House decision. All of these companies were fine until they were not.
ZTE? I think you mean the opposite? White House has reversed previous ban?

What it feels like is that we are in a "nifty fifty" era. The FAANGs plus a handful of other stocks (Autozone?) have driven the market for quite some time. These are generally very good companies in their business models and growth BUT the valuations are now quite high. Their share prices are held up by market extrapolations of historic growth rates.

If we look at the Nifty Fifty era, eventually gravity caught up with these stocks and drove their multiples back down to sensible levels.

The problem with a retail margin investor is that he/ she is "short volatility". Whereas the House is long volatility-- the market as a whole can live through long downturns. The investor can be right in the long run, but is driven to bankruptcy in the short run.

If you look at the Spread Betting companies in the UK (IG Index, CMC markets etc.) that's exactly what is going on there. That's why they spend so much money at sports events, etc. They need new customers, because their existing ones have been wiped out.

With leverage, the odds are with the House. It's worth remembering that stocks are much, much more volatile than theory predicts - this really is a high risk asset class (which is why it pays such high returns, long run).

traineeinvestor
Posts: 498
Joined: Wed Nov 26, 2008 8:52 am
Location: Hong Kong
Contact:

Re: Margin debt ratio

Post by traineeinvestor » Thu May 17, 2018 8:23 am

Not quite the question OP asked, but we have total gross debt to total assets of around 9.8% at present - all debt is either mortgages or a margin facility secured against a portfolio of index funds/stocks/bonds. Given where interest rates are we get a positive carry on our debt.

FWIW, I am retired and am comfortable with a modest level of debt even if I am still figuring out what "modest" means.

alex_686
Posts: 3652
Joined: Mon Feb 09, 2015 2:39 pm

Re: Margin debt ratio

Post by alex_686 » Thu May 17, 2018 9:13 am

Valuethinker wrote:
Thu May 17, 2018 7:35 am
It's been called "picking up nickels from in front of bulldozers" - it's an apt description and you probably read Andrew Lo's "Capital Decimation Partners" paper? About a fund that makes a nice living for its managers for 9 years, then wipes out its entire investment capital in the 10th, investors thus average 0 return over the 10 years.
I have not, but I am sure I can find dozens of examples. I would not use the nickles in front of a bulldozer. That term is usually reserved for statistical arbitrage over very short periods.
Valuethinker wrote:
Thu May 17, 2018 7:35 am
The essence of the Agency Problem in Hedge Funds is that it is "other peoples' money"-- managers do not have as large a stake in the success of the fund as investors do.
I know that this is a popular notion, it is an issue, but I think it is overstated. Investors have more control than you may think. But I think my point holds. Hedge funds did very well in 00s thanks to calm markets and cheap leverage. One could easily replicate many hedge funds this way. Lots of cheap talk about Alpha but really leveraged Beta.
Valuethinker wrote:
Thu May 17, 2018 7:35 am
ZTE? I think you mean the opposite? White House has reversed previous ban?
Have they? Last I heard Trump was talking about it. Ah, the capricious nature of politics. In any event, will ZTE be worth as much when investors know that it is build on foundations of sand? What skeletons might lurk in Apple closet? Heck, what if the market decided that Apple was just an ordinary company and not a super special one? It is easy for a company to lose 1/2 of its value overnight.

I will contest a little about leverage, bets, and the house. There have been many brokerage houses, mutual funds, and hedge funds which have blown up thanks to leverage. Leverage helps and hurts regardless of size.

tymishu
Posts: 24
Joined: Thu Feb 01, 2018 10:49 pm
Location: NJ

Re: Margin debt ratio

Post by tymishu » Thu May 17, 2018 10:18 am

Luck has been with me the past two years and half to the extent the NLV of this two position portfolio reached close to 50% of our net worth following its explosive growth. If I lose it all we can still retire in relative comfort but no question I will be very upset and my wife will be very upset. I am 65 and still working. Not that I need to but I like to as I still enjoy it. My wife retired 5 years ago.

Despite my inexperience in stock trading, I think I did let the success get to my head. There are days when I see the portfolio go up or down $200k plus I would not even flinch. A $100k fluctuation day becomes quite normal once you are used to it. On one of the worst trading day earlier this year I saw it plunge $300k. I simply brushed it aside. Fortunately it did recover.

I was hoping to slowly reduce the leverage so I would not be in the highest tax bracket this year again. On the other hand, if I were to choose between having to pay Uncle Sam and not having to pay him there would not be any question what I'd choose. Thank you all for your suggestions. I will draw it down to reduce my exposure.

Post Reply