read about this from an article published in i3investor recently. It is a big hit and as usual appear as the top article. This is a catch phrase in the article.
“Let me explain in details with examples so that you can learn how to make more money using margin to its limit, provided you know how to select really good shares to buy.”
It is precisely that this statement came from a very popular and famous person that it can be fatal for the youngsters and newbies who respect him so much and tend to follow what he preaches.
Having been in i3investor for quite some time posting my articles and responding to comments, it is in my opinion that if I do not write something about this topic (again), I am doing a disservice to the younger readers and newbies in this forum, and to the society at large.
In most civilized societies and in a criminal case, a witness who fails to give evidence or produce the required documents can be punished for contempt of court. So I am just an ordinary citizen doing his duty.
This article titled “Secrets of tycoons revealed” by “using margin to its limit” is actually misleading, I admit. I have had no experience on that actually. It is merely done so to catch your attention, as who doesn’t want to be a tycoon? Got you!
But don’t get me wrong. I do believe there are some investors who have become very rich tycoons using margin to its limit. You can even read some testimonials about them in public forums, even in i3investor forum. My sincere congratulation to them, deep down from my heart. Give me a “five”.
However, for youngsters and newbies, and even for most experienced investors, before you embark on this journey of trying to “make more money using margin to its limit”, it may be wise for you to read this article posted by someone else here first. I think it was from Warren Buffett.
http://klse.i3investor.com/blogs/kianweiaritcles/67466.jsp
So everyone is waiting for the book of “Secrets of tycoons revealed by using margin to its limit” from this guy below. I presume “margin accounts” mentioned below is for stock market investment/speculation.
Posted by Desa20201956 > Feb 26, 2016 04:42 PM | Report Abuse
Secrets of the tycoons
..........the secret of the tycoons is that they all have margin accounts, they all have higher risk appetite than their neighbors at one stage in their lives.
My article below clearly is not an article about “Secrets of tycoons revealed by using margin to its limit”. It is also not for those coin flippers who gotten ten, or even twenty flips of heads, but rather for the rest who participated in that coin flipping contest.
The wisdom of Super Investors
I have written an article on “The Core Principles of Super Investors” in this link below:
http://klse.i3investor.com/blogs/kcchongnz/88007.jsp
These super investors include Warren Buffet, Joel Greenblatt, Seth Klarman, and Howard Marks. They managed multi-billion USD funds for investors and they themselves are worth billions from the success of their own investments. For those who are interested, you can follow the above link and find out who they are, how they do it, and why are they so successful.
Do super investors all have margin accounts as proposed by the above statement that “the secret of the tycoons is that they all have margin accounts”?
To answer the above question, we will read between the lines of what they have said.
“I've seen more people fail because of liquor and leverage—leverage being borrowed money. You really don't need leverage in this world much. If you're smart, you're going to make a lot of money without borrowing.” Warren Buffett
“If you are going to be a very concentrated investor, you should not use leverage. You can’t leverage because you need to live through the downturns and that is incredibly important.” Joel Greenblatt
“The trick of successful investors is to sell when they want to, not when they have to.” Seth Klarman
“Leverage magnifies outcomes, but doesn’t add value.” Howard Marks
“Trying to avoid losses is more important than striving for great investment success. The latter can be achieved some of the time, but the occasional failure may be crippling. The former can be done more often and more dependably….and with consequences when it fails that are more tolerable.” Howard Marks
To me, these are all very inspiring words of wisdom. They will guide me throughout my investing journey. I hope you embrace them too. But of course it is your personal choice, and I have no issue about it.
The Perils of Margin Finance in Investing: A Summary
I have written too many articles about the perils of investing using margin finance. In my previous article on “Is Debt good, when is it good?”, I have quoted how the Buddhists, Christians and also the Muslim fervently discouraged their followers to be in debt, especially the bad debt. Yes, lessons of moral science which are essential for the investors in a jungle out there.
http://klse.i3investor.com/blogs/kcchongnz/91556.jsp
I have written and provided numbers and different scenarios the peril of leverage here with various scenarios that margin financing can be devastating if the outcome of events goes against you and you can lose everything and more, with an example of a leverage fund I had had experience with.
http://klse.i3investor.com/blogs/kcchongnz/44344.jsp
I wrote and repeated about what happened in 1998 in KLSE when Anwar Ibrahim was sacked as the Deputy Prime Minister, and warned that Black Swan, or a six sigma event can happen, and it happens quite frequently nowadays, and many investors with margin finance lost their pants.
http://klse.i3investor.com/blogs/kcchongnz/61822.jsp
Sometime in June 2015 I was arguing with someone regarding the peril of margin finance when the Shanghai Stock Exchange, SSX, was at its peak at 5023. It was only 8 months ago and today SSX closed at 2767 for a loss of the broad index of a whopping 45%. How much do you think those individual speculatos in high flying stocks with margin finance would have lost?
http://klse.i3investor.com/blogs/kcchongnz/79429.jsp
I have even given a real life example, someone who is supposedly very skillful and competent in investment, and in using OPM too to show how dangerous is margin financing in stock investment.
http://klse.i3investor.com/blogs/kcchongnz/82699.jsp
Margin financing in stock speculation, asyou can see from the above examples, can incur heavy losses to speculators and has ruined many individuals and families. It is not good for the overall market too as every investor is affected when the market experiences a free fall due to margin calls.
This is a good comment regarding the use of margin finance appeared in my last article.
Posted by soojinhou > Feb 21, 2016 06:05 PM | Report Abuse
Thanks KC for the timely reminder of the danger of margin financing. All investors should prepare for a catastrophic event. It doesn't need to happen often, it only need to happen once in your lifetime to wipe out your entire wealth, if you are heavily leveraged using margin financing. These events are not that rare really. Very few economists predicted the subprime crisis, and no one foresaw the recent crash in oil price. The only way to recover from such catastrophic events is to sit tight and wait it out, and you cannot wait it out if you are heavily leveraged.
Beware that stock returns are not normally distributed and fat tails are very common in the stock market.
But does it necessary to have a fat-tail event like that of 1987, 1998, 2001, 2008 in the equity markets to get speculators killed using margin finance?
Let us just look at the recent small “blips” in the stock market when Ringgit just strengthened a little recently, and how the share price of some seemingly good stocks which I own a couple of them too, were affected, and the effect on those using margin finance when they bought their stocks at their peak prices. This maximum drawdown of share prices from its peak to its trough is the risk which investors should be more concern about.
Using margin to the limit to become a tycoon or a pauper?
“Investing is not easy, and anybody who thinks it is easy is stupid.” Charles Munger
First up is this V.S Industry which has been heavily promoted in seminars and forums including this i3investor. You know this type of seminars co-organized with investment banks would have some YST promoting margin finance to participants at the end.
For sure many retail investors have made a lot of money if they have invested in V.S a couple of years ago, especially if they followed the advice of using margin finance then. They may continue to make money in the future too. But “how to make more money using margin to its limit” is not my favorite topic. What I want to talk about is “How not to get yourself killed for using margin finance”.
Figure 1: Share price movement of V.S Industry
V.S share price dropped by 32% from its peak of about RM1.68 to RM1.16 in the one-and-a-half-month period from around 25thDecember 2015 to 12th February 2016. There seems to be margin selling with heavy volume closed to 20m shares a day around that time. An investor who have bought the shares at its peak and with 50% margin would have lost about 60% of his equity. How long does an investor need to recoup a 60% loss in shares in a normal market? 5 years?
Let us look at Focus Lumber Berhad, a stock I hold a little. It has just announced its final 2015 results earning 10.4 sen for the latest quarter and 30.7 sen for the whole year. It has zero debt, high double digit returns on capitals, and a Free cash flow of RM28.6m in 2015, or 27.7 sen per share. At yesterday’s closing price of RM2.58, its cash yield is a whopping 10.8%, more than twice that of bank fixed deposit rate. My article appended below has argued that a cash yield of more than 5% could be a no-brainier investment.
http://klse.i3investor.com/blogs/kcchongnz/76694.jsp
Isn’t Focus Lumber a good share to buy? It is quite obvious actually that it was, even at RM3.00. But shouldn’t you try “to make more money using margin to its limit” in order to become a tycoon?
You make your own judgment by referring to Figure 2 below here:
Figure 2: Share price movement of Focus Lumber Berhad
If a newbie had bought Focus Lumber at its recent peak of RM3.02 around mid-January 2016, he would have lost a whopping 33%. If he has followed the persistent advice to buy good stocks using margin to its limit, say 50%, he would have lost more than 60% of his equity as a result of margin calls around 10th February 2016, in less than a month period, even in a slight blip of the market! He has no chance to wait to recoup when the share price recovered to RM2.60.
I have a question here. How can margin calls be good when your shares were forced sell around RM2.10, and now with the forced sell proceeds, you can buy the shares from the bottom up to RM2.60?
Let us look at another stock, a good stock in my opinion, Hevea, as shown in Figure 3 below.
Figure 3: Share price of Hevea
Hevea’s share price dropped by 34% from RM1.73 around 5th January to RM1.15, in just one month. Don’t you think most of those who bought Hevea at RM1.75 with margins were struck by margin calls and forced sell by investment banks? If investors have bought the share without margins and hence able to hold on, they would have recovered as the share price has risen to RM1.40 now, and likely to rise some more because of its good quarterly results just announced.
The above drawdowns of share prices of seemingly good companies were nothing compared to this, also seemingly good company, Genetic, as shown in Figure 4 below.
Figure 4: Share price of Genetic
Genetic’s share price dropped by 48% in less than three months. The 50% margin players on this stock would have all their equity completely wiped up in just three months, due to just a small blip of the overall market, not even a major correction of the market.
In this case, instead of the title “Secrets of tycoons revealed by using margin to its limit”, the more appropriate title should be “Secrets of tycoons become paupers revealed by using margin to its limit”.
Here is another good stock but if you use margins to its limit to buy it at its peak at RM2.30 in early January 2016, you will sustain heavy losses too when its share price dropped to about RM1.70, just a month later.
Figure 5: Share price movement of Chin Well
Conclusion
So what do you think about this statement below?
Posted by Desa20201956 > Feb 26, 2016 05:58 PM | Report Abuse
If margin a share that goes up.....everyday, you can buy more shares......everyday the banker give you more money to buy shares.
No margin account.....you cannot buy anymore shares.
The first guy becomes a tycoon.
The second guy makes enough to eat a little bit.
I would like to make my own statement as below:
KC: If margin a share that goes down.....everyday, you have to borrow from Ah Long to top up.
No margin account, you can sleep well and invest for long term
Got margin account..... .......everyday the banker forces sell your shares and you cannot sleep.
The first guy becomes a tycoon in the long term.
The second guy eats shit.
As a senior and respectable citizen, it is unwise to keep on propagating and encouraging the general public to use margin finance in stock investing which goes against the moral of the society and the proven conventional wisdom.
Widespread margin calls can happen in a big way, any time. The stock market is highly unknowable and unpredictable. Margin calls affect all investors as the overall market plunges and it will take a long while before recovery like that of the Great Depression, the Asian Financial Crisis, the KLSE Second Board Saga, the Dotcom Bubbles and most recently the US subprime housing crisis which affected the whole world.
Margin calls can also happen during a perfectly normal market during a correction as recently.
Here is a better advice from a forumer, an ordinary investor:
Posted by limayseng > Feb 21, 2016 06:54 PM | Report Abuse
yes, i saw my friends who bought shares using margin, still paying debts to banks though it happened in 2007/2008? Beware of the consequences because not everyone has the skill to stomach any unsuspected avalanche in stock during a crash.
“Keep the forest intact, and you will never worry about no wood to burn” A Chinese proverb.
Those who wish to learn the trick of “make more money using margin to its limit”, please contact me at
ckc14training2@gmail.com
Oop, wrong sentence.
It should read, “For those who wish not to become a pauper using margin finance to “play” the market, please contact me at the above email address to learn how to build up long-term wealth for a small fee, slowly but surely.
“Let me explain in details with examples so that you can learn how to make more money using margin to its limit, provided you know how to select really good shares to buy.”
It is precisely that this statement came from a very popular and famous person that it can be fatal for the youngsters and newbies who respect him so much and tend to follow what he preaches.
Having been in i3investor for quite some time posting my articles and responding to comments, it is in my opinion that if I do not write something about this topic (again), I am doing a disservice to the younger readers and newbies in this forum, and to the society at large.
In most civilized societies and in a criminal case, a witness who fails to give evidence or produce the required documents can be punished for contempt of court. So I am just an ordinary citizen doing his duty.
This article titled “Secrets of tycoons revealed” by “using margin to its limit” is actually misleading, I admit. I have had no experience on that actually. It is merely done so to catch your attention, as who doesn’t want to be a tycoon? Got you!
But don’t get me wrong. I do believe there are some investors who have become very rich tycoons using margin to its limit. You can even read some testimonials about them in public forums, even in i3investor forum. My sincere congratulation to them, deep down from my heart. Give me a “five”.
However, for youngsters and newbies, and even for most experienced investors, before you embark on this journey of trying to “make more money using margin to its limit”, it may be wise for you to read this article posted by someone else here first. I think it was from Warren Buffett.
http://klse.i3investor.com/blogs/kianweiaritcles/67466.jsp
So everyone is waiting for the book of “Secrets of tycoons revealed by using margin to its limit” from this guy below. I presume “margin accounts” mentioned below is for stock market investment/speculation.
Posted by Desa20201956 > Feb 26, 2016 04:42 PM | Report Abuse
Secrets of the tycoons
..........the secret of the tycoons is that they all have margin accounts, they all have higher risk appetite than their neighbors at one stage in their lives.
My article below clearly is not an article about “Secrets of tycoons revealed by using margin to its limit”. It is also not for those coin flippers who gotten ten, or even twenty flips of heads, but rather for the rest who participated in that coin flipping contest.
The wisdom of Super Investors
I have written an article on “The Core Principles of Super Investors” in this link below:
http://klse.i3investor.com/blogs/kcchongnz/88007.jsp
These super investors include Warren Buffet, Joel Greenblatt, Seth Klarman, and Howard Marks. They managed multi-billion USD funds for investors and they themselves are worth billions from the success of their own investments. For those who are interested, you can follow the above link and find out who they are, how they do it, and why are they so successful.
Do super investors all have margin accounts as proposed by the above statement that “the secret of the tycoons is that they all have margin accounts”?
To answer the above question, we will read between the lines of what they have said.
“I've seen more people fail because of liquor and leverage—leverage being borrowed money. You really don't need leverage in this world much. If you're smart, you're going to make a lot of money without borrowing.” Warren Buffett
“If you are going to be a very concentrated investor, you should not use leverage. You can’t leverage because you need to live through the downturns and that is incredibly important.” Joel Greenblatt
“The trick of successful investors is to sell when they want to, not when they have to.” Seth Klarman
“Leverage magnifies outcomes, but doesn’t add value.” Howard Marks
“Trying to avoid losses is more important than striving for great investment success. The latter can be achieved some of the time, but the occasional failure may be crippling. The former can be done more often and more dependably….and with consequences when it fails that are more tolerable.” Howard Marks
To me, these are all very inspiring words of wisdom. They will guide me throughout my investing journey. I hope you embrace them too. But of course it is your personal choice, and I have no issue about it.
The Perils of Margin Finance in Investing: A Summary
I have written too many articles about the perils of investing using margin finance. In my previous article on “Is Debt good, when is it good?”, I have quoted how the Buddhists, Christians and also the Muslim fervently discouraged their followers to be in debt, especially the bad debt. Yes, lessons of moral science which are essential for the investors in a jungle out there.
http://klse.i3investor.com/blogs/kcchongnz/91556.jsp
I have written and provided numbers and different scenarios the peril of leverage here with various scenarios that margin financing can be devastating if the outcome of events goes against you and you can lose everything and more, with an example of a leverage fund I had had experience with.
http://klse.i3investor.com/blogs/kcchongnz/44344.jsp
I wrote and repeated about what happened in 1998 in KLSE when Anwar Ibrahim was sacked as the Deputy Prime Minister, and warned that Black Swan, or a six sigma event can happen, and it happens quite frequently nowadays, and many investors with margin finance lost their pants.
http://klse.i3investor.com/blogs/kcchongnz/61822.jsp
Sometime in June 2015 I was arguing with someone regarding the peril of margin finance when the Shanghai Stock Exchange, SSX, was at its peak at 5023. It was only 8 months ago and today SSX closed at 2767 for a loss of the broad index of a whopping 45%. How much do you think those individual speculatos in high flying stocks with margin finance would have lost?
http://klse.i3investor.com/blogs/kcchongnz/79429.jsp
I have even given a real life example, someone who is supposedly very skillful and competent in investment, and in using OPM too to show how dangerous is margin financing in stock investment.
http://klse.i3investor.com/blogs/kcchongnz/82699.jsp
Margin financing in stock speculation, asyou can see from the above examples, can incur heavy losses to speculators and has ruined many individuals and families. It is not good for the overall market too as every investor is affected when the market experiences a free fall due to margin calls.
This is a good comment regarding the use of margin finance appeared in my last article.
Posted by soojinhou > Feb 21, 2016 06:05 PM | Report Abuse
Thanks KC for the timely reminder of the danger of margin financing. All investors should prepare for a catastrophic event. It doesn't need to happen often, it only need to happen once in your lifetime to wipe out your entire wealth, if you are heavily leveraged using margin financing. These events are not that rare really. Very few economists predicted the subprime crisis, and no one foresaw the recent crash in oil price. The only way to recover from such catastrophic events is to sit tight and wait it out, and you cannot wait it out if you are heavily leveraged.
Beware that stock returns are not normally distributed and fat tails are very common in the stock market.
But does it necessary to have a fat-tail event like that of 1987, 1998, 2001, 2008 in the equity markets to get speculators killed using margin finance?
Let us just look at the recent small “blips” in the stock market when Ringgit just strengthened a little recently, and how the share price of some seemingly good stocks which I own a couple of them too, were affected, and the effect on those using margin finance when they bought their stocks at their peak prices. This maximum drawdown of share prices from its peak to its trough is the risk which investors should be more concern about.
Using margin to the limit to become a tycoon or a pauper?
“Investing is not easy, and anybody who thinks it is easy is stupid.” Charles Munger
First up is this V.S Industry which has been heavily promoted in seminars and forums including this i3investor. You know this type of seminars co-organized with investment banks would have some YST promoting margin finance to participants at the end.
For sure many retail investors have made a lot of money if they have invested in V.S a couple of years ago, especially if they followed the advice of using margin finance then. They may continue to make money in the future too. But “how to make more money using margin to its limit” is not my favorite topic. What I want to talk about is “How not to get yourself killed for using margin finance”.
Figure 1: Share price movement of V.S Industry
V.S share price dropped by 32% from its peak of about RM1.68 to RM1.16 in the one-and-a-half-month period from around 25thDecember 2015 to 12th February 2016. There seems to be margin selling with heavy volume closed to 20m shares a day around that time. An investor who have bought the shares at its peak and with 50% margin would have lost about 60% of his equity. How long does an investor need to recoup a 60% loss in shares in a normal market? 5 years?
Let us look at Focus Lumber Berhad, a stock I hold a little. It has just announced its final 2015 results earning 10.4 sen for the latest quarter and 30.7 sen for the whole year. It has zero debt, high double digit returns on capitals, and a Free cash flow of RM28.6m in 2015, or 27.7 sen per share. At yesterday’s closing price of RM2.58, its cash yield is a whopping 10.8%, more than twice that of bank fixed deposit rate. My article appended below has argued that a cash yield of more than 5% could be a no-brainier investment.
http://klse.i3investor.com/blogs/kcchongnz/76694.jsp
Isn’t Focus Lumber a good share to buy? It is quite obvious actually that it was, even at RM3.00. But shouldn’t you try “to make more money using margin to its limit” in order to become a tycoon?
You make your own judgment by referring to Figure 2 below here:
Figure 2: Share price movement of Focus Lumber Berhad
If a newbie had bought Focus Lumber at its recent peak of RM3.02 around mid-January 2016, he would have lost a whopping 33%. If he has followed the persistent advice to buy good stocks using margin to its limit, say 50%, he would have lost more than 60% of his equity as a result of margin calls around 10th February 2016, in less than a month period, even in a slight blip of the market! He has no chance to wait to recoup when the share price recovered to RM2.60.
I have a question here. How can margin calls be good when your shares were forced sell around RM2.10, and now with the forced sell proceeds, you can buy the shares from the bottom up to RM2.60?
Let us look at another stock, a good stock in my opinion, Hevea, as shown in Figure 3 below.
Figure 3: Share price of Hevea
Hevea’s share price dropped by 34% from RM1.73 around 5th January to RM1.15, in just one month. Don’t you think most of those who bought Hevea at RM1.75 with margins were struck by margin calls and forced sell by investment banks? If investors have bought the share without margins and hence able to hold on, they would have recovered as the share price has risen to RM1.40 now, and likely to rise some more because of its good quarterly results just announced.
The above drawdowns of share prices of seemingly good companies were nothing compared to this, also seemingly good company, Genetic, as shown in Figure 4 below.
Figure 4: Share price of Genetic
Genetic’s share price dropped by 48% in less than three months. The 50% margin players on this stock would have all their equity completely wiped up in just three months, due to just a small blip of the overall market, not even a major correction of the market.
In this case, instead of the title “Secrets of tycoons revealed by using margin to its limit”, the more appropriate title should be “Secrets of tycoons become paupers revealed by using margin to its limit”.
Here is another good stock but if you use margins to its limit to buy it at its peak at RM2.30 in early January 2016, you will sustain heavy losses too when its share price dropped to about RM1.70, just a month later.
Figure 5: Share price movement of Chin Well
Conclusion
So what do you think about this statement below?
Posted by Desa20201956 > Feb 26, 2016 05:58 PM | Report Abuse
If margin a share that goes up.....everyday, you can buy more shares......everyday the banker give you more money to buy shares.
No margin account.....you cannot buy anymore shares.
The first guy becomes a tycoon.
The second guy makes enough to eat a little bit.
I would like to make my own statement as below:
KC: If margin a share that goes down.....everyday, you have to borrow from Ah Long to top up.
No margin account, you can sleep well and invest for long term
Got margin account..... .......everyday the banker forces sell your shares and you cannot sleep.
The first guy becomes a tycoon in the long term.
The second guy eats shit.
As a senior and respectable citizen, it is unwise to keep on propagating and encouraging the general public to use margin finance in stock investing which goes against the moral of the society and the proven conventional wisdom.
Widespread margin calls can happen in a big way, any time. The stock market is highly unknowable and unpredictable. Margin calls affect all investors as the overall market plunges and it will take a long while before recovery like that of the Great Depression, the Asian Financial Crisis, the KLSE Second Board Saga, the Dotcom Bubbles and most recently the US subprime housing crisis which affected the whole world.
Margin calls can also happen during a perfectly normal market during a correction as recently.
Here is a better advice from a forumer, an ordinary investor:
Posted by limayseng > Feb 21, 2016 06:54 PM | Report Abuse
yes, i saw my friends who bought shares using margin, still paying debts to banks though it happened in 2007/2008? Beware of the consequences because not everyone has the skill to stomach any unsuspected avalanche in stock during a crash.
“Keep the forest intact, and you will never worry about no wood to burn” A Chinese proverb.
Those who wish to learn the trick of “make more money using margin to its limit”, please contact me at
ckc14training2@gmail.com
Oop, wrong sentence.
It should read, “For those who wish not to become a pauper using margin finance to “play” the market, please contact me at the above email address to learn how to build up long-term wealth for a small fee, slowly but surely.
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