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61 - How to leverage your equity portfolio without margin

The DIY Investing Podcast: Value Investing | Fundamental Analysis | Mental Models | Business Management

Release Date: 02/02/2020

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Over the long-term, you will maximize your investment returns if you can somehow use other people’s money to invest. Debt leverage allows you to access other people’s money for your personal benefit. Yet, margin debt is a bad idea.

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More Episodes

Mental Models discussed in this podcast:

  • Leverage
  • Risk Management
  • Uncertainty / Probabilistic Thinking

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Show Outline

The full show notes for this episode are available at https://www.diyinvesting.org/Episode61

What is good about leverage?

  • Using other people's money to make investments has the potential to improve your long-term financial outcomes. 

What is bad about margin debt?

  • Callability (#1)
  • High-interest rates
  • Non-fixed interest rates
  • Can be forced to sell your investments at a bad time
  • Solution: We need a method that is the opposite of margin debt:
    • Result: Mortgage Debt

What is good about mortgage debt?

  • Non-callable
  • Low fixed interest rates
  • A missed mortgage payment doesn't force you to sell your investments.
  • The bank you owe the mortgage to is often a different financial entity than the custodian of your equity portfolio.

Would you rather have home equity or stock equity?

  • Risk tolerance
  • Return Potential

Summary:

Over the long-term, you will maximize your investment returns if you can somehow use other people’s money to invest. Debt leverage allows you to access other people’s money for your personal benefit. However, we must remember Benjamin Graham’s words: “On what terms and at what price?” The terms of the debt matter and the price of the debt also matters. Margin debt has bad terms and a high price. If you choose to leverage your portfolio, you need to select the best form of debt in which to do so. Mortgage debt tends to have the best government protections.