Leveraging Will Hurt Your Performance In A Bear Market
Somewhere in 2019, I paid back in full all my margin borrowing and transferred my share holdings back to my CDP.
I considered the possibility of a market downturn and wanted to own whatever that has been bought already in full cash. Without the burden of interest and without the stress of capital that I couldn't afford to lose.
But this article is mainly going to be this concept on share financing in a bear market.
There's a story below on retail investor loading up on debt to buy stock. If you're keen to read, click here.
Leveraging has always been around
What is leverage: Quite simply, it is borrowing other people's money for your investment.
Financing charges are at all time cheap. It's true.
You can get bank balance transfer at EIR 2% (unsecured loan from credit card, probably a method in the article above).
You can get margin leverage if your shares are used as collateral at around 3%p.a (4%+p.a not too long ago).
I've even written before on unit trust funds with leverage allowed (previously a service only in private banks).
Bear markets are notoriously hard to invest well
This is what Howard Marks (co-chairman of Oaktree Capital Management) has to say.
Terrible news makes it hard to buy and causes many people to say,
"I'm not going to try to catch a falling knife."
But it's also what pushes prices to absurdly low levels.
I've also shared before my experience investing in the last bear market of Global Financial Crisis (GFC).
Bear markets are hard to stay invested. Everyone who can buy is on a "Let me WAIT FIRST!" attitude.
Some who are new to markets (like I was then) will explore on "shorting" the markets.
Sounds familiar now? That is speculation. Searching for immediate profit gratification.
In any case, investing with your own money is hard already with all the negative news and volatility of a bear market. What more money you can't actually lose?
Having debt can affect performance of even the best
Benjamin Graham (Warren Buffett's teacher) invested through the great depression and had a investment fund with 44% financed by debt then.
He had certain level of success by 1929 already and possibly attracting investment capital.
But when he met a retired businessman, he heard a different advice.
Benjamin Graham shared a story of John Nix who had advised to him then to pay off all debts first. That advice certainly fell on deaf ears.
Source: "100 Baggers" by Christopher Mayer
Benjamin Graham did eventually unwind the debt after 1930 and survived investing through the great depression of 1930s.
But his results when he was on leverage? Bad. Plainly bad.
He could have been close to wiping out all of his own capital.
In the good times, market volatility is low and emotions are easier to manage.
Having leverage certainly help to amplify gains.
But when bear markets hit, prices start to get volatile.
From an investment standpoint, valuations logically are more appealing.
But holding on to mounting papers losses and being wrong for a long period of time is very difficult.
Conclusion
What we can learn is being able to sleep well on your investments is mightily important in a bear market.
Having borrowings (debt) will emotionally drive your decisions.
So invest with cash you have that you won't need tomorrow. And be patient.
If you are new to investing, do check this video below. Hopefully it helps you.
Hi,
Very informative post! I noticed that currently the fees for DBS balance transfer is less than if one were to take up Share Financing. What would be the pros and cons of each? Hope I can learn abit more regarding this topic, thank you for your time!
Regards
Robin
Hi Robin, haven’t seen the details of the DBS balance transfer but my guess is it’s also a 3mth or 6mth timeframe. Sharing abit of a story, I used to balance transfer out from SCB and CITI. But when it was due, it was such a hassle if there ever was a late payment charge. The end amount was also always a moving target that only the phone banker can help. I’ve since given up on it mainly for the time needed to undo the hassle. Share financing on the other hand is perpetual. Rates are more costly though thats true. Inviting you to sub on https://www.youtube.com/user/joshconsultancy/ for weekly ideas on investing and retirement planning! Cya