Posted by houseofordos > 2014-01-05 08:39 | Report Abuse

This leverage method would work well if you can find an investment that guarantees returns above cost of debt.

Posted by coolio > 2014-01-05 09:31 | Report Abuse

what a very informative artical! Thanks Kcchongnz

Posted by kcchongnz > 2014-01-05 10:30 | Report Abuse

Is there such a thing as "guaranteed" in investing, especially you want to get a return higher than the cost of borrowings?

Posted by houseofordos > Jan 5, 2014 08:39 AM | Report Abuse
This leverage method would work well if you can find an investment that guarantees returns above cost of debt.

Posted by Tan KW > Jan 5, 2014 08:52 AM | Report Abuse
how if borrow $ to invest in good company that sell in great discount price (high MOS) like KFIMA and KUCHAI?
my own opinion, we have to ensure we have enough cash flow to cover the loan repayment but not hoping the equity investment will provide us the cash flow. we only able pick good company with huge MOS but we will not able to determine when the market will give a fair price to the selected stock.
kcchongnz, what is your view?

Tan KW, you have now become a great value investor. Buy them in loads if you find those value stocks as described by you. But with borrowed money for an ordinary investor like you and me, I am not sure. And bear in mind the followings:

The market’s not a very accommodating machine; it won’t provide high returns just because you need them. Peter Bernstein

There is a big difference between probability and outcome. Probable things fail to happen-and improbable things happen-all the time. Beware of fat tails.

Posted by Ayoyo > 2014-01-05 10:46 | Report Abuse

Very informative article on the pitfalls of leverage, chong! I like your writings and generous sharing of your knowledge. I've just enquired on Mr koon's article on leverage and whether I should give it a go as a swing and momentum trader. I guess you have helped answer that niggling question for me.

Posted by Chrollo > 2014-01-05 11:43 | Report Abuse

It's is always very nice to read kcc's writing.. It's true that during advantageous times, using OPM is a very good opportunity to increase your wealth.. Although the downfall, I believe can be compensated with a very large base of knowledge added with a proven system and also not to mention that one must not be greedy..
I deeply belive in MOS but however, we will not be able to know when the stock will go back to its expected intrinsic value as many stocks lay dormant for a long time before breakout.. I believe it is always the best to buy a breakout stock added along with good fundamentals..
And I would like to ask a question.. I am still learning so what I say may be wrong.. The question is that if we were to go on a value stock.. Will not our funds be held down for the dormant period until it flies? Overdiversifying will also actually bring you lesser return or maybe losses.. What is your opinion? Thank you

Posted by kcchongnz > 2014-01-05 12:33 | Report Abuse

Posted by Chrollo > Jan 5, 2014 11:43 AM | Report Abuse

And I would like to ask a question.. I am still learning so what I say may be wrong.. The question is that if we were to go on a value stock.. 1) Will not our funds be held down for the dormant period until it flies? 2)Overdiversifying will also actually bring you lesser return or maybe losses.. What is your opinion? Thank you

Question 1: I will repeat the same response

"The market’s not a very accommodating machine; it won’t provide high returns just because you need them." Peter Bernstein.

"To be a value investor, you have to be willing and able to suffer pain:" The pain of waiting if you may say. Jean Marie Eveillard

But sometimes you may not necessarily have to wait too long, if you are lucky. And luck may not simply come to anybody. Please refer to the return of my two portfolios set up this year, both of them less than a year.

Question 2: Over-diversifying brings lesser return? Sure but have you thought of just having two stocks in your portfolio, or under-diversification, say Kumpulan Fima and SKP resources which fell in price albeit a little, while watching most other stocks went up in price a lot for the last one year?

I advocate diversification, not over-diversification. Please read this:

http://klse.i3investor.com/blogs/kianweiaritcles/43093.jsp

Posted by JCool > 2014-01-05 12:41 | Report Abuse

Everyone shd try tis extreme leveraging...... at least once in ur lifetime..... for extreme rush....

1. Set aside say RM 100,000 hard cash... n ready urself for its total loss....

2. Search for a counter whc is a sure thing.... or at least u r cock sure is a sure thing...... n buy to d tune of RM 500,000..... without d intention of picking up....

3. Pray hard......


It may looks dangerous... but may b not....... since how likely is it tat u wil b surpried n screwed by a crash (by definition a drop of 20%) in d mkt/ur counter within d very short n managable period of T+3.... tat wil totally wipe ur RM 100,000.... as a black swan is a black swan simply bcos it happens so so rarely...

n hey for safety measure... u actually hv in place a cut loss point.. tat is d RM 100,000 refer 1 above



u want leverage... tis is leverage.... even whn u can't get a loan....


but WARNING.. tis is more akin to betting n is potentially suicidal... n if u found urself making a loss... jz blame urself for being cock sure of d counter u chose in d first place...

Posted by Chrollo > 2014-01-05 12:43 | Report Abuse

Thanks kcc .. Appreciate your prompt reply.. Thank you very much.. I studied graham's book and Buffett book their waiting period is around 7-10 years..can we actually have their waiting patience? For me I definitely died as my holding longest was only a meager 1 month since I started two months which is damn sad..
Thanks a lot for your reply again.. I will read over your posting again and if you have any good websites or books or even writing, I would definitely love to hear it from you.. My patience is my downfall in investing.. I sold many only ended up going up because I can't hold them..

Posted by houseofordos > 2014-01-05 13:56 | Report Abuse

kcchongnz Is there such a thing as "guaranteed" in investing, especially you want to get a return higher than the cost of borrowings

One example I can think of is like Amanah Saham schemes like ASB or ASM, these funds payout at least 6 pct annual returns even in bad times.... In fact banks used to provide loans just to buy ASB.

Posted by houseofordos > 2014-01-05 14:14 | Report Abuse

KC, all studies have shown that stocks generally go up in the long run. As long as we have cashflow to service the loan, just buying an index fund should give excess returns on the cost of debt in the long run as long as interest rates remain low . However if interest rates were to go up drastically like during the asian financial crisis, leveraging is definitely dangerous..

Posted by Ayoyo > 2014-01-05 14:23 | Report Abuse

IMHO, I think kcc can benefit from some form of market timing tactics to complement his sound FA. Buffet was a market mover in that he can be buying at any stage and still the stock will move due to his brand name but mere mortals like us is hardly make a statistic at all.

I'm sure kcc has some simple entry rules in his arsenal and not just 'buy at any price point as long as it is value' approach. Ooi teik Bee may be a good in between for both camps of FA and TA

For me, I'm lousy (or just too lazy) at FA. My trades are 90% TA-based and just based on simple 'tape reading' techniques of price and volume action. No indicators whatsoever to cloud my judgement. If a a stock hits my filter, usually just 1 or 2 will catch my eye for a watch or trade Ina a day or sometimes, none at all. I'll then check the simple fundamentals like profit, NTA and PE. looks ok, I'll trade and then ride the momentum . I'm not good at (and no time since momentum trading is about seizing opportunities) using IV, DCF or other models to check.

Which is why I'm still riding trades in success, astino, MFCB, farlim, gmutual. Stocks that have good simple numbers but may be avoided by the pure fundamentalist for its inherent lack of solid foundation in the numbers.

As for leverage, I'm not convinced if I should take it on. My returns are good. The past year realized profit is 80% while if I'll add my running profits in(stocks not sold), it's about 130%. But this is achieved thru very high frequency of trades . If I use OPM, my statistic will look much better but to me, statistic is meaningless. In all practicality, if I can afford to buy cash, just use it otherwise it'll just lie idle in Fd earning 3% while margin will cost me 4,5%, thus net is still a negative 1.5%. Then I ask, what's the point then? KCC just vindicated this argument

Posted by michael99 > 2014-01-05 15:22 | Report Abuse

strictly not for beginner .

Posted by kcchongnz > 2014-01-05 16:29 | Report Abuse

Posted by houseofordos > Jan 5, 2014 02:14 PM | Report Abuse

KC, all studies have shown that stocks generally go up in the long run. As long as we have cashflow to service the loan, just buying an index fund should give excess returns on the cost of debt in the long run as long as interest rates remain low . However if interest rates were to go up drastically like during the asian financial crisis, leveraging is definitely dangerous..

"all studies have shown that stocks generally go up in the long run", but in the long run, we are all dead.

Ever heard of the lost decade of DJIA? DJIA was above 11,000 in year 2000. 10 years latter, it even went down below 10,000. How many people can afford to have their borrowed fund tied up in the market and continuously paying interest? Yes, you said it right, what if interest rate goes up to above 10%, like what happen during the Asian financial crisis?

What about if in 1990s, you have bought MUI, PMCorp, MPCorp, KNM etc with borrowed fund and keep them until now?

What if you have dabbled in the second board counters in 1996 when most of the stocks are in their tenths and hundredths of dollar a piece?

What if you have borrowed money and invest in the internet companies in 2000 and kept them until now?

Yes, stock prices go up in the long run. Yes all studies show that. But that is history. The future is uncertain. Yes, I agree we should still invest in the long term; but should we leverage, knowing that a black swan can appear any time? Beware of the fat tail.

Even though you invest in good stocks with the borrowed money can be very dangerous when a black swan appears when you are forced to sell off because of banks calling back loan, or margin calls.

Posted by edmundgooi > 2014-01-05 16:32 | Report Abuse

Buy within your means

Posted by kcchongnz > 2014-01-05 16:40 | Report Abuse

Ayoyo, I have to say that you have done extremely well in your trading adventure last year. But I can't help saying some sincere words here.

The past year is a good market. The broad index KLCI went up 14%, which is much better than a normal year. You would have done much better if you have borrowed money and have heavier bets.

But every once a while, someone makes a risky bet on an improbable or uncertain outcome and ends up looking like a genius. But we should recognize that it happened because of luck and boldness, not necessary skill. In the short run, a great deal of investment success can result from just being in the right place at the right time. The keys to profit are aggressiveness, timing and skill, and someone who has enough aggressiveness at the right time doesn’t need much skill. And that includes many people, and me too.

It is very good that you seem to recognize that too. Many don't. The killer will be if one doesn't appreciate the role of luck.

Posted by Ayoyo > 2014-01-05 17:08 | Report Abuse

Kcc, thanks for the honest words. I have no regrets not borrowing to leverage on my speculations . It is precisely because of this that my line is not over extended and I'm able to control my emotions and trade objectively .

And I have no arguments with a kamikaze speculator who strikes it big in a fluke but as you are aware, a successful speculator is someone who is able to do it consistently.. That's why I'm resign to the fact that I'm never gonna get a multi bagger from a single stock holding, being a momentum trader. That's not my edge and I'm not sorry about it.

Yes, luck plays a role but to strike lottery , you will still need the effort to buy the ticket in the first place. Thus, in some ways, you make your own luck . If I may add, the keys to profit is to find your trading edge and have the discipline and conviction to stick to it.

And again, I thank you for your wonderful nuggets of wisdom

Posted by Chrollo > 2014-01-05 17:19 | Report Abuse

Ayoyo and kcc, hope to hear more from u guys =) great writing..

Posted by houseofordos > 2014-01-05 17:37 | Report Abuse

KC, you have presented all the key points and risks one should consider when leveraging. Yes I agree leveraging is doubled edge sword. I personally have been considering to refinance my home and use proceeds for investment. For now I still have high cash ratio to stocks so not planning on doing that yet.. But what you explained from your personal experience of leveraging is exactly what I hope to accomplish...

Posted by Chrollo > 2014-01-05 17:45 | Report Abuse

This few weeks i am on a holiday and thinking that if one were to wish to be wealthy and rich in a fast manner, leveraging is the only way.. There is just so much cash for a person who is young like me.. without leveraging, even if i have 50% gain, it will only bring about few k or few hundred.. and we are talking bout a superior gain of 50%.
However, if one were to take on borrowings without knowledge , the bid farewell to the money.. Currently im doing trial and error to test a system to buy and sell before i take on borrowings.. Wish everyone good luck..

Posted by Ayoyo > 2014-01-05 18:59 | Report Abuse

The difference between skill and luck

"When a trade stops out, was it because your original hypothesis was wrong or because you were unlucky with the timing? When a trade is successful, was it for the reason you expected or did you catch a lucky break? If you can’t tell if you're clever or lucky, then you are nothing more than a passenger. . For, useless statistics cloud judgements while useful ones are predictive and persistent. skill is controllable and repeatable, luck is not."
Mike mauboussin

Chrollo, it took me a long and painful journey to be able to trade profitably for a living. I wouldn't suggest you mortgage your home and plough it into the markets. You'll have to determine what your speculating personality is, trader or investor? Then hone your skills around these. Read lots of books and find out what works for you. For me, the defining moment came when I read 'reminiscences of a stock operator' and was amazed how the legendary speculator, jesse Livermore, traded simply on price and volume action. The book contains insights into how a stock operator manipulates the markets and is a mandatory read for all trading interns at the large broking houses in US. From therein, I just continued my study and research into it until my hone my skills.

Leverage featured heavily in Livermore's speculations and at his height, his worth was worth the equivalent of 100billion today. Alas, he died poor and probably from his losses compounded with over extended credit.

But, his teachings and quotes are as much gems and wisdom as they are buffet's.

Chief among which, a fool and his money will soon be parted

Posted by Chrollo > 2014-01-05 23:09 | Report Abuse

Ayoyo, it is a deep honour to hear your past and also advice.. I will get the books u recommended and read it as i am reading and applying.. Thank you very much for the recommendation!

Posted by DonnieYen > 2014-04-26 00:22 | Report Abuse

I am a new investor and I thinks it's good to have you folks give such pearls.

Posted by SuperMan 99 > 2015-12-08 01:20 | Report Abuse

Thank you for all your words & sharing, truly appreciate.