On March 31, 2021 I published a post titled, Buying Stocks on Margin Is a Bad Idea: You Could Lose Big, I wrote the post because I was concerned about my softball acquaintance’s excessive risk-taking.
Compared to what he was earning as a teacher, his position was a huge red flag. Noting that he also wanted to start a family, I tried to encourage him to be more conservative during the stock craze of 2021.
I learned my lesson during the collapse of the dotcom bubble while working at Goldman Sachs from 1999 – 2001. Fortune is easily made and lost, that’s why I encourage readers to regularly Convert Funny Money to Real Assets, This way, you increase your chances of protecting your gains.
Unfortunately, my advice fell on deaf ears. In their eyes, I was a lazy softball player who didn’t dive for balls, slide and run at 100%. No matter how many times I explained to him that I didn’t want to hurt myself as a father of two young kids, he kept scolding.
What I realized from writing this post is that losing all your money while buying stocks on margin may not be the worst thing that can happen. Let me explain
betting big on margin at the top
Here is an excerpt of what I wrote in the post,
My friend makes about $70,000 a year as a preschool teacher.
As we were discussing Tesla’s future one day, he told me that he had bought more stock on margin. Looking at the rise in Tesla stock, I thought he had a $250,000 position in Tesla already based on his earnings.
When I asked him how many shares he now held, he said, “Over 1,000!” In other words, at one point, he owned over $900,000 worth of Tesla stock!
I’m not sure how he keeps getting fresh funds or how he’s been able to borrow so much. However, he added that he would “only have to pay a 7% interest rate on his margin.”
No matter how much I encourage him to de-leverage, he won’t. She is adamant Tesla will continue to fly to the moon. He wants to become rich. At 38, He Wants achieve financial freedom Now!
losing a lot of money on margin and then some
Unfortunately, since March 2021, Tesla stock is down nearly 70%. As a result, he could suffer a maximum loss of $630,000.
From March 2021 he has got a new job with increment. But even though he now makes $100,000 a year based on my FS-SEER Risk Tolerance Methodologyhe has to now work for at least 10 more years to make up for his loss.
Working at least 10 more years is one way to achieve financial independence. Elizabeth Holmes is going to prison for 10 years, OK, it’s not so bad. But near the end of his life, I’m sure he would rather be playing softball, spending time with his daughter, and traveling than working.
Losing money is ultimately losing time. Losing time is more costly when you enter the second half of your life.
worse than putting money on margin
In addition to going on margin to buy Tesla stock, he may have also borrowed money from his parents to buy Tesla stock. He helps manage his immigrant parents rental properties, When you come from an immigrant family, money pooled together for the greater good.
Losing your own hard earned money is one thing. Losing the hard earned money of parents is another matter. Shame can feel unbearable. As an immigrant, losing the trust and respect of your family is the worst.
I remember pitching my brother-in-law to a stock that I thought looked promising. Goldman Sachs had just taken the stock public and it was trading 10% below its IPO, so I told him to buy. But the stock continued to decline by another 20%. Uh Sorry, Steve!
losing years of progress
Losing ~$630,000 is a lot for anyone. But if you lose $630,000 on margin, that $630,000 likely means your entire net worth has disappeared.
In other words, at age 39, he may have lost 17 years of savings after college, Losing 17 years of savings and investing progress sounds worse than working 10 more years.
Any self-respecting person would be willing to work hard to rectify his mistakes. But based on wiping out years of financial progress undue risk exposure can be intolerable.
lose the respect of your peers
There is a tendency to brag when you are making money from your investments. And he bragged on Facebook about how much money he was making from his Tesla position.
like a softball field, there was a little humility when it comes to their investments. Now that Tesla’s stock is so low, it no longer has Situation “Preschool Teacher Investment Guru.”
Please be humble when it comes to investing. You will lose money at some point in your investing career. Ideally, you want to feel a little emotion when you’re making a lot of money and losing a lot of money.
Not likely to lose everything on margin
A margin call is a demand by your brokerage firm to increase the amount of equity in your account. You can do this by depositing cash or margined securities into your account or by liquidating existing positions to generate cash.
Thanks to margin calls, it is unlikely that my acquaintance lost 70% of his $900,000 position in Tesla. Given that he went on a maximum margin of 50%, he was forced to sell some stock after a 25% drop in order to maintain Tesla’s 50% margin ratio.
FINRA Rule 4210 requires that you maintain a minimum of 25% equity in your margin account at all times. In practice, however, most brokerage firms have strict requirements that demand you maintain at least 30% equity – and in some cases – significantly more.
So, instead of losing $630,000 in the Tesla, he might only lose $350,000. View the latest margin interest rates from Fidelity. Losing money on margin and paying 12% margin interest rate is a bad combination!
lose less and perform better
even though first rule of financial freedom Never losing money, it can be impossible to follow during bear markets. The larger your investment, the more difficult it is for you to earn enough money from your day job or business to keep your net worth positive.
Therefore, the second best thing you can do is lose less money than the average person. If you lose less than the average person, you are actually winning. Because everything is relative when it comes to personal finance.
At Financial Samurai, we’re all about uniting risk-appropriate asset allocation So that whatever the economic environment, we’ll be fine. We invest logically based on how we value our time.
we are ready to feed FOMO investing by assigning on majority of 10% of our capital for the riskiest assets. Even if 10% of our speculative capital drops to 100%, we still have 90% of our remaining capital left.
stop buying stock on margin
In case it isn’t clear by now, please don’t use margin to invest exclusively in stocks growth stock, Not only will you pay margin fees, but you can also lose all your money. Then there is loss of progress, time and respect of your family and friends.
there is a reason bond companies And banks usually only accept real property as collateral. Funny money can disappear overnight. Going on margin to buy funny money assets is like walking through a minefield and playing with a live grenade.
Being 40 years old and having the same net worth as when you were 23 is frustrating. The regrets you’ll have for confusing the mind with a bull market can only increase. And if regret builds up too much, it can ruin many other aspects of a perfectly fine life.
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