Actually quiet good, tested with 1987, 2001 and 2007, used in 3 faster bear markets later. Execution gets easier every time, the first time it was a horror.
There are exactly two points to make this work: patience (for the market timing) and the power to execute. That hurts, a lot. It is against all your body and brain. But you have to do it.
Not now that all the youngsters ask for leverage because it is all sweet since many years. But after losing a big part of your assets. For me it was half of my money, like 8-10 years of salary for hard work. That hurts and to execute a plan in this situation is extremely difficult. If you donât trust yourself to be able to do that, better donât start at all.
Since the low of COVID my stocks did rise 340% plus all I spent in this time and I did pay back all the debt except the debt in my money management of the momentum strategy, which is like a third of what it was at the low. First the pain, then the gain. There is no other time you can make risk adjusted that kind of money, but not after losing a lot first.
In literature they say market timing is easier in bubbles. For me it is not, I have seen bubbles multiplying their value again and again. For me market timing is easier in busts, cheap stocks that start to rise. And there is not much competition, everybody is licking their wounds.
I had to wait a few years until the debt was paid back in the dividend strategy, yes. But that is part of what I did refer to as âpatienceâ. Because the payback in my dividend strategy is slow, only dividends and market dividends or sells are used and I sell not much. And if I spend cash the debt gets higher. I always take out cash as debt, me spending money is not a reason to sell a stock.
In my momentum strategy the margin is managed every day according to the state of the stock market, there the payback was fast.
I have a follow-up question, and Iâll just ask it here because it fits the topic
Letâs assume I have CHF 200,000. I donât have any more money.
Story Nr. 1, Mortgage for a house:
Letâs assume I buy a house worth CHF 1,000,000
To do so, I take out a mortgage of CHF 800,000
This means that 80% is financed by the bank, 20% (CHF 200,000) from me
Now there is a real estate bubble bursting and the house is worth CHF 400,000 (halved)
So the bank has loaned me CHF 800,000, but the collateral is now CHF 400,000
Risk: I have to sell, which will bring me CHF 400,000, use this to pay off my mortgage, but Iâm short another CHF 400,000 for that. This leaves me without house and CHF 400,000 in debt.
Story Nr. 2, Lombard Loan:
Letâs assume I take out a Lombard loan of CHF 180,000
To make this possible, I need CHF 200,000 in shares (assets)
Now there is a stock market crash and my assets is only worth CHF 100â000 (halved)
So the bank has loaned me CHF 180â000, but the collateral is now CHF 100â00
Risk: The bank is now selling assets to reduce the lombard loan and restore the ratio to the correct level. I lost a lot of money, but I donât have any debts.
My questions:
In my example, the house got me into CHF 400â000 dept, but the Lombard loan did not. Why is a mortgage for a house less risky than a Lombard loan?
If the assets decline in value faster than the bank can sell them, meaning that the assets can no longer repay the Lombard loan, do I then have debts, or is this a risk for the bank?
Can that even happen with IBKR, which sells directly without a long wait?
I know, silly questions. I have no experience with debt.
because your example borrows 800k for house and only 180k for shares. the amounts are different. so obviously youâre not in 400k of debt in the 2nd example when you borrowed only 180k.
The outcome would have been the same if I had borrowed more, no? What I wanted to say was: with a mortgage, I am in debt, but with a Lombard loan, I am not, because margin call is faster.
EDIT: Hmm, okay. Perhaps a mortgage for a house should be compared more to a Lombard loan for buying shares in order to multiply the assets. But the question remains the same: Can a Lombard loan put me in debt if there is a stock market crash or will I just lose money until I have no assets left? Losing everything (lombard loan) vs. losing everything + debt (house mortgage).
In such a situation I doubt you even get 400â000 for the house. Seen it in the end of the 80ies. The highest bidder gets it and often it was some bank employeeâŠ
The lombard loan is the same in principles, but as the stock market puts the price at sight every moment and stocks are more liquid than real estate, you may act. You canât sell a room of your house, but you can sell part of your stock positions.
If you donât act you may run into the same problems. Some broker sell directly, others do margin calls and others do nothing. The âdo nothingâ are dangerous as you may end up with no stocks and debt as with real estate.
Interactive Brokers sells directly.
You should control your margin yourself, a simple spreadsheet is enough!
Are you asking if you sell all your assets and it is still not enough will IB just walk away and say âhey, that 400k you still owe us, just forget it?â.
The mortgage example is a 5x leverage. I guess you would find yourself in a similar situation with 5x leverage in the lombard loan (except for the fact that - hopefully - you would be liquidated earlier by the broker, before going into the negatives )
More: Is the broker responsible for liquidating my assets fast enough so that this situation does not arise in the first place, or am I? But I think the questin is answered => IBKR will try to do that (Thanks for the explanation @cubanpete_the_swiss and @weirded), but if it doesnât work, Iâll bear the risk. And some brokers do not do this automatically, which increases the risk. Got it.
For me, the conclusion:
A Lombard loan can be safer than a mortgage.
I donât understand it well enough, so I donât use it.
Without in depth fact-checking, I remember that in certain jurisdictions (EU, I think) the answer is yes. Having a negative account balance is on the broker and not on the regarded retail customer in question.
oh well in that case, iâll go get my kids to make a massive leveraged bet on bitcoin derivatives. maybe one will strike it lucky and we can all retire.
Far be it from me to âencourageâ anyone to take on debt (this is not financial advice, etc. etc. ), but I think one might remain relatively safe, provided leverage is kept at a reasonable level. For myself, I set a threshold of 30% of the equity value.
Edit: we discussed about this some time ago, you may have a look here
Sure, just to put things into context. The 30% reference value I mentioned is simply a personal upper limit. I donât use it regularly and Iâm not suggesting that anyone else should apply this (or any other specific value).
(Examples below based on IBKR values, Reg-T margin assumptions):
Option 1: I have $100, take a $30 margin loan, and invest the $130 in a âstableâ asset (e.g. VT) with a 25% margin requirement.
Margin requirement = $37.5
Equity would need to fall from $130 to $37.5 before requirements are breached â ca. 71.2% drop.
Option 2: I have $100, take a $30 margin loan, but spend the $30 on pizza & beer. My invested equity remains $100.
Margin requirement = still $37.5 (based on the $130 exposure)
Equity would need to fall from $100 to $37.5 â ca. 62.5% drop.
For comparison:
During the dot-com bubble, the NASDAQ fell about 75% (over ~2 years).
In the 2008â2009 crisis, the S&P 500 dropped almost 60% (in ~1.5 years).
So yes, big drawdowns happen, but they donât occur overnightâthere is usually time to react.
In the end, it comes down to personal risk tolerance. Yours seems lower than mine (which is fine), even though I also wouldnât call myself a âgamblerâ .
Not sure about the point youâre trying to makeâŠ
To clarify my intention behind the post you quoted:
Big drawdowns typically last months to years.
With online access to your brokerage account, you can monitor and react on a daily basis.
By âreact,â I mean:
progressively reducing exposure by:
selling some shares, or
adding cash, or
simply doing nothing
Once again, I want to stress that Iâm not encouraging anyone to take on debt or suggesting how much.
That said, I have the impression there is some misinformation circulating here from time to time - or topics treaded as âtabooâ, so I think itâs useful to illustrate things with numbers and examples. What people do with that information is, of course, entirely up to them.
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), but I think one might remain relatively safe, provided leverage is kept at a reasonable level. For myself, I set a threshold of 30% of the equity value.
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