Lessons of an Investing Addict Part 3: Margin

Using "margin" means borrowing money from your broker to purchase more stock than you could afford using only your available cash.  Think of it like a credit card that you can only use to buy stock.  In this case, there can be a tremendous upside to taking the risk of utilizing margin, but there is also a significant downside if the investment goes against you - even more of a downside than just the interest you pay on the borrowed money.

The Federal Government (Regulation T) allows you to borrow up to 50% of the initial purchase price of a position, called "initial margin".  Beyond that requirement, brokerages require a minimum equity maintenance to be kept to minimize potential losses to you and to them.  These minimum maintenance requirements can vary. 

Like Diamonds, Cycles are Forever - Premature Thoughts on a Stock Market Crash

It is a bit early to call this past week's action a "crash" or to state that the market is in the midst of a crash, but it is also always wise to plan ahead for various possible future scenarios.  From a value investor's standpoint, crash = opportunity.  The last few years since the 2009 financial crisis, may have been a bit rough for value investors.  While the rising tide of the market over the last 6 years has inevitably raised all boats, those who focus solely on a Graham-esque value strategy may have been left in the dust as growth stocks have been the been doing the heavy lifting.

Bull runs of this nature are difficult for a value investor to stomach.  He likely invested in the 2009 crash, enjoyed the gains until he sold out at what seemed a fair valuation, and subsequently watched agitatingly while the overall market continued to appreciate.  He has likely either converted to mostly cash or focused on commodities, energy, and possibly retail stocks, which have lagged behind the rest of the market sporting low P/E's and P/B's.  Energy and commodities, specifically, have been absolutely hammered this year, while the Dow finally appears to be leveling off after the 5 year bull run.  He follows all of the rules he has picked up from Graham, Buffett, and gang, yet it appears those around him blindly throwing money at in-vogue stocks like Tesla are the ones celebrating!  He has flashbacks to 1999-2001.

But bull markets must come to an end and, like diamonds, cycles are forever.  Love him or hate him (I, for one, am not a big fan), Jim Cramer makes some valid points in "Real Money" when it comes to cycles.

Lessons of an Investing Addict Part 1: The Groundwork of an Investor

I've discussed in previous posts that keeping a tight budget is very important in reaching your financial goals.  A Google search will turn up hundreds of articles providing ideas on how to trim your budget and an entire blog community exists full of participants trying to outdo one another on who can live in the most frugal manner.  I think that is a little extreme.

Instead, I want income growth to be the main driver of my financial independence.  I tend to focus much of my free time and energy on stock investments and I will outline my strategy here.  Disclaimer:  I also mentioned in a previous post that I don't necessarily agree with Jim Cramer's overall investment philosophy, but from his book "Real Money", I wholeheartedly agree with his concept of dedicating a minimum of 1 hour per week per stock to research.