Getting leverage

[Shooter MacGavin]

It pains me that we have nearly zero interest rates, yet I can't figure out how to borrow long-term (in the US) to buy public market securities.  I know I can margin for really cheap with IB but I consider that unsafe since we are prone to have moments of madness in the markets. Is there another way to try to get longer term, safer leverage?  I guess one could buy put options to ensure one doesn't get a margin call in a market panic, but that has been generally costly. 

 

Any other way to get longer term leverage?  I don't have a house so I can't take a second mortgage.

 

I've tried to short corporate bonds, but to no avail.  I tried to short the UST ETF but it is not available to short.

 

I would love to buy some (what i consider) safe stocks with long-term, cheap financing. anyone figure this out?  Is there a derivative way to do it, or a broker that will allow me to short bonds? Thanks for your thoughts and apologizes if there's another thread like this.

 

[gg]

I haven't tried to do this, and know nothing about it, but could you possibly short US govt bonds? It's more liquid than any individual corporate bond

[PatientCheetah]

If you have a hard time making money without leverage, it would be a bad idea to use more leverage. Leverage takes far more trading skill and great timing. If your account is above certain size, you can apply for portfolio margining. It gives you more margin than I would ever feel comfortable fully utilizing.

[glorysk87]

It pains me that we have nearly zero interest rates, yet I can't figure out how to borrow long-term (in the US) to buy public market securities.  I know I can margin for really cheap with IB but I consider that unsafe since we are prone to have moments of madness in the markets. Is there another way to try to get longer term, safer leverage?  I guess one could buy put options to ensure one doesn't get a margin call in a market panic, but that has been generally costly. 

 

Any other way to get longer term leverage?  I don't have a house so I can't take a second mortgage.

 

I've tried to short corporate bonds, but to no avail.  I tried to short the UST ETF but it is not available to short.

 

I would love to buy some (what i consider) safe stocks with long-term, cheap financing. anyone figure this out?  Is there a derivative way to do it, or a broker that will allow me to short bonds? Thanks for your thoughts and apologizes if there's another thread like this.

 

You want to lever up in order to buy equities at significantly higher-than-average valuation levels?

 

Well boys, I think we've found our indicator that we're at the market peak...

[fareastwarriors]

Take the small margin loan at IB. If the loan is small enough, even if there is madness you should be able to ride it out.

[Shooter MacGavin]

I haven't tried to do this, and know nothing about it, but could you possibly short US govt bonds? It's more liquid than any individual corporate bond

 

I wish I could.  they don't let you!

[Shooter MacGavin]

If you have a hard time making money without leverage, it would be a bad idea to use more leverage. Leverage takes far more trading skill and great timing. If your account is above certain size, you can apply for portfolio margining. It gives you more margin than I would ever feel comfortable fully utilizing.

 

Well no one is saying I'm not making money.  I am so far (thankfully), but  in theory, if you can borrow safely (long-term, non-recourse) at 1-2% and put it in an asset that has a 12-15% return, and you can do that safely, well I would do that all day long up to a point where I felt that the assets coverage ratio would be comfortable. 

[Jurgis]

Mortgage or HELOC is the closest you can get to non-recourse (possibly not) and long term and still not 1-2%.

 

For small percentages of portfolio, yeah, I guess IB margin.

[Shooter MacGavin]

It pains me that we have nearly zero interest rates, yet I can't figure out how to borrow long-term (in the US) to buy public market securities.  I know I can margin for really cheap with IB but I consider that unsafe since we are prone to have moments of madness in the markets. Is there another way to try to get longer term, safer leverage?  I guess one could buy put options to ensure one doesn't get a margin call in a market panic, but that has been generally costly. 

 

Any other way to get longer term leverage?  I don't have a house so I can't take a second mortgage.

 

I've tried to short corporate bonds, but to no avail.  I tried to short the UST ETF but it is not available to short.

 

I would love to buy some (what i consider) safe stocks with long-term, cheap financing. anyone figure this out?  Is there a derivative way to do it, or a broker that will allow me to short bonds? Thanks for your thoughts and apologizes if there's another thread like this.

 

You want to lever up in order to buy equities at significantly higher-than-average valuation levels?

 

Well boys, I think we've found our indicator that we're at the market peak...

 

I'm flattered you call a market top based on my behavior.  Since you're so convinced, you should probably short the market.

 

I don't really care much about market levels.  I'm so insignificant, I can always find stuff to buy, with 20-25%+ IRRs. Never had much trouble with that in any market environment.

 

If you look at the best performing stocks of all time, the fortunes were made on low-cost, non recourse leverage. 

 

Berkshire, Fairfax, Danaher, Middleby, Capital Cities, everything John Malone does etc etc.

 

They all behave like private equity in some way..they get a cheap, long-term source of financing (in berkshire's case, negative) and plow it into assets that earn relatively high rates of return.  Of course, some things aren't leveragable and some are.  Some structures are riskier for the borrower, some aren't.  (covenant lite, great for borrowers, dumb for lenders). 

 

I'm not advocating for margin....because that is marked-to-market, and recourse.  the worst kind.  I'll repeat that. MARGIN BAD.

 

I would love however to issue 10 year term bonds at 2% and plow it into berkshire which may earn 10-15% for example.  in 10 years my cost of financing would cummulatively be 21% (1.02^10), while Berkshrie may have appreciated 159% (1.1^10)....or a 138% spread, no equity down.

 

If I could short US treasuries, that's effectively borrowing at the yield, today at 1.76%.  I'll take as much of that as you'll give me.

[Jurgis]

I would love however to issue 10 year term bonds at 2%

 

Won't we all.  ;D

I'd prefer to issue 99 year bonds at 0%. But that's just me.  8)

[Shooter MacGavin]

I would love however to issue 10 year term bonds at 2%

 

Won't we all.  ;D

I'd prefer to issue 99 year bonds at 0%. But that's just me.  8)

 

right?  I'll take that all day long.  the previous poster's Pavlovian negative response to leverage is a bit amateurish, in my opinion.  Credit structures, legal structures are incredibly important , as are the underlying assets being financed.

 

The current rate environment is amazing for investors.  Corporations are all taking advantage of it, either by re-capping or going on acquisition sprees.  Now this is a good idea for some, but not a good idea for some (cyclical companies).

 

it's funny, banks in the US will let you collateralize your publicly traded equities to let you buy private stakes in other partnerships or houses, but they won't let you buy publicly traded partnerships known as stocks.

 

there's gotta be a way to exploit the embedded low interest in options or futures or something!!  I'm too dumb to figure it out.

[BG2008]

Mortgage or HELOC is the closest you can get to non-recourse (possibly not) and long term and still not 1-2%.

 

For small percentages of portfolio, yeah, I guess IB margin.

 

Home mortgages are probably the best way to go about this.  They do not care what your securities trade at.  The dumbest things that I've heard are "MLPs yield 6%,let's borrow at 1% and lever it 2-3x." 

 

If you think you're sitting on companies trading at 50-60 cents on the dollar, then yeah, it makes sense to lock into 30 years fixed with no mark to market risk.  The overall concept of leverage just doesn't sit well with me.  So, I try to avoid it in general. 

[TwoCitiesCapital]

There are 3 ways that I generally get leveraged exposure:

 

1) Margin loans through IB.

 

IB generally has cheap margin rates and I limit the amount that I borrow through this mechanism to like 5% of my total assets so that I could easily cover a margin call without forced liquidation. Also, the assets in that account tend to be incredibly volatile (BBRY, FNMA, short TSLA, put options, etc.) which limits the amount of margin I'm willing to take against them.

 

2) Deep-in-the-money calls

Buying deep-in-the-money calls that have a delta near 1 typically gives you leveraged exposure to the underlying name and they're deep in the money so you don't have to worry about a zero valuation at expiry barring a massive decline. You obviously won't get the dividends so this is a better candidate for capital appreciation type stocks AND it needs to be very deep in the money before 95-99% of the call's value is fundamental value with nearly no time value attached. This is how you lower the "cost" of borrow while getting nearly 1.5-2x leverage on your cash. Also, with this strategy, if stocks do crater 50-60%, you actually end up better off than if you owned the stock, because once it passes your strike price on the way down the delta drops below 1 and you lose less than what the market loses.

 

3) Loan consolidation offers from credit cards

I regularly receive offers from credit cards (like the Slate from Chase) where they give me 12-18 months interest free on any amount rolled for "loan consolidation." I take the checks they give me, cash them into my investment accounts, and use that money interest free for 12-18 months. There's typically a 1-2% balance transfer fee so that's your annual rate paid. When the money comes due, either liquidate the investments and cover it or roll to another card with a similar offer and pay the 1-2% again. 

 

This is definitely the riskiest of the 3 so extreme caution should be taken with the amount borrowed unless if you want to end up as a horror story/bankrupt. I do #3 regularly because I have no other outstanding debt and I keep the amount borrowed to something I could cover with my income in less than 6 months just in case there's a situation where I'm unable to roll to another card or repay the loan before accruals of interest. I've done for the last 3 years and it's worked relatively well in providing additional cash that is non-recourse, is independent of market movements, and is of low interest.

 

Lastly, I've been looking into getting an unsecured credit line so I can be more opportunistic with my leveraged exposure (i.e. have a lot more cash at 2009 low-type levels), but the rates I've seen on many of them haven't really made much sense and many I have looked at carry regular fees to maintain which is something I'd rather avoid. If anyone else has had luck with decent rates and low fees, please direct me to your bank :)

 

 

[Jurgis]

Mortgage or HELOC is the closest you can get to non-recourse (possibly not) and long term and still not 1-2%.

 

For small percentages of portfolio, yeah, I guess IB margin.

 

Home mortgages are probably the best way to go about this.  They do not care what your securities trade at.  The dumbest things that I've heard are "MLPs yield 6%,let's borrow at 1% and lever it 2-3x." 

 

If you think you're sitting on companies trading at 50-60 cents on the dollar, then yeah, it makes sense to lock into 30 years fixed with no mark to market risk.  The overall concept of leverage just doesn't sit well with me.  So, I try to avoid it in general.

 

Yeah, I'm not gaga about leverage either. But ... if someone offered me 10-100 year 2% with no collateral adjustments, I'd take as much as I could. :) For some reason, nobody does. ;)

 

Mortgages: 30 year fixed at 3.5% is still an option on inflation. If we get inflation and rates adjust way higher, then it's an asset and not a liability.

 

Now, 30 year at 3.5% is not at 2%, so I'm less interested to take as much as I could. Plus it also comes with a house attached to it, so ...

 

FWIW and all that.

[Shooter MacGavin]

There are 3 ways that I generally get leveraged exposure:

 

1) Margin loans through IB.

 

IB generally has cheap margin rates and I limit the amount that I borrow through this mechanism to like 5% of my total assets so that I could easily cover a margin call without forced liquidation. Also, the assets in that account tend to be incredibly volatile (BBRY, FNMA, short TSLA, put options, etc.) which limits the amount of margin I'm willing to take against them.

 

2) Deep-in-the-money calls

Buying deep-in-the-money calls that have a delta near 1 typically gives you leveraged exposure to the underlying name and they're deep in the money so you don't have to worry about a zero valuation at expiry barring a massive decline. You obviously won't get the dividends so this is a better candidate for capital appreciation type stocks AND it needs to be very deep in the money before 95-99% of the call's value is fundamental value with nearly no time value attached. This is how you lower the "cost" of borrow while getting nearly 1.5-2x leverage on your cash. Also, with this strategy, if stocks do crater 50-60%, you actually end up better off than if you owned the stock, because once it passes your strike price on the way down the delta drops below 1 and you lose less than what the market loses.

 

3) Loan consolidation offers from credit cards

I regularly receive offers from credit cards (like the Slate from Chase) where they give me 12-18 months interest free on any amount rolled for "loan consolidation." I take the checks they give me, cash them into my investment accounts, and use that money interest free for 12-18 months. There's typically a 1-2% balance transfer fee so that's your annual rate paid. When the money comes due, either liquidate the investments and cover it or roll to another card with a similar offer and pay the 1-2% again. 

 

This is definitely the riskiest of the 3 so extreme caution should be taken with the amount borrowed unless if you want to end up as a horror story/bankrupt. I do #3 regularly because I have no other outstanding debt and I keep the amount borrowed to something I could cover with my income in less than 6 months just in case there's a situation where I'm unable to roll to another card or repay the loan before accruals of interest. I've done for the last 3 years and it's worked relatively well in providing additional cash that is non-recourse, is independent of market movements, and is of low interest.

 

Lastly, I've been looking into getting an unsecured credit line so I can be more opportunistic with my leveraged exposure (i.e. have a lot more cash at 2009 low-type levels), but the rates I've seen on many of them haven't really made much sense and many I have looked at carry regular fees to maintain which is something I'd rather avoid. If anyone else has had luck with decent rates and low fees, please direct me to your bank :)

 

TwoCitiesCapital.

 

I agree with you on calls.  I always think about a call as a cost of borrow plus protection.  This is definitely a good way to get non recourse leverage if the put premium + borrow is relatively cheap (although it rarely is).  In fact, in another thread I think I postulated that the Berkshire puts /and or calls are pretty cheap right now. something like 4%+ annualized cost on a stock that could easily do 10%+ annualized or more (in my view)... ..that's one to keep rolling over for a while.

 

never thought about the 3rd.  Interesting!  I'll think on it.  thanks for the feedback.

[Jurgis]

Credit card offers 12 month @ 2% - I did that in the past, but no longer do it. I only get offers that amount to less than 1% of my investments and you have to be sure not to use that card for anything else, since payments go to the "0% cash advance" first, so you'll be paying interest on purchases if you use the card for something else.

 

BTW, I also keep in bank (cash) way more than 1% of my investable amount. So I could "borrow" from myself more than 1% than the credit cards offer and not pay 2% at all. ;) So in short cc offers not worth it for me anymore.

[thepupil]

my credit union gave me a 100% LTV 5 yr loan on my 6 yr old car w/ 60,000 miles for 2%...not super long term and it was only $20K but if you own your car outright that's not a bad way to get some cheap cash.*

 

*if you already have insurance coverage that lender will require you to have, if you don't have that, then it can be an expensive form of financing because auto lenders require certain coverage

[LC]

I agree with you on calls.  I always think about a call as a cost of borrow plus protection.  This is definitely a good way to get non recourse leverage if the put premium + borrow is relatively cheap (although it rarely is).  In fact, in another thread I think I postulated that the Berkshire puts /and or calls are pretty cheap right now. something like 4%+ annualized cost on a stock that could easily do 10%+ annualized or more (in my view)... ..that's one to keep rolling over for a while.

 

But with the calls, you only get 2 years of leverage at most, right? Then you need to roll them over at a different annualized % cost.

 

Is there a way to use futures/options to extend this fixed-rate cost?

[Shooter MacGavin]

I agree with you on calls.  I always think about a call as a cost of borrow plus protection.  This is definitely a good way to get non recourse leverage if the put premium + borrow is relatively cheap (although it rarely is).  In fact, in another thread I think I postulated that the Berkshire puts /and or calls are pretty cheap right now. something like 4%+ annualized cost on a stock that could easily do 10%+ annualized or more (in my view)... ..that's one to keep rolling over for a while.

 

But with the calls, you only get 2 years of leverage at most, right? Then you need to roll them over at a different annualized % cost.

 

Is there a way to use futures/options to extend this fixed-rate cost?

 

 

right..there isn't a way to lock it in with options, but it may not be that big a deal.  I can't talk to futures, I don't know how they work, but I would love for someone to educate me.

 

Berkshire is generally a low volatility stock since its investors aren't manically exchanging their stock.  So hopefully the option pricing ("borrow plus put" or "call") stays at that rough under 5%. For purposes of thinking about the roll forward, it's better to margin and buy a put than buy a call.

 

if you margined at IB, and bought a just out of the money put to protect your loan, and if berkshire went up, then at expiration you could roll your put for less...you only need to roll it for right below your cost in order to protect from a margin call.....so your overall cost of premium (put plus interest) is lower.

 

if berkshire stays flat, then hopefully the put premium, which is largely  priced on vol, stays low too..but the intrinsic value is most likely to be higher two years later ...in which case the intrinsic value of the option (not the extrinsic value) is higher..or said differently, the spread between your upside and the put premium plus interest is higher...so you can afford to take up your put premium percentage if it ends up being a bit higher

 

if berkshire goes down..you're still fine, you're put protected you from a margin call.  and then you can pay a higher put premium on the then stock price (of let's say 8%) and that's ok, because from this level you now have a higher upside.

 

this exercise assumes that your interest costs stay flattish..but hopefully they don't go from under 2% at IB pre-tax at IB to like 5%..chances are they rise in 25 bps - 50 bps increments

 

In fact, I'm tempted to just sell everything else and just run a levered, protected berkshire portfolio in IB.  I said this on the other thread too, looking for people to give me a reason why I was an idiot to do that.  I'm sure I'll get an answer soon :)

 

[PatientCheetah]

What if Buffet dies, the put protects your downside so the real cost is opportunity cost. To be honest, I am not impressed with Buffet's successors' pick. How other conglomerates performed after their key persons passed are also telling.

[glorysk87]

 

I'm flattered you call a market top based on my behavior.  Since you're so convinced, you should probably short the market.

 

I don't really care much about market levels.  I'm so insignificant, I can always find stuff to buy, with 20-25%+ IRRs. Never had much trouble with that in any market environment.

 

If you look at the best performing stocks of all time, the fortunes were made on low-cost, non recourse leverage. 

 

Berkshire, Fairfax, Danaher, Middleby, Capital Cities, everything John Malone does etc etc.

 

They all behave like private equity in some way..they get a cheap, long-term source of financing (in berkshire's case, negative) and plow it into assets that earn relatively high rates of return.  Of course, some things aren't leveragable and some are.  Some structures are riskier for the borrower, some aren't.  (covenant lite, great for borrowers, dumb for lenders). 

 

I'm not advocating for margin....because that is marked-to-market, and recourse.  the worst kind.  I'll repeat that. MARGIN BAD.

 

I would love however to issue 10 year term bonds at 2% and plow it into berkshire which may earn 10-15% for example.  in 10 years my cost of financing would cummulatively be 21% (1.02^10), while Berkshrie may have appreciated 159% (1.1^10)....or a 138% spread, no equity down.

 

If I could short US treasuries, that's effectively borrowing at the yield, today at 1.76%.  I'll take as much of that as you'll give me.

 

Not calling a market top just being sarcastic. I'm just saying it's bad portfolio management to lever up on the long side with stretched valuations. 

[LC]

Not calling a market top just being sarcastic. I'm just saying it's bad portfolio management to lever up on the long side with stretched valuations.

 

Well, they go hand in hand, righ?

 

It's easy to lever up because rates are low. And valuations are stretched because rates are low.

 

When rates are high, it is harder to lever up, but valuations will be cheaper.

 

So really you want to look at the spread, right? Use leverage when the spread is high and delever when the spread comes down.

 

 

[Shooter MacGavin]

Not calling a market top just being sarcastic. I'm just saying it's bad portfolio management to lever up on the long side with stretched valuations.

 

Well, they go hand in hand, righ?

 

It's easy to lever up because rates are low. And valuations are stretched because rates are low.

 

When rates are high, it is harder to lever up, but valuations will be cheaper.

 

So really you want to look at the spread, right? Use leverage when the spread is high and delever when the spread comes down.

 

LC,

 

really well put.

 

every company uses leverage.  No retailer would be in business without trade financing.  they pay nothing for it.  no bank would be in business without leverage.  They use cheap deposits as a cost of financing.  Most companies pay their employees every two weeks to a month.  That's free leverage.  leverage isn't necessarily bad for companies or investors.  badly structured leverage is bad. duration mismatch is bad. Margin is bad.

 

[wachtwoord]

I think margin is good as long as you keep it low relative to colletoral (your portfolio).

[scorpioncapital]

And add in a buffer for potential market drops. A 1.3x margin ratio can quickly jump to 2x in a recession.