Is your sell strategy different if you used borrowed money?

[scorpioncapital]

Just wondering, if you are more likely to sell down somewhat when you would otherwise hold even through some volatility when you use borrowed money in a portfolio? In other words, does the leverage cause you to sell a good company that is not overvalued but say fair or on the high end of fair value? Is there an objective metric. E.g. if the stock goes up 10% and you are leveraged 2:1, would you sell because it met a 20% annual return target on equity?

[rb]

No.

 

Buying and selling decisions are based on the underlying equity not the means of financing. That's important.

[scorpioncapital]

Do you mean you try to figure out which stock is more likely to go further and which is more likely to tread water? Now I'm thinking a leverage limit criteria might be another option.

 

My intuition says that if you use leverage you must be willing to let go much sooner of a stock you like even if it hasn't matured to its full potential yet, i.e. one's greed must be even more carefully studied :)

 

[SharperDingaan]

We find that when we have leveraged positions, we're almost always going to be hedging through sale & repurchases at various points. The gains on those round trips pay the interest, and repays the bulk of the debt itself ;).

 

SD     

[wachtwoord]

I think it makes sense to answer yes to this question as using leverage makes more sense the more undervalued a holding is. As it approaches fair value you'll be inclined to reduce the position. Therefore you will start selling earlier (simply because your position became relatively larger because you bought more at a more extreme undervaluation) than with a smaller non-leveraged position. It's important to note that you should finish selling at the same point though.

[TwoCitiesCapital]

No.

 

Buying and selling decisions are based on the underlying equity not the means of financing. That's important.

 

While theoretically I would agree, in practice - I think they are different. When buying with only equity, you can afford to be wrong on a multitude of things:

 

1) The lowest price it can reasonably hit

2) The timeframe for it to hit your target

3) The end target

 

etc. etc. etc.

 

When financing purchases with borrowed money, being wrong about any one of those can ruin a position/portfolio depending on the amount of leverage. I think in practice, it makes sense to be quicker to sell in all scenarios if you purchased with borrowed money.

[Gregmal]

Depends on cost of capital

[scorpioncapital]

I would imagine cost of capital is almost always defined by the whipsaw in volatility and liquidity risk except in a few cases of very high interest rates and even then you can own stuff that keeps up. The risk always seems to be the amount of shares you lose involuntary due to a margin call vs the ones you lose voluntary by selling prematurely as insurance against such a scenario.