A Quick Thank You

Before I get into today’s topic, I want to take a moment to thank all of our readers all over the world who take the time to check out this site and maybe even read some of the posts. As of this month, people from at least 9 different countries have checked out the site. I am able to see this through the amazing WordPress app which allows me to make most of my posts entirely from my phone, complete with links, pictures and even audio or video should I start to move into that space sometime. Below is a screenshot of the readers by country that have visited the site this month:

Surprisingly, I have a strong readership from Australia so cheers to you all for reading. Maybe I’ll put some vegemite on my toast tomorrow in your honor (doubtful but you never know).

I have made some progress in my marketing scheme, currently with over 400 people following the Cash Chronicles Instagram page and the actual website getting over 200 views and about 100 visitors per month. Although I have decided not to post content necessarily to try to attract more readers, the small wins I can claim out of getting new readers is not lost on me. My philosophy on this is that people would prefer authentic posts on topics where they share an interest with me, not a ploy to try to cater my posts to as wide of an audience as possible.

My other strategy has been consistency. I post every Monday and Thursday night and only in a few cases during the past 5 months has a post been abbreviated or late. This, and the new readership, may have helped push the site to the first page in the Google rankings when you search for Cash Chronicles, although it seems this website shares a name with a column on an Australian website called The Footnotes so maybe my Australian readers have been mostly mistake clicks. If that’s the case then you all can keep your vegemite, I don’t like it anyway.

Onto the Topic

While discussing in my last post why most people should not be buying and holding single stocks especially over the long term because it’s too unnecessarily risky, a thought came to my mind: what about the people who want to take even more risk than what the market return has to offer.

In this sense, I am still sticking to my guns that you should stick to index funds and ETFs that track a broad market if you are investing in equities rather than holding a single stock.

For those few who are comfortable with volatility though, you may want to consider another option: buying the index but using leverage.

Look to the Sage of Omaha

Warren Buffet is one of the most studied investors in history. Everyday on Instagram I see posts of quotes that are supposedly attributed to him. His sharp, well read mind mixed with his folksy, simplified, explanations are what endears him to many people.

As described in a post here a few years ago, much of Buffet’s return has been due to the use of leverage. As I described in my last post, it’s very hard to pick a single winner for the next 30-40 years, but combine the one winner you pick with 50%-60% leverage and then you have a recipe for stellar returns.

Just to give you a quick numerical example to what I mean, remember that the return on anything is juiced when you borrow to get it. The money you put in is the equity and the rest represents the borrowed funds. The equation is:

Return = Return on Total Invested Assets/Proportion of Assets That is Equity

Let’s say to have $50, you borrow another $50 and you invest it in the stock market. If you receive an 8% return then you have:

16% = 8%/0.5

So on $50 of equity with borrowed funds, you can essentially earn double the return of just using the $50 to invest outright, which would have given you a $4 return in the case above as opposed to $8 with the leverage.

To give you another example, in my last post I had mentioned that the S&P 500 has returned about 9% on average over the past 100 years. Let’s say you have $100,000 and you want to borrow another $100,000 to double your return:

• Total Investment = $200,000
• Return: $18,000
• Return on Equity = 18%

So just by using leverage and buying the market index you have went from boring returns to spectacular returns like a hedge fund manager.

A word of caution here though, whatever gets amplified on the upside, also gets amplified on the downside. In other words, if it doubles your returns it also doubles your losses. If in any given year, you maintain the same proportion of debt vs equity and the market were to lose 9%, you would see your losses doubled to 18% on the downside as well.

The Real World Example

In the examples I gave above, there was an implicit assumption that you were able to borrow for free. This is not the case in the real world, and most of us do not have the funds to buy a triple A rated insurance company and use its leverage to invest the proceeds.

The things you want to stay away from when trying to leverage your return are things that have interest higher than the non-leveraged return you are hoping for, these include:

• Credit cards
• High interest loans
• Margin for trading
• Personal Loans

These are what is considered “bad” debt. You want stable low interest debt, which in the US, usually is considered to be a home refinance or a home equity line of credit that allows you to use your home as collateral to achieve those government subsidized low interest rates, i.e. mortgage rates.

Once you do this, you will have to subtract the interest you are paying from the return to get the net return after interest expenses. In the case above, where we had an 18% return on equity, when you take into the cost of a 5% interest loan on the other portion of the invested assets, you get:

Total Return After Interest Expense = $18k – $5k = $13k

Respectable, but not as enticing as the original 18% return.

How did I come up with these figures? Take for example a house you bought for $400,000 with 20% down and rented out with a 5% mortgage. After 5 years of 4% growth in home prices, you refinance for a value of $486,000 and get about $100,000 back in cash. Assuming rates are still 5% you now pay 5% on that debt annually and can combine this with another $100,000 in savings for 2x leverage. If you are disciplined enough to implement this over time, it can offer you consistent leverage over a long period of time.

The point here is that the interest rate is relatively low on that debt. Some readers may point out that you can achieve levered returns of the index through levered ETFs but I would like to tackle the intricacies of those ETFs and levered returns in a separate post because I would have to get quite technical to explain the risk and the structure of these types of vehicles.

Conclusion

So if you are looking for more risk than just the index, and you can handle the volatility, you may want to give leverage a try. The best way to do this may be to invest through savings and home equity to take advantage of the lower interest rates by using your home as collateral. Keep the leverage consistent and keep it balanced as well as controlling your emotions so as to not react to market swings.

If you do these things, you could be on your way to some hedge fund like returns.

The information provided by www.cashchronicles.com is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney or other professional to determine what may be best for your individual needs. www.cashchronicles.com does not make any guarantee or other promise as to any results that may be obtained from using our content. No one should make any tax or investment decision without first consulting his or her own financial advisor or accountant and conducting his or her own research and due diligence. To the maximum extent permitted by law, www.cashchronicles.com disclaims any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses. Content contained on or made available through the website is not intended to and does not constitute legal advice or investment advice and no attorney-client relationship is formed. Your use of the information on the website or materials linked from the Web is at your own risk.