Mother Of All Financial Evils – Part 2

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August 27, 2006 | Stocks | | Author Asif

As I mentioned in my previous blog entry about margin, I tried a little experiment to see if I could come out ahead by using a credit card balance transfer offer at 3.99% fixed APR. This APR would stay fixed at 3.99% until the balance was paid off in full and hence there were no immediate time constraints and I did not have to worry about margin calls.

I invested this amount in three stocks and one Exchange Traded Fund (ETF). I picked one international stock, one high dividend yielding stock and one high risk/return stock. All three stocks were featured in previous editions of SINLetter. The high risk/return stock I picked was VA Software (LNUX) and it has provided the best returns to date with a gain of over 150%.

For the high dividend paying stock I picked Pfizer (PFE), which had already lost a third of its value and had just declared a 26% dividend increase. For the international stock I picked the Indian automobile company Tata Motors (TTM), which was featured in my December 2005 investment newsletter. While Tata Motors did not sport as high a dividend yield as Pfizer, its dividend yield of 2.3% (back then) was more than the average dividend yield of the S&P 500.

To add some diversification, I also bought the PowerShares Value Line Timeliness Select Portfolio (PIV) ETF, which I discussed in this blog entry. This ETF is the only investment of the four that I picked that is showing a modest loss right now. Given below is a table that has all the details of how this experiment has generated a return of 50% in little less than 9 months.

Investment Symbol Purchase Price and Date Portion Invested Price Now (8/25/2006) Change
VA Software LNUX $1.77 (Jan 4, 06) 15.98% $4.62 161.02%
Tata Motors TTM $12.08 (Dec 7, 2005) 33.39% $18.45 52.73%
Pfizer PFE $21.05 (Dec 12, 2006) 29.12% $27.23 29.26%
Value Line ETF PIV $15.52 (Dec 8, 2005) 21.51% $14.30 -7.86%
Total Returns Including Dividends and Trading Costs ** 50.25%

** I sold 46% of my stake in VA Software on May 23, 2006 @ $4.55/share

While my little experiment turned out well, using any kind of leverage is dangerous without understanding all the costs involved and what it really takes to break even or make a profit. After paying interest on your borrowed money and trading costs, you still have to pay capital gains tax on any profits you make. And finally there is a time cost involved, which depending on your situation can make or break the deal.

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  1. Tom
    August 27th, 2006

    New to this blog and just read your last two blog entries.

    Ok, so I don’t know who this Travis is, but if he is buying stocks on margin, he is just plain stupid and should not be writing an investment blog or at least title it “how not to invest”. I can’t count the number of people who lost their shirts investing in margin in the late 90s. One bear market is all it takes.

    But what’s even more shocking is your recommendation. I can tell you that a friend of mine ended up commiting suicide following your method – borrowing against a credit card. Enough said.

    Bottom line, ok, lets not be very negative – but borrowing on margin or against a credit card has the same risk, the risk is also shared by those who leverage margin without even knowing that they are – I am refering to folks who write naked puts. The risk is simple “getting drunk” – margin doesn’t hurt unless you get drunk on it and tread the lines of margin calls, borrowing against a credit card doesn’t hurt unless you get drunk on it and overdo it and have credit companies knocking on your doors and not having any money to pay them. But the unfortunate truth is that 99% (random statistic) of those who indulge in these activities will end up getting drunk on it and suffer. Might as well not go there in the first place, but then when has anyone learnt from other people’s experience. Ha!

    The more investment and financial blogs I read, the more I feel like there should be more regulations on blogs – it is gaining in popularity by the day and can misguide individuals who really need to be hand held. JMO.

  2. John
    August 27th, 2006

    You just got read the riot act. :)

  3. Asif
    August 27th, 2006

    John, it certainly appears like I just got read the riot act. :)

    Tom, I could not agree more with you that using both margin and credit cards as leverage are dangerous, especially in Inexperienced hands. Why do you think the title of the post is "Mother of All Financial Evils"?

    However it is highly unlikely that I was going to get "drunk" with the experiment I tried. I have been inundated with credit card offers every single day over the last 9 months but did take them up even though I did very well with the amount borrowed back in December. I though I was pretty clear in my blog entry about a few things, but let me reiterate some of these points.

    The purpose of these two blog entries was not to recommend using credit cards instead of margin. The purpose was to point out how dangerous margin can be and the costs involved even if you choose to use other methods of leverage such as credit cards.

    The APR on the offer I took was 3.99% fixed and my online savings account was paying as much at that time. So in that sense it was risk free capital.

    The fed was raising interest rates back then and so in fact it was better than risk free capital.

    If things went wrong, I had enough cash on hand to pay off the complete balance instantaneously. Did I mention that this was an experiment?

    These four investments do not represent my entire portfolio and are a very small subset of my diversified portfolio.

    Please feel free to read the rest of my blog entries and my investment newsletters to see if it misguides investors in any way. In fact you should also check out the excellent coverage of Chicos, IMAX and Blackboard on Travis’s blog. I think some investment blogs do a better job of covering certain stocks than some Wall Street analysts. Having skin in the game (money on the line) and no hidden agendas certainly helps some of us look at all the angles.

    The standard disclaimer: This blog and the newsletters are for educational purposes only and not a recommendation to buy or sell securities or follow the author’s financial experiments. 

  4. Kevin
    August 27th, 2006

    A collection of information bestowed upon us by an insightful, articulate, results orientated person.

    Followed by….

    Someone else who takes one small piece of an article that fully details margin. Interprets in his own interest that the article is a proponent of using margin (which it isn’t), brings up a suicide of a friend and overly personal stuff for his first entry to the blog.


    Relax, take a look around at the site and what it has to offer. If you feel the information contained within is detrimental to you or others, then simply pack your bags and find a more suitable home.

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