With the market sitting near all-time highs, the masses naturally get more bullish and with bullishness often comes irrational thinking... Thoughts like, I'm making good money, but I can make more. Hello margin loans! I'm admittedly against using margin loans, period end of story, but I'm especially against using margin with market valuations sitting near all-time highs. Why? - Reversion to the mean for valuations can happen at any time. - Company fundamentals are strong, but its stock still drops. - These unexpected losses are magnified, small dips potentially resulting in bigger losses. - Margin calls potentially result in forced liquidation of positions(s). - The forced liquidation prevents you from holding the stock thru a rebound. - Margin loans are inherently expensive and interest accumulates. - Margin debt + interest obligation doesn't go away, even if investment goes to zero. - There's a herd mentality with margin, meaning if you're irrationally bullish and using margin, so too are a large number of other individual investors, resulting in excess speculation across the market, especially the riskiest parts of it. That speculation results in higher volatility, higher volatility increases the chances of corrections, and corrections increase the chances of you being margin called. Call me risk averse, but I'm admittedly against any strategy or trade that can potentially blow up the portfolio it took years to build, overnight. It's akin to playing russian roulette with your money IMO. Story of an ex-coworker who played russian roulette w/his portfolio... https://www.blossomsocial.com/posts/Story-Time-Lessons-from-the-Dotcom-Bubble-and-Margin-Calls__POST-1761523083938-Eu0IVarC_Ue0euExuxhY14Xn3
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3 Comments
H CL@heroichenry · 7mo
Good post. Seeing a lot of users here using margin to buy CC or yield max funds. Hopefully they'll bring that debt level down while distribution are still high or consistent before they get called.
Satwinder Singh@thevalueinvestor · 7mo
Scott, I’ve personally never used margin, though I know a few people who do. I understand why it can be tempting, especially in an environment like this, where equities seem to grind higher month after month and leverage can amplify returns. That said, I’ve always believed that using money that doesn’t truly belong to you carries real risk. For me, preserving flexibility and sleeping well at night matters more than squeezing out extra gains through borrowed capital.
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