Beware when the geniuses show up in finance. “I can make your money work harder!” some may say, and the simple-minded say, “Make the money sweat, man! We have retirements to fund, and precious little time to do it!”
Those who have read me for a while will know that I am an advocate for simplicity, and against debt. Why? The two are related because some of us tend toward overconfidence. We often overestimate the good the complexity will bring, while underestimating the illiquidity that it will impose on finances. We overestimate the value of the goods or assets that we buy, particularly if funded by debt that has no obligation to make any payments in the short run, but a vague possibility of immediate repayment.
The topic of the evening is margin loans, and is prompted by Josh Brown's article here. Margin loans are a means of borrowing against securities in a brokerage account. Margin debt can either be for the purpose of buying more securities, or “non-purpose lending,” where the proceeds of the loan are used to buy assets outside of brokerage accounts, or goods, or services. Josh's article was about non-purpose lending; this article is applicable to all margin borrowing.
Margin loans seem less burdensome than other types of borrowing because:
But, what does a margin loan say about the borrower?
