Logical Mistakes I made Justifying Leverage
Channel: Marc De Mesel
Date: 01/09/2019

Thought I was only increasing potential reward but not increasing my risk as long as I kept the investment isolated and did not invest more if it would go down. However this would not be a good investment strategy as one always needs to judge an investment based on it's current allocation and risk/reward ratio. Typically, when an investment goes down a lot but fundamentals are still good, risk/reward ratio has gone up a lot and therefore increasing allocation is a must if one aims for optimal returns.

I also reasoned since chance is low Tesla will drop to say $100, or go sideways for long, causing margin calls and reducing my equity and amount of shares with every whipsaw, chances are high I will end up with more shares thanks to a margin loan. And in the end, if it tenfolds, that is the only thing that counts. 

However even if one does not isolate the investment and is open to invest more if it would go down, this is less likely to happen as you are now forced to invest more just to keep your shares, and therefore investing even more so that you also increase your exposure and amount of shares becomes even harder, causing you to more likely fail in doing so thereby lowering your overall returns. 

Lastly investing with leverage increases volatility and drawdowns, causing higher stress levels impacting personal & family life and even life duration, simply not worth it.

There are some situations where margin loans are interesting, for example it allows you to stay invested while putting your cash to work somewhere else. In this case you do not use leverage, and you always make sure that this cash does not go down lower in value than the margin loan outstanding so that in case your stock goes down in value and a margin call happens, you simply send back the cash to your broker to not be margin called.