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1. 

   secretwealth
   

   Expert
   Joined: Jun '11
   Posts: 1,506

   So, I'm so impressed with the leveraged income experiments going on here that I've decided I want to try it myself, but I want some advice/comments/guidance before I take the plunge. I haven't been with IB before, so it's going to take me a few days to set the account up. When it's all done, I plan on leveraging 10k into some relatively stable dividend-yielding non-REITs, mixed between stocks and funds. Here's what I'm thinking of getting:

   T
   RAI
   VGR
   PHT
   PHK
   PTY
   ERH
   ERC
   EAD
   PCN

   I know it's a long list, but any thoughts would be much appreciated. I'll of course track the progress of this here as have the giants who have come before me, and upon whose shoulders I rest.

   Posted 1 year ago #
2. 

   George the original one
   

   Expert
   Joined: Jul '10
   Posts: 1,938

   > I haven't been with IB before, so it's going to
   > take me a few days to set the account up.

   I've only used the web client rather than the full client... make sure you deal in full lots of 100 sh and make sure you're getting a market order rather than a limit order (the web client is a little pushy about writing limit orders).

   How do you plan on dealing with price drops once the portfolio is built? Are you going to inject extra money or are you going to sell off?

   Posted 1 year ago #
3. 

   secretwealth
   

   Expert
   Joined: Jun '11
   Posts: 1,506

   I was planning on sell offs if price drops become an issue, but I'm also hoping to buy at a low point in the market (i.e., not now).

   Posted 1 year ago #
4. 

   livinlite
   

   Journeyman
   Joined: Feb '12
   Posts: 108

   Is $10K enough to make a big difference in your investment return rate? In ERE book, he says it doesn't pay to hunt the best returns in stock investments until you have a relatively large asset base you're trading.

   At $10K, there may be other more lucrative ways to grow the nest egg...

   I'm thinking about arbitrage opportunities in consumer goods...can you buy bikes or furniture and refurb them? cars? could it be easy to buy an undervalued $100 piece of furniture, clean it, and sell it on craigslist for $200 than to try to beat the market and get 100% gains?

   That's something I'm considering looking into until I have ~$50K in cash assets to invest..

   Running numbers: $10K @ 10% return gets you $100, vs. $10 at 1% in a savings account. I'm thinking there are easier ways to make $90 profit than trading stocks..that $90 could be eaten up by comissions too..and taxes. When you move to $50K, you get a $450 delta, which is more worthwhile, but maybe still not "worth it" depending on how hard/long you have to work to get that 10% return.

   Just my $0.02..

   EDIT:

   Disregard what's ^^^^^^^^^^^ (I was asleep at the wheel in my math)

   Posted 1 year ago #
5. 

   secretwealth
   

   Expert
   Joined: Jun '11
   Posts: 1,506

   livinlite: A good point, but there are two issues:

   1. I'm in NYC, and arbitrage is fiendishly competitive here. Just about every economic nook is already well filled.

   2. I'm terrible with my hands.

   Also, 10% of 10k is 1,000 and 1% is 100, so the difference is 900/yr. or $75/mo. That difference covers my cell phone and internet bills. Not a small difference at all IMO.

   Posted 1 year ago #
6. 

   George the original one
   

   Expert
   Joined: Jul '10
   Posts: 1,938

   @livinlite - check your math... order of magnitude error there.

   In general, we're all running experiments in leveraged income at this time, so a lower investment is warranted while we learn the difference between theory and reality.

   Posted 1 year ago #
7. 

   jacob
   

   Expert
   Joined: Jul '10
   Posts: 3,297

   Aren't you just exchanging increased downside risk (you'll be more susceptible to downswings if the plan is to liquidate to keep your margin) for income?

   I did something similar with covered calls (exchanging upside potential for income) and eventually determined it was a wash.

   Ultimately it should arbitrage out so that the leveraged strategy is only profitable of you can borrow at less cost than the dominant market players OR you have a positive alpha (that's good enough to beat what is now a larger beta).

   In other words ... are you sure leverage would sound as exciting if it wasn't for the fact that markets have risen spectacularly over the past 2 years?

   Posted 1 year ago #
8. 

   secretwealth
   

   Expert
   Joined: Jun '11
   Posts: 1,506

   Jacob, you bring up a good question about how this would work in a down market; of course, a 2008 crash would be absolutely disastrous, even for the relatively stable stocks listed. I suppose a stop-loss of maybe a 10% drop in stock prices would be necessary to protect from such a scenario.

   While in theory you're right that the arbitrage should even out, that is assuming that everyone is playing the same market. The big guys seem to be going after bigger yields, so they aren't playing in this niche of the market.

   I've played around with seeing the expected returns on this type of portfolio in the past few years, and it seems to me that timing is more important than anything; especially with the high-income funds, buying at a down point in the market (like last summer) would make this portfolio work much better than an up point (like right now). For this reason, I'm going to wait on this experiment until the market crashes, which I honestly don't expect to happen for a couple months--although it definitely will happen.

   Posted 1 year ago #
9. 

   livinlite
   

   Journeyman
   Joined: Feb '12
   Posts: 108

   "For this reason, I'm going to wait on this experiment until the market crashes, which I honestly don't expect to happen for a couple months--although it definitely will happen."

   The questions then is...will there be another QE pogrom and will we see the DOW-7K to DOW-14K run up again? Or will we re-orient to a "new normal" at 666 on the S&P; which is probably closer to where things should be given global debt, resource scarcity, etc.

   This is feeling more and more like one of those "what happened yesterday may not say much about tomorrow" type times.

   I still think (as Jacob said in the book) that ERE'ing is a worthy hedge against TEOTWAWKI anyway. If it all goes to hell, at least we won't be crying about our Benz's and iPads - and will be in a much better position to get by on what's available - even if we aren't seeing 6-10% returns from the market.

   Last comment - I've read many places that the best way to build long-term wealth is to know when to move back into cash near the top of a market so you can buy at a discount during the next dip - but that assumes the return of growth following a period of declining prices. What happens if there is prolonged deflation? At that point doesn't the game fundamentally change to a new-normal?

   Posted 1 year ago #
10. 

    Chad
    

    Expert
    Joined: Jul '10
    Posts: 1,001

    Prolonged deflation would change the game, but it's unlikely at this point in time in the U.S.

    "The questions then is...will there be another QE pogrom and will we see the DOW-7K to DOW-14K run up again?"

    Yes to the DOW 14k (at some point), but unlikely DOW 7k again. We have had a nice runup and certain areas are starting to get expensive, so a pullback or "rest" is likely in the near future.

    We would definitely see another QE/FED event if things were more than just a pullback.

    Posted 1 year ago #
11. 

    GandK
    

    Journeyman
    Joined: Sep '11
    Posts: 271

    I agree with Chad about a pullback being likely soon. In fact, barring a war or a major terror attack, I believe the stock market performance this year is going to be very similar to last year and follow a similar pattern: modest growth through EOM April, a pullback in early summer... the 2012 summer Olympics (mid-July through mid-August) should create a modest rally as they usually do, especially for companies that are Olympic sponsors or will make significant money off the games (Coke, Visa, British hotel chains, etc.). I expect the market to fall off a cliff in late August, and not start to climb in earnest again until late October (in advance of the Halloween Indicator).

    I am definitely going to move most of my non-hedge positions into cash before the end of April so I can "buy low" when the market drops. I have already done so with some of them (those that are already up more than 10% for the year).

    Posted 1 year ago #
12. 

    secretwealth
    

    Expert
    Joined: Jun '11
    Posts: 1,506

    GandK--that's almost exactly my thinking, except I hadn't considered the Olympics. I might do some swing trading until May, then sit it out and wait. I'm waiting now, after making some money from January's rally. I hate waiting.

    Posted 1 year ago #

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