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Saturday, November 17, 2018

The little story of me and my margin account

I updated my portfolio yesterday, something I didn't do in a really long time. Actually, I didn't publish any portfolio update since August! And that's because the TSX had been such a rough place to be this year. I usually update my portfolio only to flatter my ego, when my portfolio registered great gains. With this recent update, I just wanted a more precise idea of where I was standing. I had been thinking about paying down my margin for also a really long time, its been an idea that stayed on, but I never took action. And my margin debt even was real massive shit, a $100 000, and sometimes, it exceed the 100k mark. I had a margin account for quite a long time. But when I first open my brokerage account, I didn't have back then a margin account - I had a margin opened only several years later. At the time, the idea was to open a margin to pay off some debts. And at the time, it was quite a good idea. The stock market was on a good path, interest rates were low. I had everything for myself. And during those good years I collected good assets. And I occasionally used my margin to pay some living expenses, and I sometimes use my margin money to invest. I was that kind of girl. I was a margin kind of sexy girl, tun of money at my feet, and the power of my young thirties.

I never had any problems managing my margin account, mostly because it was living under great stocks that I was holding inside my non-registered portfolio, and because I always try to keep a $13 000 of unused margin money. 13k being the minimum of the minimum. $15 000 was better, and $20 000 even better. But no matter how much I had left of unused margin money, whenever I was leaving for my annual vacation in Cuba - or even while leaving Montreal for a few days in New Brunswick, I always had to use extra precautions. So what I used to do whenever I was leaving Montreal behind, I was making sure to transfer between 10k to 15k from my credit lines to my margin in order to keep it safe while I was away. The stock market being what it is, I couldn't take the risk of not doing anything to keep my margin safe.

There's nothing safe about having a margin account inside a non-registered portfolio. No matter how much cash you put in, a margin situation is never safe. But it kept me satisfy and I had a peace of mind knowing that I had extra cash on my margin while being away. This little scenario kept happening each time I went to Cuba - once a year - and every time I went to New Brunswick - many many times a year! Just keeping my margin "safe" cost me money. Not that much, but still, it was money flying away.

I had my fun with my margin account, I had paid my other debts. And back at the times, the interest rate was low on my margin account - the good old days - but it's not the case anymore. Interest rates are skyrocketing and it's not going to stop anytime soon, especially in Canada. It's been announced that the prime rate will get increased again sometime soon. I appreciate the fun margin account, but now, I am somewhere else. I felt more and more the need and necessity to pay off my margin.

I decided to sell my Premium Brands Holdings Corporation (PBH) shares, it was a personal decision that relies exclusively on my shoulders, like the rest of all of my investment decisions. And like all of my decisions, they are all mine to take. And it makes me kind of laugh to read the comment of readers. I only post them to entertain. It's easy to say that I should sell my PBH shares when the investment was rocking at $122 a share... It's easy to talk, but its something else to be an investor on the everyday life. And I would like to know how much money those soft talkers actually have for themselves...

I always wrote about absolutely everything that concerns my investment life and I go into the deep bottom of it. Popular bloggers don't even give half of what I give to my readers. I made great money by selling my PBH shares, but of course, I could have made even more if while selling when PBH was on top. But my intention has never been to sell my PBH shares. I decided to sell because I didn't want to see PBH go lower and I just couldn't be there and do nothing about it. I could have only partly sold, but I was released to see my margin usage going down. Since the amount on the margin was exceeding the $100 000, my only option to reduce it was to sell some assets. The stock market is a place of opportunity. The buy and sell are orders, and the "if I would sell", or the "if I would have bought" always remain. I could have made better, or worst, but I stand on my decisions. Talkers can talk, but cane the same talkers can do better? I doubt.

The stock market is not a soft place to be, the TSX is rocky, but interest rates are going up. It's not the best cocktail. In other words, what I mean is that we just don't know what this is going to lead us to. The financial places worldwide could get all upside downs again soon that it wouldn't surprise me at all. Usually, the TSX is easier and I get more of a natural feel of it. Even following the 2008 stock crash, it was writing in the stars that the TSX was going to jump over it. I knew that. It was what I believe in. But now, it's all different. I love investing in stocks and I think that I will always be investing in stocks, but not while having a margin. On the date of November 16, my margin account is now at $66 373.29. I just don't remember the last time my margin usage was so low.

Selling stocks at profit inside a non-registered account mean tax to be paid. If you would like to learn more on the matter, this article by Tina Orem is really great.

2018 year was the year I sold PBH, and 2019 could be the year when I sell my oil stocks. You understand of course that the idea is not to sell everything on the same year, in order to pay a bit of tax this year, and a bit next year. I could invest a bit in my RRSP by March 2019 - its an idea I have in mind.


Anonymous said...

That article for tax on capital gains is for the United States, these aren't the same rates in Canada

Anonymous said...

when you read an article about calculating capital gain and it talks about "Short-term capital gains" you know it's for the US.
We don't have that long/short concept in Canada. Also, the way we calculate the cost basis is different, and we have a 90 day rule that's important.

You can read full explanation of how to calculate capital gain for Canada here:

Anonymous said...

Hi DG, I was the person that last posted my experience with a margin account in the early 90s and how it blew up in my face after the bubble bust and how it is so easy to loose everything is just a few days. Having said that, I'm a bit wiser and more experienced now, so my thoughts on the margin account has always been that it is a great tool to multiply your returns, if the returns are in the double digit. While we had a good run, in both US and Canadian markets, in the markets for close to 10 years, we never had a recession for this long of a bull run. So obviously, owning a margin account makes sense in a bull market where you can somewhat maintain the requirements of that margin. You could sell your higher winning stocks to repay the margin and reduce the amount. That is the principle of owning the margin in the first place. Buy depressed stocks on margin and when they rise in value, you sell pocketing the difference in profits and repay the margin. But in a bear market and during a recession, you can not do that as all stocks price will be depressed. At the same time, interest rate will not all the way to zero. The banks will be pressured to recall your margin, so you are forced to sell most of your stocks, even the good ones. It is in this moment that you'll loose everything and every good position you built up over the 10 year period, because it will take another 20 year period to regain your former position, which means 20 wasted years not having the ability to compound your portfolio. In the 1990s, my portfolio was larger than my dad's who was conservative and never used any margin and was long on good stocks and long on high interest government bonds. When the bubble burst, I lost everything and deferred my retirement to another 20 years -- I could have retired today @ age 50, but not figured 63 years of age would be the earliest and then wait 2 years more to get my CPP and the later OAS and GIS.

Another thing about holding a margin account is the interest payment you are making. Let's say you're making 2% annual payment and you expect your portfolio to compound @ 7% annually minus fees and taxes, you need to expect your portfolio to generate at least a 9% return annually and reliably for all your years of investing. That is possible during the 1990s and 2000s when the markets were returning double digit, but I highly doubt that moving forward we will be generating this level of returns past 2021 due to trump tradewars and overall consumer debt levels in Canada. I believe we are still in a low inflation environment and I suspect the rates will stop @ around 2.5 or 3% at the most before we hit recessionary mode in earliest 2019 or 2020 as the yield curve had flattened. This coming recession in Canada will be consumer driven as consumers are saddled with 170% of debt to income and I've seen the devastation of the American great depression and what it did to the Americans -- tent cities in Seattle, LA, Portland after the 2008 bust. It is better not to have any debts during a recession or going into a recession as debt does not disappear or devalue during or after the recession. Your assets will and it will take a long time to rebuilt assets after a recession.

Sorry for being a gloomer, but I've been through high interest rate environment and I know how it can devastate anyone with debt as many people nowadays are unaware what high interest rate can do. It can bring rate increases but also induce a fall in the markets. That is why they raise rates -- to normalize borrowing rates and the consequence of that has always been a recession following afterwards.


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