The Ultimate Leverage Investment Thread

[john kane]

Introduction

I know I started something similar with the unofficial 2+2 portfolio, but the thread got lost after I didnt update it for a few weeks when i had exams and i lost my login and password details for yahoo finance after i deleted my cookies or something like that.

sooooo....basically as im sure a lot of you have read, a lot of people have some good research on certain stocks.

what i'm hoping is that everyone puts down their stock pick(s). Also put stop loss and at what price to sell if it rises (a limit sell?).

I understand this could be viewed as freeloading, in that someone like me can't contribute much whereas others could. But I hope we could all gain from picking up ideas from others who have researched. Also if anyone who contributes wants poker advice or accountancy advice (in 3 years time) i'll try to help.

Designing the Leveraged Portfolio

Basically, I'd like to come up with a portfolio with beta-adjusted weighting (if that is correct).

I think having say 40% in long term investments (long term trends in forex, markets, commodities) and 60% in short term stocks (stock picks from 1 week to 6 months say).

Thus say 10% for a forex, 2 commodities and a market
and 5% each for 12 stock picks.

Ideal stock picks will be those which have limited exposure to a market fall. So market falling won't kill 60%. Shorting stocks are also fine (in fact good to balance).

I'm going to start off with $20k to invest once this is up and running.

So each stock I'll put in $1k and each long term instrument $2k.

If someone says they think a 10% stop loss on their stock is correct then i'd leverage at 10 times. If stop loss at 33% then 3 times leveraging.

Hope this all makes sense.

I'm going to suggest that for 2 of the long terms, from a lot of people on here for:

long gold

and from Barron:

long USD/JPY


what to do
so if you have a stock suggestion/tip please put:

1. stock symbol
2. stop loss
3. sell limit

also please if you do give a stock tip please be willing to post an update should the position change.

or if you have a long term trend change such as interest rate, forex, commodities, markets please put that down as well.

many thanks for your time. as i say i know this comes across as me trying to freeload, but ill keep everything updated, and hopefully it will be interesting for all.

[krishan]

Can you even leverage 10x on stocks? What about margin requirements?

I'm long wrls on my own for 6 months or so. Near term catalyst is reporting a crappy portion of the segment as discontinuing operations highlighting the value of the remaining segment. 6 month because there is a huge push for their product through February '08 (maybe longer) due to FCC ruling. Not bullish long term because their main competitors are actually currently partners and the partnerships won't remain long term.

I don't have a stop loss. I'd sell or hold based on the guidance provided next quarter and the stocks reaction. They should guide to a sequential increase in revenue Q4. Depending on the reaction I'm either selling after the quarter or holding through Q4.

I would sell at 9.00 if it gets there before the earnings release.

Krishan

[kimchi]

[ QUOTE ]
and 5% each for 12 stock picks......If someone says they think a 10% stop loss on their stock is correct then i'd leverage at 10 times. If stop loss at 33% then 3 times leveraging.


[/ QUOTE ]

I have some disposable suggestions regarding risk:

It looks like you would lose your entire position should your stop-loss be hit. Since you are betting 5% of your portfolio on each stock, then that means you're risking 5% on each trade.

I think this is a bit too risky and you might be better off toning down your bet-sizes (by a factor of 5, to be honest). Also your portfolio heat looks to be 100%. I think you'd be better off with 20% - especially since I believe you're just starting out.

Also, what vehicle are you using to trade? I suspect you're using spreadbetting. Bear in mind you should factor in the spread when assessing initial risk, and also that spreadbetting is an artificial market. If a 2+2er makes a recommendation with accompanying limit buy/sell orders, then you need to understand how much the corresponding market is trading above the underlying market.

I did a little study on this a while back, and some markets can be off by a few %! However, they do tend to trade above the underlying throughout the day. (I contacted CMC, Capital Spreads, Finspreads amongst others to ask why without receiving satifactory explainations from any of them)

Limit orders on spreadbetting often suffer from (sometimes significant) unfavourable slippage on both sides of your round-trip. Using guaranteed stop-losses will cost you a few pips, but may be worth considering.

Final point - financing. With UK overnight LIBOR around 5.8% these days, this can be a significant expense for positions held longer than the short term. It's sometimes worth having shorter-term targets for prices. Spreadbetting isn't really suitable for holding more than 5 months or so.

Good luck [img]/images/graemlins/smile.gif[/img]

[DcifrThs]

just to be clear:

[ QUOTE ]
and from Barron:

long USD/JPY


[/ QUOTE ]

that is suppposed to be long JPY/USD i.e. betting that the japanese yen will rise relative to the USD.

anyways, interesting thread...a few thoughts.

what do you mean by "beta adjusted weighting"?

do currencies/commodities have betas? if so i haven't seen them. if not, then the beta weighting won't work in that part of the portfolio since those two are hugely volatile and are not easy to get without a lot of leverage (except gold of course).

also 12 stock picks @ 5% each with "limited market risk" are gunna be hard to find. further, many stocks i see quoted on here would eat up more than 5% worth of vol in risk space relative to the entire portfolio.

overall though, your general idea is good since currencies, commodities and stocks aren't highly correlated, the alpha portfolio would have a good structure.

further, if you really wanted to isolate your bets, you'd pick those 12 stocks with "limited market exposure" and short some % of the risk you allocated to those 12 picks in the S&P 500 futures market (so if the market falls, you don't lose much money via your longs in those stocks but gain money via the short of the futures market of the S&P500)

just some thoughts,
Barron

[john kane]

thanks for the replies.

[ QUOTE ]
Can you even leverage 10x on stocks? What about margin requirements?

[/ QUOTE ]

im basing this on using a spreadbetting account. i have a guarenteed stop loss account, which i have to deposit the total i can lose. i am assuming that the larger stop loss we want for a stock, the lesser we want to leverage, as the more volatile the stock will be so relative we want that to have a lesser leverage than those of lesser volatility.

thanks for the recommendation of wrls. unfortunately on my spreadbetting account it doesn't have trade wrls (it trades a huge load of US stocks but for some reason, i guess size of stock, they don't offer it). nonetheless i'll track this stock in a yahoo portfolio and it will be included in that.

[ QUOTE ]
you're risking 5% on each trade.

I think this is a bit too risky and you might be better off toning down your bet-sizes

[/ QUOTE ]

the main reason i put 5% was becuase of the minimum amount to trade with per stock. given stop loss and appropriate leveraging, i think the minimum is $1k per stock. i dont really want to gamble more than $20k and that works out at 5% each. also i don't know if more than 12 stock recommendations will be generated by this thread. if we can get up to 24 stock recommendations then ill try and do $500 per trade.

although i guess it could be set at 2.5% per trade and if we dont have enough then the rest of the money can sit in a savings account waiting for more recommendations.

[ QUOTE ]
Also your portfolio heat looks to be 100%. I think you'd be better off with 20% - especially since I believe you're just starting out.

[/ QUOTE ]

thanks for the link, i tried to read over the article, was interesting, but dont think i fully understood it. fwiw this is more of taking 10% of your portfolio and using it as 'take a shot' at a high leverage portfolio, so realistically it's this leverage portfolio is only 10% of your total portfolio (thats what ill be doing fwiw).

[ QUOTE ]
Also, what vehicle are you using to trade? I suspect you're using spreadbetting. Bear in mind you should factor in the spread when assessing initial risk, and also that spreadbetting is an artificial market. If a 2+2er makes a recommendation with accompanying limit buy/sell orders, then you need to understand how much the corresponding market is trading above the underlying market.

[/ QUOTE ]

yep totally agree, problem with the small stocks is the spreads are very wide.

[ QUOTE ]
Using guaranteed stop-losses will cost you a few pips, but may be worth considering.

[/ QUOTE ]

yep my account has guarenteed stop loss at cost of a small extra spread. last thing i want is to wake up one morning and overnight a stock has gone busto and cost me tens of thousands.

i still think there must be a way to use this. say you have a big announcement which will lead to share ending +30% or -30%. if you put a guarenteed stop loss at -10% say, then you either are +30% or -10% i.e. ev of 10% profit.

[ QUOTE ]
Spreadbetting isn't really suitable for holding more than 5 months or so.

[/ QUOTE ]

i understand the concept, but if shouldnt it be more based on whether long term the position will make you more by leveraging than the libor cost+opp cost of tying up money?

[ QUOTE ]
that is suppposed to be long JPY/USD

[/ QUOTE ]

sorry yep, got confused as in my account im currently shorting USD/JPY (that is same as long jpy/usd i assume?)

[ QUOTE ]
what do you mean by "beta adjusted weighting"?

[/ QUOTE ]

thanks for your explanation, i see the dilemma. maybe leveraging based on the % distance of the stop loss? - would that be an automatic way of meaning the more volatile (= bigger % stop loss) are less leveraged than less volatile positions.

[ QUOTE ]
also 12 stock picks @ 5% each with "limited market risk" are gunna be hard to find. further, many stocks i see quoted on here would eat up more than 5% worth of vol in risk space relative to the entire portfolio.

[/ QUOTE ]

yeah i guess 'limited market risk' was more an ideal than a reality. maybe aiming for 2-4 week higher volatile short term stocks mixed in with some 2-6 month longer term lower volatile stocks could be a way to do it.

[ QUOTE ]
overall though, your general idea is good since currencies, commodities and stocks aren't highly correlated, the alpha portfolio would have a good structure.

[/ QUOTE ]

cool good to hear.

[ QUOTE ]
short some % of the risk you allocated to those 12 picks in the S&P 500 futures market (so if the market falls, you don't lose much money via your longs in those stocks but gain money via the short of the futures market of the S&P500)

[/ QUOTE ]

ideally there will be a few stocks to short so that will act as our hedge rather than via shorting the index, if this cant be done then i agree shorting index would be wise.

thanks for all your valuable thoughts.

as i mentioned above this isn't a way of putting all your wealth into this, rather use this as say 10% of your wealth into this high risk portfolio, that's what ill be doing, and if it is going well after a few months then maybe shift it to 20-25%.

thanks again.

[kimchi]

[ QUOTE ]
Spreadbetting isn't really suitable for holding more than 5 months or so.


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i understand the concept, but if shouldnt it be more based on whether long term the position will make you more by leveraging than the libor cost+opp cost of tying up money?


[/ QUOTE ]

A $20k account fully leveraged 10x will attract an overnight financing of approx $35-40 per day on long positions, or will pay you interest of around $22 per day on short positions.

If you have a mix of long/short positions, then the cost of financing will be somewhat offset. It's also worth having 2 SB accounts. Firstly if one platform goes down (happens more often than you think) and you desperately want to buy/sell - you have a second option. Secondly, some brokers charge/pay LIBOR +/- 2% for long/short positions while others have different structures.

At the very least, you can go with the expensive finance broker for shorts and the cheap finance broker for longs. It will help cut down the juice.

Also, many brokers have (had?) "sign-up bonuses". Make sure you whore them all [img]/images/graemlins/cool.gif[/img]

[spider]

[ QUOTE ]
i still think there must be a way to use this. say you have a big announcement which will lead to share ending +30% or -30%. if you put a guarenteed stop loss at -10% say, then you either are +30% or -10% i.e. ev of 10% profit.

[/ QUOTE ]

How is this guaranteed? Guarantees are never free.

[soko]

[ QUOTE ]
[ QUOTE ]
i still think there must be a way to use this. say you have a big announcement which will lead to share ending +30% or -30%. if you put a guarenteed stop loss at -10% say, then you either are +30% or -10% i.e. ev of 10% profit.

[/ QUOTE ]

How is this guaranteed? Guarantees are never free.

[/ QUOTE ]

It's not and his assumption is absurd. There is no way you can determine that an announcement will give a 50-50 shot at either going up 30% or down 30%.

[john kane]

kimchi, good idea, ill definitely look around a number of different spreadbet providers and try and get some free cash as well.

it is guaranteed, the price you pay is a larger spread. if you have stock X at $1.67 and stop loss at $1.50. if bad news overnight and it opens at $.40 you sold it at $1.50.

sure you cant detemerine an announcemtn will give a 50:50 shot, but take northern rock the past couple of weeks. it finally stabilised at 170p or so, any guide bid was 150p or so. now given that it could have easily risen over good news but likely biggest drop was down to 150p, then it looked a great spreadbet guarenteed stop loss investment.

[DcifrThs]

[ QUOTE ]
it is guaranteed, the price you pay is initely look around a number of different spreadbet providers and try and get some free cash as well. a larger spread. if you have stock X at $1.67 and stop loss at $1.50. if bad news overnight and it opens at $.40 you sold it at $1.50.


[/ QUOTE ]

huh? if i hold something at X with a stop loss of L*X, and the market opens at O where O<L*X, doesn't the order just get filled at the first possible moment below L*X?

meaning that if the market collapsed quickly (ie. in a big jump like in 1987), you aren't "guaranteed" to get L*X as you ask b/c nobody would bid it.

am i wrong? if so, please explain how the guarantee works. is there a buyer who will always bid at L*X? if so, is there a cost to this type of "insurance"?

thanks,
Barron