4/24/2013
As I told you yesterday, Apple is not a buy yet, this stock need to close above $446 to reverse its downtrend, and that’s my friendly reminder for today.
Lesson 2 on becoming a Millionaire
Leverage… That’s right you need to use some sort of leverage in your investing. Every single Billionaire Investor I have studied has used leverage to juice his returns, even the Great Warren Buffett.
Warren Buffett has historically leveraged his portfolio at 160% or 1.6X times his initial investment, I know this sounds complicated, but all this means is if Buffett invests $1 million dollars with leverage it becomes $1.6 Million dollars. I personally invest a $100,000 like $150,000 dollars, using 1.5 times leverage giving me 50% more buying power, and also juicing my returns by more than 50%. Leverage is what I call the real Billionaires Secret.
The recent news that Warren Buffett used leverage shocked a lot of people in the industry, (by the way if you want to read the articles on Buffett using leverage in his stock portfolio (just type in to google Warren Buffett and Leverage and it will pull up many articles including the Economist.com’s).
But I think a lot of people are shocked when they hear that the supposed conservative value investor, Warren Buffett uses leverage, but he does and thats why he beats the pants off mutual funds stock broker and the like.
Why is leverage so important in trading stocks because, if your just average, and you make 10% a year trading stocks in your portfolio, if you leverage your portfolio like Buffett at 1.6 times, you will then actually make 16% a year. And trust me that’s a huge difference when compounded over time.
The one problem with leverage is that most online brokerage firms charge you a very high rate, as high as 8% to trade on margin or use leverage, so at that borrowing rate its very expensive to leverage and probably not worth it. But there is one publicly traded online brokerage firm that only charges you 1.5% to borrow or leverage your stock account. This is the one I use and let me tell you its like getting free money, remember 1.5% is the interest rate they charge you to borrow for one year (its 1.5% for one year0. So if you buy and hold a stock for just 3 months you will only pay 50 basis points one half of one percent, that is virtually nothing. If you want to know the name of this online brokerage firm email me at wmeade@purealpharesearch.com.
Now another Billionaire who is a huge leverage buff is Steve Cohen of SAC Capital, Steve Cohen uses huge leverage up to 8 times or 800%. Again this means if you have a $100,000 account at 8 times leverage you now have an $800,000 account, and obviously your returns go up by 8 times, and you can now see why Mr. Cohen has been able to put up 80% gross annualized returns in his hedge fund for years. Remember even a small account, lets say $10,000 dollars, that returns 80% a year like Mr. Cohen’s hedge fund, would be worth $11 million dollars 12 years, you could basically retire on the beach in 12 years with $11 million dollars.. But here is the catch, Mr. Cohen is a big hedge fund and he can borrow tons of money for little or no cost.
So how does a small or retail investor leverage his stock account up to 8X and potentially return 80% a year well its easy, and I will tell you if you write me at wmeade@purealpharesearch.com
So in summary: Lesson 2, Leverage is the Billionaires and Millionaires Secret, you will never be a Millionaire or Billionaire if you do not use some type of leverage or margin.
Will Meade
Editor of the Billionaires Portfolio
www.billionairesportfolio.com