Should You Borrow Money to Invest in Stocks?
NEW YORK (TheStreet) -- Margin took some real knocks this week from the press, most of whom, until this week, thought margin was that thing on the left hand side of a piece of lined paper. So now that we have seen and heard of the underside of margin from just about everybody, why do we allow it at all?
Margin, of course, is just another form of credit. The notion of borrowing money, per se, is not a bad one. People borrow money when they don't currently have the money on hand they need to make a sizable purchase but the purchase is necessary.
That's how I prefer to use margin at my company. I use it judiciously, a couple of times a year when I need capital to make a sizable bet. Sometimes we think that stocks get so cheap that we are willing to lever up. In 1991, when I was trading with my wife, we made a huge margin bet.
At the time, the U.S. was about to launch the Gulf War. The press was filled with all sorts of stories about the much-vaunted Iraqi Republican Guard, elite troops that could cause real problems for our military. A close reading of the papers at the time would have made you believe that Iraq's army could equal the United States' Army.OK, I am a military history buff, always have been. I have studied the great traditions of our military, and have spent a lot of time analyzing its ability to project power when it has to. The day before the Gulf War began my wife, Karen, my trading partner, said " How long is this war going to last, and how bad will it be?" I told her we would win in a heartbeat and the only question was whether we would occupy Baghdad or not. I told her it was a walk and it would be clear to everyone from the moment it started. She wanted to know how confident I was about this. I said I would bet the farm on it. Everybody in the press was just too darned negative about the U.S. military. At the time a vicious bear market had ruled over equities since the Kuwait invasion. It had shown no signs of relenting other than a possible bottom in the financials in the months leading up the New Year. My wife and I had played it lean. We had a great year relative to the market in 1990, finishing up nicely, which had given us three years of much better than market performance.
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