Leverage up to the Eyeballs
Invstr’s new Power Up feature is allowing the community to go double or nothing on stock market no-brainers, simulating real-world leverage. It’s a delicate tool; high risk, high reward, but we can learn from history!
Warren Buffett occasionally borrowed other people’s money to trade. He put the extra capital to work eighteen years ago to leverage a bet on PetroChina. It was an oil company with tapped out fields and out-of-control costs, but a dramatic turnaround sent the Oracle’s shares soaring. He scored a seven-bagger thanks to the leverage, a “seven-bagger” being Street slang for a 700% gain!
It’s not always sunshine and roses, though. When you play with fire, expect to get burnt. There was once a Manhattan office full of 16 of the smartest guys in America, including two Nobel Prize-winning economists. They were all expert financiers with hundreds of hours of combined experience, a formidable team, and they all had their personal fortunes tied to one simple objective; beating the market. Their fund was called ‘Long Term Capital Management,’ and it relied on lots and lots of leverage.
Long Term Capital Management went bankrupt in the late nineties. The brainiacs got overconfident in themselves and started taking real-world ‘Power Ups’ too lightly. It goes to show; getting good at leverage comes with keeping a level head, not being a genius.
Finally, we have trader Andy Kreiger. He made a short bet against the Kiwi dollar back in 1986, right after Black Monday. Investors were panicked and fled to foreign currencies like the New Zealand dollar, but Kreiger knew that wouldn’t last. He made such a large return that market historians can only assume the use of leverage, more risky than usual on a short bet, but clearly with the conviction to compensate.
If leverage works out, you’re a genius. You get terrific numbers. When things go sour, it’s something you wish you could undo!
In real life, various assets you already own, called ‘collateral,’ back up the borrowed money you’re given. You can’t have paper losses impairing your base of ‘collateral,’ else you get a ‘margin call,’ and have to quickly scramble to restore the collateral very quickly.
This is what makes leverage a double-edged sword, but we hope our community can be the best safe zone to let you learn the trade. You can find Power Ups in the latest version of our app. Get ready for some dramatic Fantasy League moves!
