LOC and Investing

[makethings]

Here's the deal,

I am about to get a LOC with a good rate (P+1 unsec.) because I am a professional student. $50K. The neat thing is I only have to make interest only payments for the next 2 years while I am in school.

I don't really need the money for school. I have an income. I just thought building a good credit rating would be what I want at least out of getting this LOC.

But it got me thinking, what if I play the stock market with some of this money. I know its risky to play with borrowed money like this, but given the state of the stock market there are possibilities of making some money. I've been introduced to the stock market, and although I don't invest in it currently, I am keen to follow the performance of some companies in the realm of alternative energy and metals and minerals. But not adverse to looking at other potential good deals too.

Could it be entirely plausible over the next two years, to turn 50K into 60K, 70, 100K?? I calculate 5K in interest fees I have to pay over 2 years, so I would need to turn 50K into 55K if I want to break even (not counting taxes, ie. I have loads of ed. tax credits that carry over). Or will the stock market historically need more than 2 years to get back to reasonably high levels?


I need to hear opinions, stuff I am not considering, an alternative viewpoint.. basically this is an opportunity, is the risk worth it. Thanks

[NUTS]

safe is not a good word these days - oh, sorry risky is not the in-thing to do

Safe is probably GIC - less interest on money = negative return

Risk = pick a stock, any stock - take the risk = be prepared to lose it all

Possible nice return with protection on the downside (my way) is in US listed stocks with low PE, positive earnings , pays dividends and are optionable long & deep-in-the money (12-months is good)

This may net you 10%.

Do not listen to folks that give you stock picks & tips and do not entrust money with people that try to sell you on past performance

[Capt.]

Leveraged investing can be a good thing. If you think about it, all you're really doing is using $5,000 of your money but buying $50,000 of investments.

Having said that, both gains and losses are magnified. If you gain $10,000 you've really doubled your money. But same goes for the other direction as well.

Me personally I would invest in stocks with that money. With dividend income, those alone could come close to paying off your pre-tax interest. I say pre-tax because the interest you pay on investment loans is tax deductible so that further lowers your borrowing rate. I'm a fairly risk tolerant person though, not everyone is.

No matter what, you're magnifying your risk by using debt. You're also magnifying it by jumping in this market. That could work into your favour though because there's a lot of skepticism right now. The big question is when, not if the markets rebounds.

[BTron]

One way to slightly lower the risk is average into the market, spend $10K at a time quaterly or even semi-annually over the next while. But yeah, what everyone else said, highly risky.

[asdfvcx]

But it got me thinking, what if I play the stock market with some of this money. I know its risky to play with borrowed money like this, but given the state of the stock market there are possibilities of making some money. I've been introduced to the stock market, and although I don't invest in it currently, I am keen to follow the performance of some companies in the realm of alternative energy and metals and minerals. But not adverse to looking at other potential good deals too.

First of all, people who repeatedly use the word "play" to describe investing in the stock market annoy me. :)

But seriously, I believe that people who invest for fun or entertainment are much more likely to lose money, although I don't have any evidence of it.


You say you've been introduced to the stock market, but I don't really know what that means. Leveraged investing involves much more risk than non-leveraged. It's something that should probably be only considered by experienced investors.

Leverage magnifies loss and new investors usually over-estimate their risk tolerance. This combination can lead to very bad things when the investor loses more than he now realizes he is comfortable with and starts doing stupid things. If you are a new investor it's hard to determine how you will actually handle a large loss and since leverage greatly increases the chance of a large loss, I would say it is very unwise for inexperienced investors.

[alanbrenton]

Possible nice return with protection on the downside (my way) is in US listed stocks with low PE, positive earnings , pays dividends and are optionable long & deep-in-the money (12-months is good)


Hi Nuts, could you care to elaborate on the last portion of your sentence. I've read one of your other post about BAC shares and would like additional information on how you make profit selling call options deep in the money. It sounds like a very good strategy and it's good for people like you to share you investment ideas. Thanks in advance.

[LeStat]

Here's the deal,

I am about to get a LOC with a good rate (P+1 unsec.) because I am a professional student. $50K. The neat thing is I only have to make interest only payments for the next 2 years while I am in school.

I don't really need the money for school. I have an income. I just thought building a good credit rating would be what I want at least out of getting this LOC.

But it got me thinking, what if I play the stock market with some of this money. I know its risky to play with borrowed money like this, but given the state of the stock market there are possibilities of making some money. I've been introduced to the stock market, and although I don't invest in it currently, I am keen to follow the performance of some companies in the realm of alternative energy and metals and minerals. But not adverse to looking at other potential good deals too.

Could it be entirely plausible over the next two years, to turn 50K into 60K, 70, 100K?? I calculate 5K in interest fees I have to pay over 2 years, so I would need to turn 50K into 55K if I want to break even (not counting taxes, ie. I have loads of ed. tax credits that carry over). Or will the stock market historically need more than 2 years to get back to reasonably high levels?


I need to hear opinions, stuff I am not considering, an alternative viewpoint.. basically this is an opportunity, is the risk worth it. Thanks

As long as you're not investing in companies that are going bankrupt, 10k profit(20%) in 2 years would be pretty easy to achieve, especially since you mentioned alternative energy stocks. I just had an 18% gain today and about 35% over the last 4 days. Sold. Cashed in. If only I had 50k to invest....

[LoookingForDeals]

As one of the previous posters have stated, leverage can amplify your gains or losses, its a double edged sword. When investing, one should always be prepared to lose your entire investment, plus the costs of interest (when using leverage), in the worst case scenario. The mistake people usually make is being overly optimistic about investment prospects, which skews their perspective of the data and analysis used to make investment decisions. And they ignore the chance that the entire principal of an investment can be lost (no matter how small that percentage is, it is still possible). You have to remember to take a conservative approach with your analysis and determine what is realistically achievable for each investment you make.

When you ask if its plausible over the next two years to turn 50k into say 100k, the answer is it really depends on you and your knowledge. You need to assess if you have adequate skills, knowledge, experience, emotional intelligence, to do it at this point in time. The risk does not come from using borrowed money to invest. It comes from the individual investor's awareness of their own limitations and knowledge. Its hard to gauge your knowledge level from just one post. Perhaps it is better to learn a bit more first, as you stated you do not currently invest in stocks (even though you are following them). I'm not sure if you've already done some of this already but if not, accumulate the knowledge to not only follow them but to assess them as an investment (analysis, etc.). Remember also that higher risk does not also equate to higher returns. Price volatility does not mean risk either. Risk also comes from not being able to assess a proper time horizon for a specific investment, thus increasing the chances that one would be forced to sell an investment at a time when it may not be advantageous to do so (and potentially for a loss).

Its good that you are thinking about different tools that are available for investing such as leverage. I suggest to hold off on using leverage at this point in your investment career for stocks until you've actually invested in them for a while. Buffet has a good saying that goes something like this: "You can learn, stare, and study the properties of water all your life. But nothing comes close to what you learn from wading in the water for a few seconds". You might not have accumulated the amount of investment skills, knowledge, and experience yet to assess the investment risks properly. But if you are really determined to do it anyway, borrowing less than 50k (in the area of 10k maybe?) might be better. My viewpoint for that is to be conservative, and borrow no more than 20-30% (in that general lower area) of your current paper investment assets (in this case it might be GICs, cash, term deposits, or bonds, if you have no stocks), to keep your debt ratio low. You want adequate coverage (of the loan), as well as to not let it put a huge dent in your total investment portfolio, in the case things go wrong.

Since you are a student you are probably pretty young and have plenty of time to accumulate knowledge and invest. Even though its more opportunistic to invest at a time of maximum or higher pessimism (which looks like now), there will be plenty of opportunities after you accumulate more knowledge. You'll then be able to see more, and different opportunities that you might not otherwise be able to see. Making bad investments will use up your capital (not to say that you will make bad ones necessarily). Exercise patience, its usually financially rewarding.

Even though historically, there were crashes that took about 2 years to recover, we cannot say that this one would too. It could easily be longer or shorter. You won't be able to predict when the stock market or individual stocks will climb to higher or more reasonably valued levels. I would consider your 2 year time horizon to be too short, 5 years or more would be better.

I'm not an expert or professional, and I'm usually very unconventional, but hopefully this give you some things to consider. Take what you find is useful, ignore the rest. =)