Margin debt hit record levels and the press found a 29-year-old living with his mother to explain what happens when you borrow money to buy stocks that might go down. His name is Hy Luu. The universe has a sense of humor.
Borrowing against your portfolio works great until the portfolio stops working. Then the broker calls. Not to chat. To collect. The stocks fall and suddenly you owe money you don't have on shares worth less than you paid. Leverage amplifies gains on the way up. It also amplifies losses on the way down. This information has been publicly available since 1929 but every generation needs to learn it again with their mom's wifi.
Regular investors joined Wall Street's borrowing binge because watching rich people do stupid things makes stupid things look smart. Professionals use leverage because they manage other people's money and need to justify their fees. Retail traders use it because they manage their own money and have no idea what they're doing. The difference is the professionals lose your money. Retail loses theirs. And their mom's basement becomes a long-term housing solution.
The article warns that leverage can amplify stock losses. You know what else amplifies stock losses? Buying stocks that go down. But that doesn't require a margin account or a financial journalist to explain it. Hy Luu could have lost money the old-fashioned way. Instead he chose to lose it with efficiency and speed. Credit where it's due.
Margin calls liquidate positions at the worst possible time and turn paper losses into real ones. The broker doesn't care about your thesis or your timeline. You agreed to the terms. You signed the paperwork. Now you're selling Tesla at a loss while living in your childhood bedroom. At least the commute is short.
Photo by Joshua Mayo on Unsplash
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