One Year Update: Leverage Risk in a Late Cycle Market

On March 4, 2019, I boldly entered the market with leverage after getting shredded in weed stocks, to no fault but my own greed.

My leverage in the new plan included:
$100,000 on Margin
$65,000 in Unsecured Lines of Credit

TOTAL LEVERAGE: $165,000

The idea was simple: buy undervalued stocks that yield more in total than what you pay in interest. Enjoy dividend increases outpacing interest rate rises. Deduct the interest during tax season.

Easy, right?

Mistake #1: Over-leveraging

My plan was to make a one-time leveraged purchase (on March 4th 2019) and then let my stocks DRIP in the margin account, while taking cash payments in TFSA and Non-Registered accounts. I would save cash for one year and deploy at the next dip.

And dips there were, sooner than expected. I purchased $50,000 worth of Canadian energy names in September of 2019. I also purchased $25,000 in CanWel Building Materials, which was at the time undervalued (and maybe still is). Each of these purchases went against my plan, but did very well in the short-term. In February 2020 I also bought more Suncor, Methanex and Nutrien — by all accounts undervalued at the time.

By February 2020, my portfolio was up 16% (at time of screenshot, 13%)
– Energy names up 20-30% (except Ensign)
– CanWel up 25%

Mistake #2: Money on the table

There’s a saying in the investment community: let your winners ride.

Anyone who’s enjoyed some leisure (or serious) play at a casino knows this.
The stock market, like a craps table, presents you with a choice.

Ride the hot hand? Increase your bet?
Take some off the table and slow it down?

There’s a second and even more important piece of advice:
ALWAYS TAKE MONEY OFF THE TABLE.

I didn’t. And so, on March 9 2020, the first morning of trading after Russia refused to cut production and Saudi Arabia decided to enter a price war, I sold (almost) everything. Here’s how the portfolio stands now:

There it is — down about $100,000.
Currently sitting 120k cash, 30k equity (77k book cost).

Some stocks sold at a gain, as you can see. Others at a deep loss, which would have been even deeper if I didn’t sell on the first wave of crashes (March 9th). I thought I put in a sell order for Suncor, Power Corp, Brookfield Property and Pembina. But alas, they’re still with me. Let’s see how these play out over the next five years.

I have no debt left — but $80,000 in loans ready to be re-deployed.

So, where do we go from here?

Rule #1: Leverage on the upswing

With COVID-19 presenting a serious humanitarian challenge, let’s first acknowledge the impact it will have on individuals, families, small businesses; no one will be left unscathed, both in health and finance.
The real estate markets are the only thing left to falter.

With that said, crises like this brought an abrupt and sharp end to the bull run from 2008. We are now in a position whereby you want to begin researching stocks to buy and hold for the next bull run. That does NOT mean jumping all-in just yet. The effects of COVID will absolutely be felt a year from now, so there is no reason to extend yourself. Companies are likely to go bankrupt, people will lose their homes, unemployment will jump, house prices will likely fall.

It’s painful to watch the market swing violently like a storm-battered cruise ship. You’re better off not even looking, and coming back in a few months.

At that time, a few months from now, I will slowly begin entering positions in large-cap companies. These include households names like banks, utilities, and telecommunications. Slowly thereafter I will dip into smaller commodity-type stocks, industrials, etc.

My days of leverage will return.

Until then, stay safe and healthy.

Good luck.

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