OT: A Word of Caution

I’ve seen more posts and comments lately about margin and options as well as running very concentrated portfolios. In my opinion margin has little to no place in a portfolio. You are effectively giving someone else the ability to tell you to sell at the worst possible time. Margin is especially dangerous in a volatile portfolio. The two best ways to make your portfolio more volatile, run a concentrated portfolio and options (microcaps and biotechs are also solid options). I know of two people personally that wiped out their life savings during bull markets, and many more in downturns, one with margin, one with options. Invariably when someone posts words of warning during times of great returns people will come up with all sort of excuses why they won’t lose their portfolio. Part of being a good investor is never putting yourself in a position to lose everything.

A couple Buffet quotes:
“Only when the tide goes out do you discover who has been swimming naked”

““When leverage works, it magnifies your gains. Your spouse thinks you’re clever, and your neighbors get envious,” explained Buffett in his 2010 shareholder letter. “But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices. And as we all learned in third grade — and some relearned in 2008 — any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. History tells us that leverage all too often produces zeroes, even when it is employed by very smart people.”

The experience of one of our own.


Some peoples’ experiences with margin calls,

Wishing you all good fortunes!


I have been quietly observing this board, while I should not speak for saul IMHO it is getting off track - Options have no place on this board. there are other places to discuss them.


Ethan, can’t speak to options as I don’t use them, but this raises an interesting question:

The two best ways to make your portfolio more volatile, run a concentrated portfolio…

I’ve tracked my investments for 15 years. Owing to IRAs and Roths for two of us, we have 4 different equity-only accounts. Somewhat unsurprisingly, the 2 smaller accounts have typically held between 3 and 4 stocks, while the larger ones, anywhere from 10 - 20. The thinking was that it was safer to have higher value accounts in more stocks.

Average annual results?

Small 1: 25.14%

Small 2: 29.58%

Bigger 1: 11.28%

Bigger 2: 17.27%

Combined I come out to a reasonably respectable 20.4%

In looking year to year at the smaller accounts, the gains tend to be explosive, while the losses tend to be unremarkable relative to the S&P. So I’ve recently begun to wonder - given the results, why shouldn’t I just condense everything to 4 or 5 holdings? Conventional wisdom says that’s lunacy, but the results tell a different story…

  • Khleb

…why shouldn’t I just condense everything to 4 or 5 holdings?

The only reason not to is if you pick the wrong 4 or 5 stocks. :wink:



I have very little against concentrated portfolios, I just said that they are more volatile.

I never said anything against volatility. My point is that volatility and leverage is a dangerous combination.

Also don’t take the last 2 years, 5, 10 years as being indicative of how markets behave. Your portfolio has to be able to survive in all sorts of conditions, not just the best.

congrats on your nice returns!


Conventional wisdom says that’s lunacy and would also say that owning somewhere between 5 to 15 stocks ,all in the tech business, is also considered lunacy. Yet that is what most NPI types do.

Right now I own 17 stocks .That’s more than I usually own but the flood of innovation as given me me more candidates than usual. 4 are very small trial positions mostly to remind me to watch them.

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I mostly agree with you. Just not quite completely. First, I don’t distinguish between options and leverage, so far as I’m concerned options are leverage applied to a wasting asset. That’s not to say I don’t ever trade options, I do. But only in very small doses, mostly I’ve come out ahead with them, but in that I only put a very small amount of capital into them, it’s hardly worth the effort.

As for margin, again sometimes, in small doses it can be strategic. Like many who follow this board and apply these investing strategies I don’t keep much of a cash position. There are times when I want to get into a position but don’t want to sell any current holdings. A small amount of margin can help until I’m prepared to sell something in order to close the margin. I never use enough margin available to me to even worry about a call by my broker.

What’s “small”? For me under 5% is small, anything over that and I feel like I’m gambling not investing.