Margin and Return on Investment.

[squiffy]

Bought 1000 shares of ODP on 9/24 at 14.67 per share. Today closed at 16.67. So paper profit of roughly $2 per share, ignoring trading costs of about $20 or so on Ameritrade.

Margin cost seems to be about $90 to $100 per month.

So paper profit of $2000 -$320, assuming price stays constant and I can sell Jan. 1 so that tax hit is taken next year. Also margin cost is tax deductible, but that is rather minor.

What is the return on investment? Anybody out there good with numbers. I haven't done much buying on margin, as I am worried about margin calls.

Overall, bought about 12,295 shares of ODP at average price of 15.76, starting 9/2/03. Today ODP closed at 16.67. So rough paper profit of about .91 per share over 3.5 months.

Not the greatest trade I have made, but ok. So up about $11K.

If ODP does not tank, will close out the year with about 55K in profits from stock trades. Since I make about 70K per year, busting my but at work, I am hoping that stock trading can get me an early retirement if I don't lose it all.

Should never have put all my retirement money in one stock, but got greedy. Won't do it again. After buying, ODP kept dropping to about 13. Scared the heck out of me.

Same thing happened with MCD which I bought at 18 and dropped to 15 or lower. Eventually made its way back to the 20s, where I sold.

Along with about 50-70K increase in equity from my California home, I made more (ON PAPER) this year from investing, than I did as a wage slave.

This year have made money on GE, ODP, MCD, HD, BBY, COST, JCP

[adios]

"Bought 1000 shares of ODP on 9/24 at 14.67 per share. Today closed at 16.67. So paper profit of roughly $2 per share, ignoring trading costs of about $20 or so on Ameritrade.

Margin cost seems to be about $90 to $100 per month.

So paper profit of $2000 -$320, assuming price stays constant and I can sell Jan. 1 so that tax hit is taken next year. Also margin cost is tax deductible, but that is rather minor.

What is the return on investment?"

Here's a link to a definition:

Return on Investment (http://www.investorwords.com/cgi-bin/getword.cgi?4250)

Definition 1

ROI. A measure of a corporation's profitability, equal to a fiscal year's income divided by common stock and preferred stock equity plus long-term debt. ROI measures how effectively the firm uses its capital to generate profit; the higher the ROI, the better.

Definition 2

More generally, the income that an investment provides in a year.

So in your case it's amount you made - margin costs divided by what you risked. Methinks you should calculate it on annualized basis.

I'm assuming you hold the investment for 14 weeks. Therefore

((2000-320)/14670)*52/14 which comes out to about 45% on an annualized basis.

"If ODP does not tank, will close out the year with about 55K in profits from stock trades. Since I make about 70K per year, busting my but at work, I am hoping that stock trading can get me an early retirement if I don't lose it all."

Could buy puts on it to lock in your gain. As I look at it now the stock is trading at 16.35. The January 17.50 puts are $1.35. So if you bought 10 January puts you'd lock in the profit. If the stock goes up you lose on the puts and you can write it off against the gain on the stock. If the stock goes down you lose on the stock but gain on the puts. You'd have to buy 10 puts which would $1350 (at the current ask), whatever commission, and a little bit of time value. Since it's so deep in the money all your really paying is a little bit of time value and commissions ii.e most of the $1350 is a wash.

"Should never have put all my retirement money in one stock, but got greedy. Won't do it again. After buying, ODP kept dropping to about 13. Scared the heck out of me."

I wouldn't do it unless I felt it was very, very undervalued. I put a lot of my portfolio on NFI about a year ago. In hindsight probably not the wisest move.

"Same thing happened with MCD which I bought at 18 and dropped to 15 or lower. Eventually made its way back to the 20s, where I sold."

Can't knock success. MCD did some big changes which seems to have helped.

"Along with about 50-70K increase in equity from my California home, I made more (ON PAPER) this year from investing, than I did as a wage slave."

This kind of thing tends to spur the entrepenuerial spirit in all of us I think.

"This year have made money on GE, ODP, MCD, HD, BBY, COST, JCP "

All good companies except for JCP but admittedly I'm not too up on it. Got to remember too that the stock market was up a lot too. I've learned this old Wall Street saw the hard way, "Don't confuse brains with a bull market."

[adios]

You probably won't be able to buy the puts. You could sell 10 deep in the money calls instead to lock it in a retirement account. Some thing like January $10 calls would work.

[squiffy]

Yes. I am talking with my old college roommate, now an anesthesiologist in NYC on a regular basis about stocks. And he makes a good point. We have the illusion of picking successful stocks. But in fact, if you happen to invest when the entire market is going up, how can you not pick a good stock?

Still, this shows the importance of very broad market timing. I don't mean day trader timing. But a very general sense of is the market at a peak or trough. And you clearly can market time in the broad sense.

You can know that there is a tech bubble and that you are in one, even though you cannot predict precisely how long it will last or exactly when it will burst.

When MCD is at a 5 year low, you know it's at a 5 year low. It could end up at a 6 year low or a 7 year low, but if it is a fundamentally strong company not on the verge of bankruptcy and facing no accounting scandal, heck, it should recover.

So, it may very well be mainly a matter of market timing.

If you will make a substantial gain, no matter which stock you pick, then why not pick a stock in a strong company, with an established reputation, low debt, etc. that is very very unlikely to go broke.

Does that make sense. I agree it's not hard to pick a good stock (company that is unlikely to go bankrupt). But it is hard to pick the right time to invest in the market or to pick the right stock.

And potential GAIN or PROFIT is only one aspect of the equation. Let's say the entire market is going up, so that MOST STOCKS will make you a profit.

There are still some stocks that are riskier than others, more volatile, more likely to go bankrupct on bad news.

So which stock you pick can still make a difference. Not so much by increasing your upside, as by reducing your downside.

Does that make sense.

But you are right. As my friend pointed out. The S&P 500 is up something like 40%. So it's not a big deal that any of us picked an individual stock that went up.

That's what stocks of major American companies do in a recovery.

That's what most stocks of most successful American companies have done over the past 100 years. Generally go up.

But some companies go bankrupt. So my main emphasis is picking a stock that is long-term strong, but currently low or moderate in price, with ALMOST ZERO CHANCE OF GOING BANKRUPT.

[squiffy]

Yes good points. They do not permit margin buying in my retirement account, which is probably a good thing.

The margin buying was in my cash account. I have about 130K in my retirement account and about 70K in my cash account.

It's probably a good thing I cannot borrow money on my retirement account.

In general, I have always read that borrowing on margin is a huge mistake. I think this is true, especially for large amounts of money. A dip in the stock and you could face a margin call and lose everything.

I suppose margin is worth it if you borrow only a tiny tiny bit on margin, and have a lot of stock that is unlikely to drop a lot, so that a margin call is unlikely, and even if a call comes, you have some emergency cash reserves to cover the margin call.

But the amount of money you can safely borrow on margin is relatively tiny.

Still, in theory, it looks very attractive because you can borrow money from Ameritrade at 5% per year, and very easily make 10-20% (probably much more) over the course of a year.

The only reason I borrowed the money was I was fully invested in ODP and the sucker kept dropping. I wanted to buy a bit more right away and it would have taken time to transfer money from my cash and checking.

And I did have to cover property tax payments and income tax payments in Jan. and April. So I didn't want to drain my bank accounts unless absolutely necessary.

So I tried it as an experiment. And since only 1000 shares out of 12,000 were on margin, I didn't think it likely that ODP would drop from 13 to 8. ANd I didn't think it likely I would get a margin call. And even if I did get a margin call, I could have covered it with money in my bank account, if absolutely necessary.

Anyway, after exploring margin, it does not look like there is any real place for it, except for a very short-term convenience loan. Not really a wise "investment" tool, unless you are willing to take a big risk.

Though in this case, I made an extra $1700 on paper.

[adios]

It's easily provable mathematically that you can diversify away individual company risk. So taking on a great deal of company specific risk IMO should be done only if it is undervalued to the point where taking that risk makes sense. Not necessarily easy to evaluate.

[Wildbill]

There are certainly some return on investment formulas you can apply, but most business models are too involved and have too many other factors to make them very effective here. A lot of the business models have at the core opportunity costs and lets face it, unless you bought that absolute best performing stock over the timeframe you could argue there were opportunity costs, so this is totally unrealistic. Also the returns are sort of based on the idea that you will consistently get these returns over a year or 5 years or whatever. Obviously this isn't a good evaluator either.

I will leave the risk analysis of you and others, what risk is tolerable is a wholly personal decision. How much you value an early retirement and how much it will personally pain you to work say another year or two are hard for anyone to judge financially.

[RocketManJames]

Hi Squiffy.

Something to think about regarding margin. Margin is generally not a good thing to dip into for the typical long-term investor. However, here's something to keep in mind...

If you can honestly beat the margin interest rate for long periods of time, going slightly into margin isn't such a bad thing... (just don't max out the margin).

For example... borrowing at 8% and getting a return of 10% is better in the long-term than getting 8% outright (without borrowing). If you work out the numbers, you'll see that the 'effective' rate of return will converge to the return rate, as the compounding effect more or less swamps out the borrowing rate.

Food for thought. Just thought it might be interesting to you.

Good luck with your trading/investing.

-RMJ

[GeorgeF]

"I made more (ON PAPER) this year from investing, than I did as a wage slave."

Salary and investment gains are not comparable as you did not risk any capital to collect your salary.


"I am hoping that stock trading can get me an early retirement if I don't lose it all."

Sorry, My guess is that you will loose it all. There are very few people who can actually make money trading and fewer that can do it and have a full time job. I suggest you simplify you investment plan to vanguard mutual funds. A low expence ratio international bond fund and use the time you save to improve your salary or homelife.

[squiffy]

I don't know George. It's really not that hard to pick a winning stock. My only losses so far came because I was stupid enough to put huge percentages of my money all in one or two stocks. Which I knew I should not have done. Had I been properly diversified, I would never have lost the money I did.

Anyway, after losing about 50-60K after 911, I am back to even now with about 200K in my retirement/Ameritrade account.

I really think it can be done. And it hasn't taken all that much time.

But then again, I love reading about investments and finance, and have been doing so off and on since age 13. So I really think I have more information and interest than the average wage slave.

I started out with the Vanguard 500 Index funds back in 1993 and started getting into individual stocks over the past 3-4 years.

By the way, bond funds are not a good idea right now. Interest rates are at a tremendous low now and are likely to climb as the world economy slowly improves.

[adios]

Hey George FWIW I like the way squiffy approaches buying stocks from what I've read.

[adios]

I like your approach a lot in the post you made about your quantitative analysis FWIW. I think you could use that approach and find a number of stocks and spread out your money more for waht that's worth but I think your approach is very rational.

[Ray Zee]

squiffy, you are wrong. it is very hard to pick a winning stock. all stocks in general follow the market closely. so it is real hard to find one that will outperform the market move in the time frame you own it. if you are looking for getting market movement than indexes is the way to go.
mistakes you make--
just because the market as you remember it has always gone up, that doesnt mean a thing. you may not remember back in the 60's when the market went down and it took ( ithink) about 16 years for someone to recover to their past positon. or something like that. plus the world is changing and we are no longer totally dominent in the financial world. that will hurt the us stock market at some time. and badly. our standard of living must decline.
another mistake-- you tend to think you can pick the low of a stock because of guessing , not so.
dont be so excited about investing and dont trade so much and you should do well as you put the effort into it. and since its called investing and not gambling dont invest in risky spots, do that in poker where you know what you are doing and can be sure when you have an edge. good luck.