Page 415 - How to Make Money in Stocks Trilogy

Money Management 285

stand that when the general market declines and your stocks start sinking,
you will lose your initial capital twice as fast if you’re fully margined than you
would if you were invested on a cash basis. This dictates that you absolutely
must cut all losses quickly and get off margin when a major general market
deterioration begins. If you speculate in small-capitalization or high-tech
stocks fully margined, a 50% correction can cause a total loss. This hap-
pened to some new investors in 2000 and early 2001.
You don’t have to be fully margined all the time. Sometimes you’ll have
large cash reserves and no margin. At other times, you’ll be invested on a
cash basis. At still other points, you’ll be using a small part of your margin
buying power. And in a few instances, when you’re making genuine progress
in a bull market, you may be fully invested on margin. All of this depends on
the current market situation and your level of experience. I’ve always used
margin, and I believe it offers a real advantage to an experienced investor
who knows how to confine his buying to high-quality market leaders and has
the discipline and common sense to always cut his losses short with no
exceptions.
Your margin interest expense, depending on laws that change constantly,
might be tax-deductible. However, in certain periods, margin interest rates
can become so high that the probability of substantial success may be lim-
ited. To buy on margin, you’ll also need to sign a margin agreement with
your broker.

Never Answer a Margin Call
If a stock in your margin account collapses in value to the point where your
stockbroker asks you to either put up money or sell stock, don’t put up
money; think about selling stock. Nine times out of ten, you’ll be better off.
The marketplace is telling you that you’re on the wrong path, you’re getting
hurt, and things aren’t working. So sell and cut back your risk level. Again,
why throw good money after bad? What will you do if you put up good
money and the stock continues to decline and you get more margin calls?
Go broke backing a loser?

Should You Sell Short?

I did some research and wrote a booklet on short selling in 1976. It’s now
out of print, but not much has changed on the subject since then. In 2005,
the booklet was the basis for a book titled How to Make Money Selling
Short. The book was written with Gil Morales, who rewrote, revised, and
updated my earlier work. Short selling is still a topic few investors under-
stand and an endeavor at which even fewer succeed, so consider carefully