Signs of a Bull Market: When investors borrow to invest

 
 
Bull markets give investors confidence to purse investment strategies they have no business being in. The results often end in tears.

Bull markets give investors confidence to purse investment strategies they have no business being in. The results often end in tears.

You know when you’re in a bull market, when you start seeing articles that talk about more advanced investment strategies. A big one that gains more interest involves borrowing money to invest in stocks and bonds.

I remember in the late 90’s when the tech bubble was ballooning and I had friends and colleagues asking me about taking on debt to invest and goose up their returns. They were enjoying some success investing in tech stocks but like any human is always wanting more. I knew at that point we had reached a Jump The Shark moment for stocks and it turned out we did.

Here’s one that I came across in the Globe and Mail, that gives a tacit endorsement that borrowing money to invest, can actually be a good strategy. It is ironically written by the same gentlemen who has been espousing the housing market is overheated and that you shouldn’t take on massive mortgages and has talked up the benefits of renting instead…yet somehow it’s OK to take on debt to buy stocks? Doesn’t make sense.

There are a few elements at play when it comes to borrowing to invest.

1)     Ego plays a role. When you have a bit of success investing, you feel you’ve channelled your inner Warren Buffet and every investment decision you make will be successful. We gravitate away from our core investing strategies and take on strategies that we have no business being in. Borrowing to invest is one of them. What happens is that emotion comes into play and that is never a good thing when investing. So what do you think happens when you hear of a strategy that can give even higher returns without putting your own cash down? You try to rationalize it by thinking, well I’ve made money in the past, so if I just do the same thing, it will work.

2)     Borrowing to invest is very much a professional game, better left to people who work on Wall Street or Bay Street who watch the market like a hawk and are able to react better when things get a bit weird in the market. For the average investor, who has other responsibilities, they just don’t have the time to do it and open themselves to bad things, when the market decides to go the other way.

Sadly people are following these types of gospels, especially these days when ultra low interest rates make yield difficult to come by. Margin debt is currently at all-time highs. With articles like the one from the Globe, we may sadly see history repeating.