Hi, have been looking for a thread on this, but can't see one... thought I'd post to see if anyone has similar thoughts...
I know there is general gloom and doom re. share markets and world finance etc., but more and more there is talk of a recovery. (Also, in terms of market pullbacks... this is a substantial one, but not as bad as some... so we can assume it will recover and go on to new highs in time.)
So... using the 'buy while there is blood running in the streets philosophy...', what do we do?
My current thinking, general strategy.
1. Assuming we have funds available - either cash or real estate LOC
2. Buy quality shares - bias toward ones with rebound potential (fear oversold) and strong dividends to service loans (franked or un-franked)
3. Margin loan... at 1:1 gearing (conservative) - can double the initial investment.
Few more thoughts...
a) If we use all borrowed funds... say LOC + margin loan... then need to service the loans (as close as possible anyway)... could look at shares such as major banks CBA, WBC, ANZ, also, property trusts such as GPT, MGR, MCW, MOF, IEF, ILF. Far as I can see they are maintaining their distrubutions... (could be wrong, but can't recally reading anything saying they were cutting...).
b) As per the 'Bank Holiday' newsletter from Eureka Report (saw on this site), the major banks at least have a history of increasing dividends... so time makes the repayments easier.
c) Large companies are down a long way basically due to fear it seems... all the codes listed above are very low compared to October 2007, and would represent substantial gains to get back there... even something like CBA for example... now about $43, if recovers to $60, that represents close to 40% gain... for a massive 'darling of the market' company!
d) Even if it takes 2 or 3 years for some of these companies to fully recover... doesn't matter much if we're close to funding the investment with dividends.
e) Re. fear of margin call... i) the LOC/cash part of the investment would not be exposed to a margin call; ii) the margin loan part could of course be exposed... however, if borrowed at 50% against shares that are 70% LVR, need a 33% fall to trigger margin call (I think that is right... haven't confirmed, sorry if a little out)... NOW, it is a 33% fall from CURRENT prices... if that happened, it would be in order of a 50% fall from October 2007... like 1987, 1929 situation... certainly possible... but... worth taking a chance on?
Applying some real dollar amounts to this... if could access say $200,000 of cash (say via LOC), margin loan out another $200,000... have $400,000 exposure to crashed market shares... hold on for several years... if could get 40% gain overall... looking at $160,000 gain... for doing nothing much except sitting on a group of shares... and it's using all borrowed money (OPM)... money out of nothing. (Maybe another form of 'living off equity' too for the people from real estate perspective.)
Anyway... sorry this is a longer note that I would have liked, but needed to explain the idea enough.
What do people think of it? Sensible? Or is there a chink in the armour I haven't seen?
Thanks for that... Ilori :-)