During the July 2021 market dip, I bought stock on margin. This endeavour into market timing earned me a tidy little profit. But was it worth it?
Market Timing Definition
First of all, there's two main philosophies behind investing: active and passive. Active investors may try to time the market, buying low and selling high. They conceive of all sorts of methodologies to rationalise their strategy, but fundamentally they are trying to outsmart the fabled "market."
Market timing is all about finding the next big gain. Stock prices are volatile, going up and down throughout the day. Every time you guess correctly and buy at a local minimum and sell at a local maximum, you're getting some profit. If you chain a few of those gains together without losing, you can feel great.
Contrast that with the financial independence staple of passive investing. Usually this will entail a system of dollar cost averaging into an index fund by purchasing shares every pay cycle. Once bought into a position, passive investors then dutifully ignore the stock's volatile movements. They hold onto it whether it's falling or climbing, and trust that it will all grow in the long term.
Thus far in my life, I've stuck to passive investing. It's one of the least volatile paths to wealth. It suits my situation for a more steady climb to becoming a wealthy mistress. I recommend it, especially for when you're starting out.
Buying the Dip
When you're a passive investor that doesn't need to pull out cash from stocks, you get in the habit of thinking of market downturns as the market being "on sale."
This mentality gives rise to the "buy the dip" mantra.
In short, when the stock price dips you should buy some of the "discounted" stock. If you do so, there's two outcomes: either the stock price recovers and you make a tidy profit, or the price free falls further.
Thus because of the risk of falling prices you should back-load, and gradually buy in more and more stock as it keeps falling. That way for large market crashes, you're buying more stock at the lower value, which will rebound sooner than if you front-loaded your purchase.
In general, we expect the market to eventually return to its heights – barring catastrophes or sea changes that wreck global commerce forever. Thus for patient passive investors, that market crash is just an extended sale that eventually will go back to appreciating stock prices.
My First Experience Buying the Dip
On July the 19th, I bought $845.75 worth of stock on margin at $219.07 a share.
I started with this amount because it's essentially pocket change with my multiple income, no kids lifestyle.
Standard issue wisdom says that you should never speculate any money that you're not willing to lose. With leverage that goes double, as you don't want to screw up with it. You losses can get out of hand easily.
I also started with this much because of the back-loading idea. Any money I deploy prematurely is unavailable if the price drops even lower. So I want to keep my reserves topped up in case of a price free fall.
So with that ~$850 worth of stock on margin, I waited the 11 days it took for my next deposit of wages to come through. I then used the wages to pay back the margin loan and use the excess to purchase more shares.
I locked in the price at $227.025 per share. Which means that the stock recovered $7.955 per share, or about 3.5% from the time I bought into the dip.
Of course, I paid interest at Vanguard's moderately high rates of 8.5%. For the 11 days I was loaned margin, this came out to be $2.40, which is only 0.3% of the principal.
That means that for thirty minutes of work, I earned a tidy 3.2% profit through financial transactions. I didn't create any value here, and I didn't solve any problems, I just leveraged money amidst doom-fearing market sentiments.
Of course, 3.2% of ~$850 is a tiny sum, only about $27. Yes, I earned a profit for being active with my investing, but is it really worth it when you adjust the profits for the time I spent making them? Logging into my brokerage, watching the news, managing my emotions around the market movements, and so on all take up my valuable time and brain space.
My attention span is drastically limited, after all.
Why Use Leverage to Purchase Stocks?
The market dipped just after the middle of the month. I already had my mid month working wages invested before the dip came. Thus I had no cash sitting around idly for use when the market dipped.
This is actually a common complaint about the "buy the dip" mantra: normal people don't have cash sitting around in war chests.
This is why I have a margin account with Vanguard. I can easily take margin loans secured with my own stock portfolio to purchase more stock. This is a form of leverage.
Doing so, however, places me in a riskier position. Should I lose my main stream of income and the market crash, I could take dramatic losses in a margin call.
I'm willing to take that risk because of my relative youth. Riskier investing behaviour early on can pay off big time when compounded, and if it backfires I still have plenty of time to recover from it.
"Time in the Market" Beats "Timing the Market"
Financial independence is a long-term prospect. It pays to make your investing practises sustainable and reliable, such as passively investing every paycheck and letting your money spend time in the market.
The total stock market has most of its gains concentrated in a few days out of the year. If you're an active investor trying to time the market, you need to be spot on every time about which day is going to be gainful. That's a fault-prone approach to investment. Making a mistake will leave you with no profits to show for all your work.
Since people can't predict the future in sufficient clarity or detail, it's easier and more reliable to simply leave your cash in the market. That way when the gains do come, you're already in position to capture them.
In terms of learning, buying stock on margin was a worthwhile first experience for me. I can read all about topics, but true comprehension takes putting it into practise.
In terms of monetary gains, perhaps this small little dip was about break-even. It cost me a little bit of time but it garnered me a tiny little gain too.
I think in the future I will keep my eyes open for a larger market dip to revisit this topic on, to see if it's still worthwhile when it takes me several pay cycles to pay back the margin loan.
After all, with Vanguard's tiered margin rates, dumping in more than $20,000 results in a lower interest rate. I'll end up paying more in absolute cost of interest, but I'll have more efficiency in terms of percentage gains.
I'm also aware of the fact that there are brokerages that offer much better interest rates – Vanguard champions passive investing, so anything that runs contrary to that philosophy is subtly discouraged with fees, clunky design, and slowdowns.
Yet I do not wish to seek out cheaper loans, because I prefer cooperatively structured businesses such as credit unions and Vanguard. The ethics of a business make it worth the extra costs to me.