All successful business man posses debts, because they know how powerful the leverage is.
I have education debts and car debt. But, here I'm going to experience my first ever "good" debt all by my decision alone. So, I'm going to do my best to understand how this debt is going to be.
Margin of Finance:
Pledge securities: RM20,000.00
Cash: RM10,000.00
Borrowing amount: RM50,000.00
Interests: 4.85% per annum (BLR: 3.80% + 1.05%)
Risks:
- 1st choice: Safest from margin call
Used amount/(Used amount + Pledge value + Cash) > 0.65 to trigger margin call.
In order to avoid this, I need to plot myself a plan - Margin of Safety.
The worst situation that I could imagine and still acceptable were all my cash shares included SFA shares dropped 62,5% from it's original value.
eg:
1st option - Use RM10K from RM50K
RM10K/(RM30+RM10K) = 0.25
To exceed 0.65, all my shares have to drop to a value of RM15K from its RM40K.
- 2nd choice: Risky from margin call
It's a bit risky if I'm going to use RM20K from the RM50K. Because the margin of safety could be only 40%.
eg:
2nd option - Use RM10K from RM50K
RM20K/(RM30+RM20K) = 0.40
To exceed 0.65, all my shares have to drop to a value of RM30K from its RM50K which is 40% from upside.
Non Margin Call but Value dropped
This is the case that acquired shares dropped from entry price, but not hitting the margin call.
1) RM10,000 from RM50,000
Interest: RM10,000 x 4.85% / 12 = RM40.41 per month.
2) RM20,000 from RM50,000
Interest: RM20,000 x 4.85% / 12 = RM80.83 per month.
Summary
I'm going to choose either the 1st or 2nd option to leverage my portfolio. 62.5% or 40% MOS, I need rules to discipline myself from emotional market.
1) This is the reserve that I will only use in Early Bull Market.
2) Every stocks that bought need to follow 15% stop loss policy.
3) Dividend need to exceed 5%.
4) No average down is allowed.
5) Revise 3 times for every decision in order to make sure winning rate is more than 90%.
* Never lose money! Never lose money! And Never lose money! - Warren Buffet.
