Margin Debt & the dangers of leverage

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Warren has spoken about the dangers of using leverage. 

Latest news about margin call:
Coindesk news - Crypto Traders Liquidated

Ether Futures Lead $1.2B in Liquidations, Crypto Market Cap Drops 16% Overnight. Many were hit with margin calls leading to one of the biggest losses within 24 hours for cryptocurrency. 


Margin Debt (as per Investopedia website):
Margin debt is the amount of money an investor borrows from the broker via a margin account. Margin debt can be money borrowed to buy securities or sell short a stock. Meanwhile, the typical margin requirement is 25%, meaning that customers' equity must be above that ratio in margin accounts to prevent a margin call.

Margin Debt data from FIRNA - $799B as of 31 Mar 2022

Margin Debt of the US of the last 5 years

Mr Buffett has said the following about Long Term Capital Management, the hedge fund ran by Nobel Prize Laureates and PhD’s, which blew up in 1998. It turned out it was heavily leveraged.
"But to make money they didn’t have and didn’t need, they risked what they did have and did need. That is foolish. That is just plain foolish. It doesn’t make any difference what your IQ is. If you risk something that is important to you for something that is unimportant to you it just does not make any sense."
“If you’re smart you don’t need leverage; if you’re dumb, it will ruin you.”
"It is crazy in my view to borrow money on securities. It’s insane to risk what you have and need for something you don’t really need… You will not be way happier if you double your net worth.

Leverage can magnify returns if you are right, but it can also lead to ruin if you are wrong. If you invest smartly you don’t need the leverage to begin with. And if you do use it, watch out below."

Buffett has quoted Charlie on leverage: 
“My partner Charlie says there is only three ways a smart person can go broke: liquor, ladies and leverage. Now the truth is — the first two he just added because they started with L — it’s leverage.”

Source: https://www.cnbc.com/video/2018/02/26/buffett-it-is-crazy-to-borrow-money-on-securities.html

We should invest only in what we can afford to lose.  Our family should not suffer from our bad investments.

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