The sight of stock markets’ inexorable rise made Marketwatch’s heart flutter.  Positive news abounds everywhere, well if you own shares anyway.

But, you might ask, where on earth is all the money coming from?  After all, as prices drive higher, someone is buying at ever increasing prices.

The money pouring into stock markets is coming from a variety of sources.  Some of it is due to investors moving away from low interest-bearing investments such as cash and government bonds.  In the United States, it is known that many people have used their government payments as part of the stimulus efforts.  Although individually not large, when combined they can represent a significant amount of input particularly in the lower end of the market where cheaper, riskier stocks swim.

Recently Marketwatch talked with you about some of the psychological factors driving the market.  The need to follow the herd is strong, particularly when you are trying to make sure you are not missing out.  This plays on what is a variation of those old human emotions; fear and greed.

So what do I do if I want to invest more money than I have?  The investment opportunities are so great, I can make my fortune if only I could put more money in in the first place.

Well, I have good news for you.  Take out a margin loan.  Its really simple.  You use your existing share, or cash, as security.  The lender calculates your Loan to Value Ratio (LVR) and tells you how much you can borrow.  Interest is payable on the loan, but who cares, I’m making money.

Let’s take a simple example.  I have $5,000 to invest but want to make as big an investment as possible.  My lender is prepared to lend me $5,000 to increase my total.  The security is the investment. Suddenly I am rich.

Margin lending can be effective because you don’t have to offer the house as security.  From a taxation point of view, some lenders allow you to prepay 12 months of interest which you may be able to claim on your current tax return.  You can’t just buy any old investment but there are a lot of approved shares and funds to choose from.

And as your wealth grows, so does the margin.  You started at $5,000 but as you make more money, you extend the loan value to seize more and more opportunities.  Marketwatch has heard of six and seven figure margins.  But there is no problem, the market is always rising so your position is well covered.

Right, have I left anything out? Oh, yes, the risks.

Well, the biggest risk is that if the value of your investment portfolio drops, you will be required to put in more money to preserve your LVR.  If you do not have the cash, you will need to sell hares possibly at a loss.  But that’s not going to happen, is it.

Marketwatch is indebted to Andy Kessler who, writing in the Wall Street Journal, charted his financial career on Wal Street starting in 1987 (Black Friday crash), moved into the ‘90’s with a couple of Asian financial crises and a Russian one, then a massive hedge fund failure thumped the US stock market.  Limping into the 2000’s he saw the dotcom crash followed up, of course, by the global financial crisis.

It is worth quoting his final three paragraphs, coming from a chap who has seen a lot of activity over the years:

“How do these bull bashes end?  When the last skeptical buyer finally sees the light and buys into the dream that every car will be electric, that crypto replaces gold and banks, that we overindulge on vertically farmed “plant-based steaks” while streaming “Bridgerton” Season 5 before we hop on an air taxi for our flight to Mars.  Those last skeptics (maybe already) convince themselves there’s no longer any downside.  And then boom, it’s over.

Bull markets need fuel. When the marginal buyer is done, there are no more greater fools to buy in, no matter how well companies actually perform.  The dream is priced in, and firms can only meet, not beat, expectations.

For those lulled by today’s bull market, remember that you own a piece of paper.  Low-yielding U.S. Treasury bills and bonds are safe because they are backed by the U.S. government, by cash flow of tax dollars and by the country’s assets (think land, not Fort Knox).  Stocks are backed by expectations of future earnings, but if you overpay during periods of high expectations (like today), then your downside is huge.  Crypto is backed simply by the faith of those who proclaim it is a store of value.  Even art and exotic cars and silly NFT tokens are backed only by faith the wealthy will overpay for uniqueness.  Faith becomes scarce when the selling starts.”

So there we have it.  If you remember nothing else about your desire to invest, remember the risks.

As he writes, a bead of sweat is on the end of Marketwatch’s nose.  This humidity is pretty horrible.  But that is no reason to ignore the clarion call of a fine wine.  Despite the weather Marketwatch has selected a red this month.  From the Frankland River, courtesy of that great winemaker, Larry Cherubino, comes the eponymous Cherubino Shiraz.  By all means drink it, it is excellent.  But try to put a few bottles down for a few years, it will be worth the wait.

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