Most people know John Maynard Keynes the economist. Not many know Keynes the investor. The track record of his personal accounts and the King’s College Chest Fund show he was a decent, though risk-averse, investor.
One thing stands out when you compare the two records. He consistently used margin loans in his personal accounts. I wanted to take a deeper dive into the impact margin loans had on his results.
For those not aware, a margin loan is borrowed money used to buy securities in an attempt to juice returns. The results can be exceptional if things go right or horrendous when things go wrong.
When you borrow money against an asset, and the value of the asset falls, bad things can happen. The main reason is due to minimum margin requirements. Lenders don’t like to lose money any more than we do, so minimum margin requirements help safeguard lenders from losses.
But it doesn’t protect you from losses. In fact, the minimums do the opposite whenever it’s triggered. Because you’re hit with a margin call. Continue Reading…