Gary Scott Highlights the Risks & Rewards of Leveraging

Posted By Tate Dwinnell |  Subscribe in a reader | Comment 1
A recent article posted by Gary Scott about the Real Laws of Investing outlined that investing in environmental issues is a huge and long lasting trend. Gary has been proving this fact.  He developed with the Danish Jyske Bank a Green Portfolio last November 20076 and it has been rising steadily since.  By mid July 2007, eight months and ten days after this portfolio was created it had risen 201.14%.  $100,000 invested Nov. 1, 2006 was worth $301,148. 
 
To make matters better the worst performing of the five portfolios that Scott created with Jyske is up 38% in this same period.  The other three portfolios are up 38%, 45% and 62% in this time period.   Such high returns are possible when one uses intelligent leverage.
 
This makes a compelling investment story considering that an investor can create a portfolio like this at one of the world’s safest banks.
 
Yet Gary recently shared a really important point about the loss potential of leverage as well. He wrote:
 
“Last year our portfolios had great success also.  Our top portfolio (Asian Emerging Markets) rose 114.16% from November 2005 to November 2006.
 
“Yet when we started our five portfolios in November, 2006, we reduced, rather than increased the leverage we used.   This is because the 2006 emerging portfolios gave us great performance for the whole of the year, but they also had a severe dip in between
 
“Look at what this means so you can see both sides (the ups and downs) of leverage.
 
“The 2006 Asian Emerging Portfolio began October 21, 2005 and shot off like race horses bolting from the gate.
 
“Four months after it began, I wrote:
 
“After 20 weeks on March 5, 2006 the Asian Emerging Portfolio has risen +75.19%  
“I also added: “These results are especially pleasing since there have been several articles in newspapers that warn that Borrow Low systems of enhancing profits through leverage may be at an end due to sharp shifts in several currency parities”.
“The warnings were true.  Beginning in March 2006 the second worst emerging market plunge of the decade began.
 
“In July 2006, a portfolio update said: “The last month has seen a blood bath in emerging markets and currencies”. 
 
“The Emerging Asian Portfolio had dropped from being up 75.19% to being up +30.28%, a loss of nearly 44.91% in four months.
 
“If an investor, attracted by high returns, had jumped into that portfolio in March 2006, they were down …badly.  From March to July the portfolio was down 44.91%, but leverage made the los much worse!
 
“If $100,000 were invested in March 2006 and an additional $200,000 borrowed, the two times leverage meant that the investor lost $134,710. Those who jumped in at the early March top could have lost their entire investment, plus 34.71% more.  This it is why it is important to know not to invest more than one can afford to lose.
 
“If investors believed in the idea and could afford to hang on, or had a money management system in place to cut losses and then reinvest when the idea turned around, they were well rewarded. The Emerging Asian Portfolio rose 83.88% from July through October, 2006.  In three months, the $300,000 ($100,000 invested and $200,000 borrowed) portfolio gained $251,640, a 151.64% profit on the $100,000 base investment…in just three months! 
 
“Review what could have happened with the Emerging Asian Portfolio in just one year. 
 
“Investors who invested $100,000, borrowed $200,000 and held on through thick and thin for a year made 114.16%
On the $100,000 actually invested, they earned $114,160 in one year aand ended up with $214,160.   Not bad!
 
“Investors, caught in greed, who jumped in March 2006 and exited in fear in July of that year lost their entire $100,000 invested and could have lost $34,710 more!  That’s bad.
 
“These losses took place quickly, in just five months. Had the investor held their sandwich at Jyske Bank, the bank would have closed their position before it reached a negative position so their loss would have not been more than their original $100,000…probably even less.  That’s still bad.
 
“Had a really wise investor timed their investment right and invested $100,000 in July 2006 they would have earned
$151,640 on the $100,000 invested) in just three months.  That’s really good!
 
“Here are three important lessons:
 
“#1: Belief in the idea is vital.  Investors who believed in the idea and held on were well rewarded.
 
“#2:  Keep a good money management system.  Investors who had a money management system, set stops and exited before the March collapse and reentered in July made a huge annual return did the best of all (up to over 400% annual profit in a year).
 
“#3: Do not invest more than you can afford to lose!  In an utterly brilliant year (when viewed from the annual perspective), the seeds for incredible performance and total loss were in blossom.  
 
“Multicurrency investing is vital in this day and age.  There is no one currency that is totally trustworthy.  Multicurrency investing enhances safety. Leverage can make multicurrency investing even more profitable…yet every investor needs to question whether to use leverage or not. If they do, they must make sure the amount borrowed it is in tune with their goals and circumstances.   If they do the borrow low deposit high strategy to leverage multi currency investing can strengthens one’s financial security and profit potential as well.”
Gary Scott is an internationally recognized entrepreneur, author and investment advisor who offers seminars on investing with multi currencies. 

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Comments on Gary Scott Highlights the Risks & Rewards of Leveraging »

July 13, 2007

Zach @ 1:08 pm

I’m always intrigued with stories of investors using leverage both successfully and unsuccessfully. It’s amazing how little respect some give to the potentially drastic consequences that can occur if positions move against them. Many use models assuming that they can withstand a 25% drop in the underlying asset (50% loss for a 2/1 leveraged account) and forget that even if they are confident the assets will rebound in value, a margin call will force them to liquidate some of the position so they are not able to retain the full position for the ride back up.

Thanks for the insightful post!
Zach