More is Less

There is no investment strategy so good that it cannot be undone by excessive leverage.

The New York Times ran an article, ‘A Bargain With the Devil’—Bill Comes Due for Overextended Airbnb Hosts. They wrote:

For years, Cheryl Dopp considered the ding on her phone from a new Airbnb Inc. booking to be the sound of what she called “magical money”…Now, Ms. Dopp associates the dings with cancellations and financial misery.

Watching people get picked off by the guillotine of borrowing is never fun, but it should serve as a reminder that when it comes to investing, more is less.

Over the years I’ve received half a dozen emails that go something like this: “If stocks have positive expected returns over the long run, and I’m 25 years old, why wouldn’t I put my money in a leveraged product?”

Until recently, this type of strategy has served investors well. Over the last five years, the S&P 500 gained 75%. Over the same time, the 3x bull ETF (SPXL) gained 240%.

But when the market rolled over, the head start that the leveraged product had was *ripped away.

It’s hard to imagine what it felt like being in a 3X bull ETF during the fastest bear market ever. In 23 sessions, you were left with twenty-three cents on the dollar. All the king’s horses and all the king’s men, couldn’t put this portfolio together again.

One of the iron laws of behavioral finance is that when things are going well, investors always think they could be going better.

Leverage is the fastest way to go from good to great, but it’s also the fastest way to go from good to broke. Every cycle investors learn that leverage is a poor substitute for patience.

*Here is the chart in video form.