Investors double stocks, pushing debt margin to record

Some investors have been tempted to seek greater gains – and have exposed themselves to potentially devastating losses – through riskier stocks, such as concentrated positions, trading options and leveraged exchange-traded funds. Others are borrowing against their investment portfolios, pushing margin balances to the first record in more than two years, to buy even more shares.

Burnworth, a civil engineer from Incline Village, Nevada, who is approaching retirement age, is using all of these strategies after turning a $ 23,000 bet on Tesla last year to nearly $ 2 million. His growing stake in Tesla has allowed him to borrow against his position to convert Tesla’s options into shares that have increased sevenfold this year. He says he also helped his daughter buy a home and a Tesla SUV for another family member.

“Before, I was not doing very well financially. Now, I am way beyond where I wanted to be for retirement, ”said Mr. Burnworth, who added that he also sold his own home and used part of the profits to buy more Tesla options.

The stock market is about to end one of its most sparkling races in years. Some of the biggest wealthmakers include Tesla, up 691% so far this year, and fuel cell company Plug Power Inc.,

more than 1,000% higher. Zoom Video Communications Inc.

increased 451%, while dozens of biotech stocks also skyrocketed, including vaccine maker Covid-19, Moderna Inc.,

up to 532%.

“The stock market is euphoric now,” said James Angel, professor of finance at Georgetown University. “Many people are extrapolating from the recent past and thinking, ‘Wow, the market has gone up a lot and I think it will go up more.’ We’ve seen it happen before and it doesn’t end well. “

In the final week of 2020, investors will be on the lookout for last-minute changes to Covid-19’s aid package after President Trump demanded higher payments for Americans. The pandemic itself remains in focus as cases, hospitalizations and deaths increase in much of the country.

A strong indicator of stock market euphoria turned red last month. Investors borrowed a record $ 722.1 billion against their investment portfolios through November, according to the Financial Industry Regulatory Authority, overcoming the previous high of $ 668.9 billion in May 2018. The milestone is loss for the stock market – margin debt records tend to precede volatility crises, as seen in 2000 and 2008.

Investors who use margin debt pledge their bonds in exchange for loans from brokers to make more investments. They may be in trouble if their guarantee falls below a certain threshold, triggering a margin call. They then have the option of putting in more money or selling the securities underlying the loans.

Many investors also use their margin balances to trade options, contracts that give them the right to buy or sell shares at a specific price afterwards. Option trading exploded this year, with individual investors shifting to the stock market. A record number of option contracts were traded this year. An average of 29 million changed hands each day this year, up 48% from 2019, according to data from Options Clearing Corp.

Traders can take advantage of options to protect their portfolios from falling stocks or place bets that major indices and individual companies will rise or fall in value. Using some of the most risky strategies, traders can also lose more than they have invested.

Mary Roberts made her first big investment last year, using some extra cash and a retirement account left over from a previous job to buy Tesla shares. Like Burnworth, her investment portfolio has grown in value this year, with the shares of the electric car maker rising, prompting her to engage in options trading for the first time using margin debt.

“By having [shares of] Tesla allowed me to do all of that. It was life changing, ”said Roberts, who is 53 and lives in Vancouver, Wash. She and her husband run a chemical distribution company that she says is struggling because of Trump’s trade war with China. Between its investments and those of its spouse, the combined portfolio is now worth seven digits, with two-thirds of that consisting of Tesla shares, Roberts said.

She says she doesn’t think she’ll see another year of gains like 2020 anytime soon. But she also has no plans to sell her Tesla shares and is open to the idea of ​​asking for more loans against her portfolio.

“This is what rich people do,” said Roberts.

Of course, individual investors who try too hard have been burned before. Many investors have lost money this year in maneuvers that have backfired, including when oil prices went negative and Eastman Kodak’s shares Co.

took a wild ride.

Joe Phoenix’s crash happened in 2018. He bet heavily against the prospect of a resurgence of market volatility, accumulating more than $ 1 million using exchange-traded products that delivered the reverse of the Cboe, or VIX, volatility meter. The products increased daily movements three times. And he made a risky bet even more risky using debt margin.

An increase in volatility in February 2018 wiped out a significant portion of its earnings, bringing its holdings to hundreds of thousands of dollars. Phoenix said the devastating loss took him out of the market later in the year. He started trading again in mid-2019, after promising himself that he would not be so risky again.

He still trades on leveraged ETFs. These products attracted $ 14.3 billion this year through November, the highest since 2008, from investors attracted by the prospect of doubling or tripling the daily movements of the S&P 500, Nasdaq’s top 100 stocks and other indices. The movements work both ways, with these funds falling by up to 15% on some of the worst days on the market this year.

Mr. Phoenix adds that the products offer him all the benefits of margin debt without the worry of a margin call or interest payments.

“This year, I did very well with my emotional reaction to things and being able to release the losers,” said Mr. Phoenix. He said he has risen more than 12% since he started trading again. “If I can do more than 8%, I am doing very well.”

Write to Michael Wursthorn at [email protected]