Investors reduce stocks, pushing margin debt to record

Some investors have been tempted to pursue larger gains — and have been exposed to potentially devastating losses — through riskier games, such as concentrated positions, trading options, and leveraged 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.

Mr. Burnworth, a civil engineer in Incline Village, Nevada, who is approaching retirement age, is using all of these strategies after turning a $ 23,000 options bet on Tesla last year into nearly $ 2 million. of dollars. His growing stake in Tesla allowed him to borrow against his position to turn Tesla’s options into stocks that has multiplied by seven this year. He says he also helped his daughter buy a house and bought a Tesla sports vehicle for another family member.

“It simply came to our notice then. Now, I’m far beyond where I wanted to be for retirement, ”said Burnworth, who added that he also sold his own home and used some of the proceeds to buy more Tesla options.

The stock market is about to close one of its scariest races in recent years. Some of the biggest creators of fortune are Tesla, 691% more this year, and the fuel cell company Plug Power Inc.,

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

has added 451%, while biotech stock scores have also skyrocketed, including vaccine maker Covid-19 Moderna Inc.,

532% more.

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

In the final week of 2020, investors will be watching last-minute changes to a Covid-19 relief package after President Trump demanded higher payments for Americans. The pandemic continues to be focused as cases, hospitalizations and deaths skyrocket across much of the country.

A strong indicator of stock market euphoria turned red last month. Investors applied for a record $ 722.1 billion loan in their investment portfolios through November, according to the financial industry regulator, which surpassed the previous high of $ 668.9 billion as of May 2018 The milestone is disastrous for the stock market: records of margin debt tend to precede volatility attacks, as seen in 2000 and 2008.

Investors who use a margin debt commit to their securities in exchange for loans from brokerage firms to make more investments. They may have problems if their warranty falls below a certain threshold and causes a margin call. They then have the option to place more money or sell 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, later on. Options trading exploded this year as individual investors flocked to the stock market. A record number of option contracts have been negotiated this year. This year, an average of 29 million people changed hands each year, 48 percent more than in 2019, according to Options Clearing Corp.

Traders can take advantage of options to protect their portfolios from declining stocks or bet on major indices and individual companies to rise or fall in value. Using some of the riskiest strategies, traders can also lose more than they put in.

Mary Roberts made her first major investment last year, using some spare cash and a retirement account left over from a previous job to buy Tesla shares. Like Mr. Burnworth, her investment portfolio rose in value this year as the shares of the electric car maker ran out, leading her to engage in options trading for the first time through the margin debt.

“Have [shares of] Tesla allowed me to do all this. That changed lives, “said Ms. Roberts, who is 53 and lives in Vancouver, Washington. She and her husband run a chemical distribution business that she says has struggled because of the trade war. of Trump with China.Between his investment and that of his spouse, his combined portfolio is now worth seven figures, with two-thirds of Tesla shares, Ms Roberts said.

She says she doesn’t think she’ll see another year of earnings like early 2020. But it also has no plans to sell any of its Tesla shares and is open to the idea of ​​borrowing more from its portfolio.

“That’s what rich people do,” Ms. Roberts said.

Of course, individual investors who stretch too much have been burned before. A lot of investors lost money this year for gambits that fell back, even when oil prices turned negative and Eastman Kodak shares Co.

he took a wild walk.

Joe Phoenix’s shock occurred in 2018. He had strongly bet against the prospect of the resurgence of volatility in the market, accumulating more than a million dollars through products traded on the stock exchange that delivered the inverse of the volatility indicator Cboe or VIX The products amplified the daily movements three times. And he made an even riskier gamble by using margin debt.

An increase in volatility in February 2018 ended a significant portion of its earnings, turning its holdings into hundreds of thousands of dollars. Phoenix said the devastating loss made it off the market at the end of the year. He started trading again in mid-2019 after promising himself he would not take that much risk again.

Still, it still trades ETFs with leverage. These products attracted $ 14.3 billion this year through November, most since 2008, from investors attracted by the prospect of doubling or tripling the daily movements of the S&P 500, the top 100 Nasdaq indices and other indices. . The moves work in both directions, with these funds falling as much as 15% on some of the worst days on the market this year.

Mr. Phoenix adds that the products provide him with all the benefits of margin debt without worrying about a margin call or paying interest.

“This year I’ve looked really good in terms of my emotional reaction to things and being able to eliminate losers,” Phoenix said. He said it has risen more than 12% since he started trading. “If I can do more than 8%, I’ll do pretty well.”

Write to Michael Wursthorn to [email protected]