Investors are doubling their shares, increasing margin debt

Some investors have been tempted to pursue bigger gains – and have exposed themselves to potentially devastating losses – through riskier actions, such as concentrated positions, trading options, and leveraged exchange-traded funds. Others borrow against their investment portfolios, pushing margin balances to the first record in over two years to buy even more stock.

Mr. Burnworth, a civil engineer in Incline Village, Nev., Who is nearing retirement age, is using all of these strategies after turning a roughly $ 23,000 bet on Tesla into a windfall of nearly $ 2 million last year. His growing stake in Tesla had allowed him to borrow against his stance to convert Tesla options into stocks that have increased sevenfold this year. He says he also helped his daughter buy a house and bought a Tesla SUV for another family member.

“It used to not go so well financially. Now I’m way past where I wanted to be for retirement, ”said Mr. 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 on the verge of closing one of its most frothy runs in years. Some of the biggest fortune makers include Tesla, up 691% so far this year, and fuel cell company Plug Power Inc.,

more than 1,000% higher. Zoom video communication Inc.

added 451%, while numerous biotech stocks have also soared, including Covid-19 vaccine maker Moderna Inc.,

532% up.

“The stock market is euphoric right now,” said James Angel, a professor of finance 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 rise even more.’ We’ve seen this game before and it doesn’t end well. “

In the last week of 2020, investors will look forward to last-minute changes to a Covid-19 aid package after President Trump demanded higher payouts for Americans. The pandemic itself continues to be in the spotlight as cases, hospitalizations and deaths are on the rise in much of the country.

A strong indicator of stock market euphoria flashed in red last month. Investors borrowed a record $ 722.1 billion from their investment portfolios through November, surpassing the previous high of $ 668.9 billion in May 2018, according to the Financial Industry Regulatory Authority. of volatility, as seen in 2000 and 2008.

Investors using margin debt pledge their securities in exchange for loans from brokerage firms to make further investments. They can get in trouble if their collateral falls below a certain threshold, causing a margin call. They then have the choice of either depositing more money or selling the underlying securities of the loans.

Many investors also use their margin balances to trade options, contracts that give them the right to buy or sell stock at a specified price later. Options trading exploded this year as individual investors flocked to the stock market. A record number of options contracts were traded this year. This year, an average of 29 million changed hands per day, a 48% jump from 2019, according to data from Options Clearing Corp.

Traders can tap options to hedge their portfolios against declines in shares or bet that major indices and individual companies will go up or down in value. By using some of the riskier strategies, traders can also lose more than they put in.

Mary Roberts made her first major investment last year, using some extra cash and a leftover retirement account from a previous job to buy up Tesla’s stock. Like Mr. Burnworth, her investment portfolio grew in value this year as the electric carmaker’s stocks rose, which prompted her to first float in options trading using margin debt.

“To have [shares of] Tesla enabled me to do all of these things. This was life-changing, ”said Ms. Roberts, who is 53 years old and lives in Vancouver, Washington. She and her husband run a chemicals distribution company that she says is struggling over Mr. Trump’s trade war with China. Between her investments and those of her husband, their combined portfolio is now worth seven figures, two-thirds of which is from Tesla stock, Ms. Roberts said.

She says she doesn’t think she’ll see another year of profit like 2020 anytime soon, but she also has no plans to sell her Tesla stock and is open to the idea of ​​borrowing more against her portfolio.

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

Of course, individual investors who overload themselves have already been burned. Dozens of investors have lost money this year on games of chance that backfired, including when oil prices turned negative and Eastman Kodak shares Co.

went on a wild ride.

Joe Phoenix’s crash came in 2018. He had bet heavily against the prospect of volatility returning to the market and had amassed more than $ 1 million using exchange-traded products that were the reverse of the Cboe Volatility meter. or VIX. The products strengthened the daily movements three times. And he made a risky bet that was even more risky using margin debt.

A spike in volatility in February 2018 wiped out a significant portion of his profits, pushing his holdings into the hundreds of thousands of dollars. Mr. Phoenix said the devastating loss shook him out of the market by the end of the year. He started trading again in mid-2019 after promising himself that he would no longer take that much risk.

However, he still trades with leveraged ETFs. Those products attracted $ 14.3 billion this year through November, the highest number since 2008, from investors interested in the prospect of doubling or tripling the daily movements of the S&P 500, the top 100 Nasdaq stocks and other indices. The moves work both ways, with such funds falling by as much as 15% on some of the worst days in the market this year.

Mr. Phoenix adds that the products give him all the benefits of a margin debt without having to worry about a margin call or paying interest.

“This year I have done pretty well in my emotional response to things and being able to cut loose the losers,” said Mr. Phoenix. He said he is up more than 12% since he resumed trading. “If I can do more than 8%, I’m doing pretty well.”

Write to Michael Wursthorn at [email protected]