During the period of 10 last year, with the continuous decline of A shares and Hong Kong stocks, a lot of news broke out on snowballs, all of which were caused by unreasonable use of leverage.

When it comes to leverage, we have to say that Buffett is cautious about leverage. But he doesn't use leverage. On the contrary, he is so good at using leverage that it seems that he is useless.

Buffett's Berkshire Company holds a large number of insurance companies, and the liquidity of these insurance companies constitutes his "permanent leverage", with no cost or even negative cost. Compared with the lever used by ordinary people, the lever he uses mainly has the following three characteristics:

Of course, in reality, most of us simply don't have the ability to build "permanent leverage" like Buffett. However, in history, people who broke the warehouse and jumped off the building because of the use of ordinary levers have never been broken. Then why do more people choose to move forward wave after wave?

This involves the amplification of the lever. But the amplification effect of leverage is not only for profit, but also for loss, and the amplification effect on loss will be more obvious. So how tempting and risky is leverage?

The magnifying effect of leverage on profit is related to the current leverage ratio, financing interest rate and investment yield. Below, I counted the additional benefits brought by leverage under different leverage multiples, different financing interest rates and different positive investment returns.

Table 1: Leveraged extra income with different leverage multiples and different financing interest rates on different positive returns.

The choice of different financing interest rates in the above table is mainly based on the fact that the financing interest rates provided by different brokers will be different. At present, the financing interest rate of most A-share brokers is 8.35%, and a few can give 5% depending on the situation, while the financing interest rate of overseas Yingtong Securities can be as low as 2%. Of course, the case of interest-free liabilities is ignored here.

As can be seen from the above table, when the leverage ratio is high enough and the financing interest rate is low enough, the additional rate of return that leverage can bring is very considerable compared with the rate of return on investment before leverage. This is why so many people can't stand the temptation of leverage.

Below, I counted the extra loss rate caused by leverage under different leverage multiples, different financing interest rates and different negative investment returns.

Table 2: Different leverage multiples and different financing rates have different leverage extra losses on different negative returns.

Comparing table 1 and table 2, due to the existence of financing interest, under the condition of the same leverage ratio, the same financing interest rate and the completely opposite investment return rate, the additional gains and losses brought by leverage are asymmetric, and the additional losses will greatly exceed the additional gains; Moreover, the higher the leverage ratio, the higher the financing interest rate, and the more obvious the amplification effect of leverage on losses.

Therefore, when we use leverage, we can't unilaterally see the magnifying effect of leverage on profits, but also see that leverage has a particularly large magnifying effect on losses.

The leverage that will lead to passive liquidation here mainly refers to those on-site leverage with liquidation line and off-site leverage with fixed repayment period that cannot be extended. When the guarantee ratio is lower than the liquidation line or repayment is needed at maturity, either a strong man breaks his wrist or passively liquidates his position.

The above-mentioned big V exposed positions should all be caused by the on-site leverage of passive liquidation. Historically, even those investors with high IQ have not been spared. Long-term Capital Management Company, which won two Nobel Prizes in Economics, borrowed a lot of bank loans to operate because of its high leverage. It suffered heavy losses during the 1998 Asian financial turmoil and the default of Russian national debt, with a loss of more than $4 billion in four months. To make matters worse, at this time, the banks came to constantly collect debts, which once made the "long-term capital management company" on the verge of bankruptcy.

Even though the two Nobel Prize winners in economics later learned their lesson and made a comeback, they set up Platinum Mulin Asset Management Company, which was much more cautious, and the leverage ratio of debt equity was only one tenth of that before, but they still did not escape the failure caused by the wrong bet on Lehman Brothers investment bank in the 2008 financial crisis.

There used to be a saying: "Leveraged funds are like oxygen. Under normal circumstances, we will not pay attention to its existence, but once extreme conditions lead to insufficient oxygen, it will be enough to kill us. "

In an open letter to shareholders on 20 17, Buffett once again emphasized avoiding investing with borrowed money: "In my opinion, it is crazy to risk your wealth for something that doesn't belong to you (implying leverage). Even if you order to double the value of your net investment in this case, you will not be happy."

Although the lure of leverage is really attractive enough, it is irresponsible to put your family at risk in pursuit of a little extra profit.

So is there any way to enjoy the temptation brought by leverage and avoid the danger of leverage? To this end, we have designed the following principles.

I believe that many people who have used leverage will have an illusion after a long time, that is, they will gradually take the borrowed money as their own money. Since it's my own money, I don't want to pay it back as soon as possible, but I want to stay in the stock market and continue to get more benefits.

This has caused the following situation: when the stock market was at a high point, I was reluctant to sell shares, lost leverage and missed the best opportunity. While the stock market continued to fall, I was even more reluctant to sell shares and fell into hell step by step.

So I think the first principle of using leverage is to always treat borrowed money as someone else's money instead of your own, and accept it as soon as you feel good!

First of all, what is extreme fluctuation? Judging from the historical bear market data of A shares and Hong Kong stocks (see: bear market, is the stock still worth owning? ), the maximum range from the peak of the bull market to the bottom of the bear market is close to 80%.

Secondly, the so-called anti-extreme fluctuation here refers to avoiding the occurrence of passive liquidation, that is, even if there is an extreme continuous decline, it will not lead to passive liquidation.

In addition, due to the different liquidation rules of different brokers, targeted planning is also needed. For example, the closing line generally adopted by A-share brokers is the guarantee ratio of 1.30%, while the closing line adopted by Yingtong Securities considers both the margin ratio and the borrowing leverage.

The following is my calculation of the maximum leverage under different calculation methods and different fluctuation ranges.

Table 3: Maximum leverage that can withstand different fluctuations under the calculation method of A-share guarantee ratio

Table 4: Under the calculation method of 4:IB maintenance margin, the maximum leverage that different maintenance margin ratios can resist different fluctuations.

For example, according to the data in Table 3 and Table 4, if we predict that there is still a 60% possibility of the current position decline, then the maximum safety leverage of the A-share credit account position is 1.444 times; For IB positions, if the average holding margin ratio is 25%, then the maximum safety leverage is 1.429 times.

Principle 2 is a leverage plan made without any capital replenishment, but if we have continuous cash flow or other financing capacity at any time, then we are not afraid of extreme fluctuations at all, and even the more we fall, the happier we are, because it means that we have the opportunity to buy cheap goods at a lower level.

Just like Buffett's Berkshire company mentioned at the beginning of the article, it uses insurance floating funds to establish "permanent leverage". During the 1974 stock market crash, Berkshire used insurance funds to raise a lot of money at the low level of the stock market until its capital could not be digested. According to statistics, except for a few unlucky investors who entered the market at 1974, the returns of others were all above 75%. This should be Buffett's famous saying "others are afraid of my greed".

Of course, for us ordinary people, it is too far away to establish "permanent leverage" with insurance floating funds like Buffett, but we can also establish our own cash flow, which can be a salary or any other possible income; You can also set up your own financing channels, which can be loans from relatives and friends, bank loans and so on. The opportunity has come, it's time for the Eight Immortals to cross the ocean and show their magical powers!

When analyzing the temptation and risk of leverage, we can see that a very important factor affecting leverage amplification is financing interest rate. With the same leverage ratio and return on investment, the difference between 8.35% financing interest rate and 2% financing interest rate is obvious. The higher the financing interest rate, the smaller the additional income and the greater the additional loss.

In addition, for A-share leverage, it is also necessary to consider that cash flow should cover the payment of financing interest to avoid the embarrassing situation of selling shares and paying interest; Interest on IB leverage will accumulate in the loan, pushing up the leverage ratio, so we have to pay attention to whether the leverage ratio is beyond the safe range.

In the aforementioned case of "Platinum Mulin Asset Management Company", we can see that due to the high concentration of its positions, once the Black Swan incident happens to Lehman Brothers, its heavy position will have irreparable consequences, even if its leverage has been reduced a lot, liquidation is inevitable.

Especially after the lever is used, once the extreme situation occurs, its amplification effect on the loss is enough to become the last straw to crush the camel. Relatively scattered positions can effectively avoid the extreme impact of the Black Swan incident on the overall position.

The time of deleveraging may occur in the rising period when it is good to close the position, or it may happen in the falling period when a strong man breaks his wrist. This is a classic example. The two big V's on the snowball have removed the lever.

"Qingyishan Chang" chose to pay off the financing at 4500 points on 20 15 in the last bull market; In the skyrocketing at the beginning of this year, I also chose to sell stocks several times and pay off the financing.

"HIS 1963" In the bear market of 20 15, when the guarantee rate approaches 150%, a strong man will break his wrist to deal with PUFA, even if PUFA will stop trading the next day; Not long ago (July this year), when the Agricultural Bank of China fell to a low point of 3.3, it chose to cut its meat and reduce its position by 5%, just to get the guarantee rate back to more than 200% and let itself sleep more practically.

As for the timing of adding leverage, it mainly depends on your own judgment on the market: how big is the further decline and what is its probability? Then, as stated in principle 2, you can choose the appropriate safety bar according to your own judgment.