What's Up with Increased Margin-Buying Power?
Remember, leverage works both ways.
--Mostly Harmless by Douglas Adams
My Canadian online broker treated me to this sunny message today:
Increased Margin Buying Power Now Available!
At first I thought it was some kind of cruel trick but the font was green and large, punctuated by an exclamation point to drive home the excitement of this new development. Wasn't margin a way to gain leverage on investments? Leverage is a dirty word in the investment community. Leverage is what created the biggest financial catastrophe known to mankind. Why would the margin "buying power" be increased for over 1,000 securities?
My broker says leverage can:
1. Increase returns;
2. Provide tax benefits; and
3. Allow for greater flexibility and diversification.
There were some links below these points that I didn't click until after I started writing this. They mentioned things like risk. Clicking through to a third page led to a download of a 57-page PDF file of service agreements and disclosure. Who has time for legal mumbo jumbo when the market is moving?
And yet, I can still remember speaking at the San Francisco Hard Assets Conference last November, where one of the few investable themes was a list of companies that were trading at or below their cash values. Exeter Resources (XRA) was being admonished by analysts for insisting on drilling up its Caspiche property with a 9,300 m (30,500 ft) drilling program. Spending C$8 million on drilling with a treasury of "only" C$23 million was viewed as reckless. What would the company do in three years when all the cash was gone?
Exeter president Yale Simpson stood up at a dinner in the Machiavelli Room that evening (which was in the basement Kuletos, which seemed like a straight-up kind of place) and rebutted his critics by pointing out that the money Exeter was spending would create value for shareholders by proving up resources in a higher-grade portion of its deposit. Bigger companies were willing to pay for proved resources and he would be doing shareholders a major disservice by not proving the value of Exeter's assets. Back then the company's share price was ~US$1.50; yesterday it closed at US$5.55 (and they had C$34.4 million in the till as of June 30).
Turns out the market has a thing for companies with real assets after all. The romance is turning torrid.
Can I buy Exeter on margin?
As one colleague recently said when I first passed on an IPO: "Oh Jim, Don't think too hard on this one... ."
I'm trying not to think too much.
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