Why You Should Buy on Margin Ep 387

Summary Notes


In this informative session, Alexi, owner of acquisition.com, a portfolio of companies generating over $100 million annually, shares his insights on leveraging margin loans to attain financial growth. He explains how the ultra-wealthy use low-interest loans against their stock portfolios to finance purchases without incurring taxes, a strategy that involves borrowing up to 65% of the stock value at rates as low as 1-2%. Alexi emphasizes the importance of using Google to find answers to financial questions and warns of the risks associated with margin loans, such as potential market crashes that could force the sale of assets. He advocates for conservative borrowing and shares his personal preference for minimal leverage, prioritizing freedom over additional wealth. Alexi concludes by encouraging prudent financial practices and offering his book as a resource for entrepreneurial success.

Summary Notes

Wealth Accumulation Strategies of the Ultra Wealthy

  • Ultra wealthy individuals utilize stock investments to borrow against, allowing them to increase their wealth without paying taxes.
  • They keep borrowing against the increased value of their stocks year over year until death, avoiding taxes on capital gains.
  • This strategy involves getting low-interest rate loans, referred to as margin loans, to finance further asset acquisition.

"Gets the stock, they buy stuff. And the amount that the stock goes up year over year exceeds what they borrow, and they can borrow more. And they keep doing that until they die and never pay taxes."

This quote explains the core concept of how the ultra wealthy use the appreciation of their stock investments to continually borrow more money, thereby growing their wealth and avoiding taxes on those gains through this cycle.

Access to Low-Interest Loans

  • Having a relationship with established banks or wealth management firms like Merrill Lynch can lead to access to asset-backed loans.
  • These loans are typically offered at a percentage of the total assets in the portfolio, often ranging from 50-65%.
  • The interest rates on these loans have historically been very low, around 1-2%, and do not involve closing costs, fees, or other startup expenses.

"And so that means that if I had $100,000 and I had 65% that I could take as a loan, then I could get an additional $65,000 at one to 2%, which is crazy, mind you."

Alexi is highlighting the practical example of how one can leverage their stock portfolio to get a low-interest loan, emphasizing the significant amount that can be borrowed and the exceptionally low cost of borrowing.

The Role of Acquisition.com

  • Alexi owns Acquisition.com, a portfolio of companies generating over $100 million a year.
  • The purpose of creating content is to help people avoid financial struggle and to encourage them to ponder deeper life questions once financial stability is achieved.

"I own acquisition.com. It's a portfolio of companies over $100 million a year. I make these because a lot of people are broke, and I don't want you to be one of them."

Alexi introduces his business and the motivation behind sharing financial strategies, which is to assist others in overcoming financial hardships.

Personal Financial Journey

  • Alexi shares his personal experience of being broke for a long period and how it was an unpleasant experience.
  • His content aims to help others avoid or escape financial difficulties.

"And I, too, was broke for a very long period of time, and it sucked."

This quote provides a personal touch, as Alexi shares his past financial struggles, creating a relatable backdrop for the advice he offers.

Margin Loans as a Financial Tool

  • Margin loans are a type of revolving credit line that can be used to purchase additional assets.
  • These loans offer flexibility with no additional costs other than the interest, which stops once the loan is repaid.

"How do I get one to 2%? Loan loans, or as they call them, margin. Right. Loans on margin to buy shit. Right. Or buy more assets or whatever."

Alexi describes margin loans as a financial instrument for acquiring assets at a low interest rate, outlining the advantages of such loans for wealth expansion.

Buying on Margin

  • Buying on margin refers to the practice of borrowing money to make a quick purchase of stocks and then selling them.
  • It is a technique that can be used to leverage investments but comes with risks.

"That is how you do buying on margin."

This quote explains the fundamental concept of buying on margin, which involves purchasing stocks with borrowed funds.

Using Google for Answers

  • Alexi emphasizes the importance of using Google to find answers to questions.
  • He demonstrates how to search for information on taking loans against stocks.
  • The process involves looking up financial institutions that offer margin loans, such as Fidelity or Robinhood.

"Google. All right, so take loans against stocks."

Alexi is showing how to use Google to search for information on how to take loans against stocks, highlighting the accessibility of such information.

Applying for Margin Loans

  • To apply for a margin loan, one simply needs to apply with their banking institution.
  • Alexi mentions that most banks offer margin loans, and he uses Fidelity and Robinhood as examples.
  • With Robinhood, upgrading to Robinhood Gold is necessary to borrow on margin.

"And if you wanted to borrow on margin, apply for margin. That's all you have to do."

This quote provides a straightforward instruction on how to proceed with applying for a margin loan.

The Importance of Self-Research

  • Alexi stresses the significance of actively seeking answers rather than just asking questions.
  • He criticizes the habit of not following through with finding answers, which can be detrimental to one's financial literacy and progress.

"One of the best ways to stay poor is to have a question and then not google the answer."

Alexi is conveying that not taking the initiative to research and find answers can hinder personal growth and financial success.

Tax Benefits of Margin Loans

  • Margin loans can be tax-efficient as they allow borrowing against stocks without incurring income tax.
  • This strategy is often used by the ultra-wealthy to finance their lifestyles without selling their stock holdings, thereby avoiding taxes.

"And so the reason that this margin based loans, things like that are useful is that they are tax free."

The quote explains the tax advantage of margin loans, which do not incur income tax on the borrowed amount.

Risks of Margin Loans

  • The risks associated with margin loans include the possibility of market downturns affecting the value of the borrowed amount.
  • Alexi mentions that the loan-to-value ratio can vary and is dependent on factors such as portfolio size and tenure with the financial institution.
  • He references M1 Finance as an example of a platform that offers a certain percentage for margin loans.

"Now the risks, so the risks of doing this are that, let's say for some reason you borrowed at..."

This quote introduces the topic of risks involved in margin loans, setting the stage for a discussion on the potential downsides and what could happen if the stock value decreases.

Margin Lending in Business

  • Margin lending involves borrowing money to invest in the stock market, typically 30% to 60% of the portfolio's value.
  • If the market crashes and portfolio value drops, the borrower must adjust the loan to the new value or face selling off assets to cover the debt.
  • Alexi has used margin for short-term investments, like private lending for hard money loans, ensuring the loan against another asset.
  • At the time of speaking, Alexi has zero debt, valuing financial freedom and the ability to sleep well at night over having more money.

"And so let's say that you took out a 60%, you max this puppy out right on your $100,000."

This quote explains the process of taking out a maximum margin loan based on the value of one's portfolio.

"So you took 60, right. And now your portfolio is worth 50. Well, to be in accordance with the risk tolerance that they have, you need to be 60% of the new $50,000 value, which means that's $30,000 is what you're allowed to borrow, which means you have to pay back the 30 of the 60 that you borrowed originally."

Alexi is describing a scenario where the market value drops and the borrower must repay part of the margin loan to meet the lender's risk tolerance requirements.

"I tend to use margin for very short term type things. So like six months, twelve months, transaction stuff."

Alexi shares his personal strategy for using margin loans, emphasizing their utility in short-term transactions.

Alexi's Personal Financial Philosophy

  • Alexi prioritizes financial freedom and peace of mind over accumulating more wealth.
  • He has repaid any margin loans used in the past and currently holds no debt, including a mortgage.
  • Alexi subscribes to Dave Ramsey's philosophy that debt increases risk over time, which can potentially lead to total financial loss.

"And for me, the objective of money was freedom, not more money."

Alexi clarifies his personal financial goal, which is to achieve freedom rather than simply increasing his wealth.

"I have zero debt, not even a mortgage. And you may be like, Alex, you're crazy, probably. But for me, I sleep really well at night knowing that I just don't owe anyone anything."

This quote reveals Alexi's current debt-free status and his belief that it contributes to his peace of mind.

"Dave Ramsey said that really resonates with me. He said, I'm paraphrasing that debt is a version of risk. And risk, if extended over a long enough time horizon, exposes you to zero, meaning you can lose it all."

Alexi expresses agreement with Dave Ramsey's perspective on debt and risk, highlighting the potential for complete financial loss when debt is carried over a long period.

Financial Risk Management

  • Alexi discusses the importance of not taking unnecessary financial risks.
  • He prefers to avoid leveraging too much to protect what he currently has.
  • Alexi has built significant wealth without relying on high leverage.
  • He advises against using margin loans to the limit, suggesting borrowing significantly less.
  • The strategy is to maintain financial stability and avoid the risk of margin calls.

"I would rather not sacrifice what I do have and that I do want and need for more of something that I don't want or necessarily don't need, because me doubling my money makes no difference in my life, but me losing all my money makes a very big difference."

This quote emphasizes the idea that the potential gain from taking financial risks is not worth the potential loss, especially when the loss could be devastating.

"I am very, very under levered in general. All right? And so I have run my life that way, and I focused my life on increasing the value of the assets that I have and just continuing to do that rather than juice everything through debt."

Alexi explains that he has achieved financial success by focusing on increasing asset values rather than using debt to amplify his investments.

"My recommendation to you, as a final parting words and disclaimer around this is that if you are going to partake in this risk, okay, because it is risk, borrow significantly less than the limit, all right?"

The recommendation is to minimize risk by borrowing much less than what is allowed when using margin loans, to avoid the dangers of a market downturn.

Market Dynamics and Investment Strategy

  • Alexi believes in being cautious and not following the crowd in financial markets.
  • He points out that excessive borrowing can lead to forced selling at market lows.
  • This forced selling can contribute to market crashes.
  • His strategy is to be in a position to buy during market lows, not sell.
  • The goal is to have financial outcomes that are different from the majority by not participating in common risky behaviors.

"The moment when they get you to sell it is the moment when it's worth the least, all right? So you get double hosed, so you lose the power of the money that you had, and then you have to sell stuff at a massive loss."

Alexi warns that margin calls can force investors to sell at the worst possible time, resulting in significant losses.

"And that's what crashes markets. A lot of people borrow that way, and that's when they ride the bull and bear cycles."

He explains that widespread borrowing and forced selling during market downturns can exacerbate market crashes.

"And we want to be little smarter and try not to do what everyone else is doing so that we can have what no one else has."

The strategy is to avoid common mistakes made by the majority of investors to achieve unique financial success.

Personal Reflection and Growth

  • Alexi acknowledges that his views on leveraging and risk might change as he gains more experience.
  • He is open to the idea that he may look back and think differently about his current strategies.
  • Alexi emphasizes the importance of learning and growing over time.

"And maybe I'm silly, which is very possible. And maybe when I'm 60, I'll think that I was an absolute idiot for thinking that way. It's very possible. Because you know what? We learn things and we grow."

This quote illustrates Alexi's humility and openness to the possibility that his opinions and strategies may evolve as he learns and grows.

Community Engagement and Purpose

  • Alexi expresses his enjoyment in creating content and engaging with his audience.
  • He motivates his listeners to aim for higher financial goals.
  • Alexi suggests that by sharing his insights, he hopes to help others succeed and potentially collaborate with them in the future.

"I make these because I enjoy it, apparently. And I do this because maybe some of you guys will crush it and cross 3 million or 10 million and want to work with us@acquisition.com."

Alexi shares that his motivation for creating content is both personal enjoyment and the potential to help his audience achieve significant financial milestones.

"So keeping awesome. Love you all. See you in the next vid. Bye. You."

The closing statement reinforces Alexi's supportive relationship with his audience, encouraging them to continue striving for success.

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