True Confessions - Brief Article

Kiplinger's Personal Finance Magazine, June, 2000

MARGIN CALLS | The danger of investing: with OTHER PEOPLE'S MONEY hits home ... hard.

I LEARNED MY lesson about the evils of buying stocks on margin on April 5, the day the Nasdaq and Dow each toppled more than 500 points before rallying. That's the day I got "the call"--the dreaded margin call from my broker, Charles Schwab. But that turned out to be only part one of my swift and humiliating education in the downside of leverage. After selling just enough of my highfliers to get my debt level under control, it happened again. On April 14, Free-fall Friday, I received Margin Call number two.

Actually, my margin call came via e-mail. I already felt sick to my stomach watching my stocks descend inexorably. Then the folks at Schwab twisted the sword:

Dear Valued Client: Our records indicate that there is a maintenance call present for your account and that additional cash and/or securities need to be delivered immediately to bring your account equity back above the required minimum level. Charles Schwab & Co. Inc. reserves the right to liquidate securities in your account to rectify the shortfall should it become necessary.

In retrospect, I admit that I succumbed to greed and hubris, betraying the principles of responsible investing by playing the market with borrowed money. Throw in sloth if you count the many minutes (okay, hours) of distraction at work watching real-time quotes stream across my computer screen in all their glorious, vernal green and, later, in a sea of blood red. Worst of all, I did all this while, yes, gambling with my kids' college fund.

The road to ruin. I am a veteran Kiplinger employee (no names, please, I'm not ready to come all the way out of the closet) and an avid apostle of investing the Kiplinger way: with research, with diversification, with dollar-cost averaging, with ... money you actually have. Companies should have at least some earnings and solid prospects for growth.

That philosophy guided my first forays into direct stock ownership.

Then came March 2000. Watching tech stocks soar to the sun, something snapped. I could make a whole lot more money, I reasoned, using my margin account to buy even more stocks.

I bought USinternetworking and saw it explode from $43 to $72. Exodus Communications jumped from $142 to $180. In between meetings, I'd pop up the quote streamer (they call it the Screamer) and watch the profits (green, baby!) roll across the screen.

In my dazed delusion of invincibility, I went too far.

The day after MicroStrategy lost 60% of its value, I rushed in to snap up 100 shares at $95, and gleefully rode the rebound to $129. There were other stocks, but I won't go into the gory details.

Reality bites. You know the rest. After a rough March finish, April started with Microsoft's tumble. MicroStrategy fell to the $70s, then the $60s, and eventually to the $20s. My quote streamer was screaming red.

I watched the equity in my account--the actual value of my account after subtracting my margin loans--sink to 34%. The exact percentage that prompts a margin call depends on the broker's policy. I fell below the limit ... twice. And when the margin call comes, "the money's due immediately," a broker reminded me impatiently--even though Schwab usually allows up to three days to settle up. You can add cash or sell securities to prop up your equity.

I ended up doing both (both times)--being forced to sell some of my stocks when they were near their lows--and marching down to the Schwab office at the corner with my checkbook to cover the rest.

I've decided that it's time to go back and review the lessons learned over the years at Kiplinger and, uh, repay the rest of my margin loans as soon as possible. And banish the Screamer forever.