Leverage is getting bad press since the market meltdown.
Traders use leverage to take positions that, if they are correct, will turn small returns into massive returns; on the other hand, a wrong move can erase their entire position.
It sounds scary and, used incorrectly, leverage can have disastrous results. But, we all have used leverage in one way or another. Whether it’s that lottery ticket you just bought, or the house you bought with a low down-payment, the philosophy holds: your small investment can leverage large amount of value. But, if you guess incorrectly, your investment can be wiped out.
But, for investors who have a high risk tolerance or a high probability of returns, leverage makes a lot of sense. In fact, for a sharp small investor, it’s one way to gain a step on the big investors and big investment houses.
In my opinion, if you know the risks and you want to use leverage, that’s your decision. What I find increasingly frustrating is that there were a lot of companies–with little or no transparency–who were (and probably still are) using leverage.
Of course, it was easy for these financial advisers to use leverage… it wasn’t their MONEY they were leveraging!
The point is, when I swing a hammer and smash my thumb, I always curse the hammer. But we all know who the curse should really be aimed at.