This morning The Wall Street Journal tells the story of Harvey Hajiyan, a financial adviser who has been making big bets in the market on margin. In speaking to the Journal, Hajiyan said a phrase that should be a warning bell to any investor “all the strategists agreed.” Any time everyone is in agreement on something, you should pick your head up and take note. Someone isn’t pricing in risk properly, and if you’re just coasting along with the crowd, that someone is you. Use Mr. Hajiyan’s tale as a reminder of what happens when investors put greed too far ahead of fear. The Journal‘s Michael Wursthorn and Chelsey Dulaney write:
Harvey Hajiyan, a 35-year-old financial adviser who lives in Toronto and has been investing for more than a decade, assumed stocks would continue to grind higher this year, similar to the gains the Dow and the S&P 500 had posted for much of the past two years without a pullback.
“All of the strategists agreed the market would go up,” said Mr. Hajiyan.
At the end of January, he placed an ill-timed bet and used only margin to fund a large position in the ProShares Short VIX Short-Term Futures exchange-traded fund (SVXY), which rises as long as stock prices remain stable. When the S&P 500 fell into correction territory to erase one of its best starts in years, Mr. Hajiyan’s investment in the ProShares fund tracking expected market swings was nearly wiped out, forcing him to liquidate hundreds of thousands of dollars of securities to answer the margin call.
“I was in denial,” said Mr. Hajiyan after he realized he lost about 600,000 Canadian dollars (US$472,260) worth of his C$1.1 million investment portfolio.
Some brokerages have taken steps to protect investors who use margin debt from investing in highly risky strategies that contributed to steep losses. Bank of America Corp.’s Merrill Lynch, for example, had already instituted a ban on allowing its customers to invest in exchange-traded products that track swings in volatility. E*Trade Financial Corp. recently decided to raise the margin requirements for clients who invest in the iPath S&P 500 VIX Short-term Futures exchange-traded note, essentially requiring clients to use their own cash to trade.
Read more here.
E.J. Smith - Your Survival Guy
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