I Gambled on Margin with MSTY – Will I Regret This Risky Move?

Gambling on a margin is a terrible idea, even if you’ve been on a bit of a lucky streak with a knack for spotting winners of late. Indeed, long-term investment and getting rich slowly, over the course of many years, is the far better way to go than something that could be highly regretful, such as borrowing money you don’t have to speculate on something that could leave you with nothing more than a few tears and a heaping pile of debt. 

In this piece, we’ll dig deeper into the case of a young individual who’s thinking about going YOLO (you only live once), betting on a margin on shares of the Yieldmax MSTR Option Income Strategy ETF (NYSEARCA:MSTY). Indeed, the MSTY is a wildly volatile investment on its own. By investing on a margin, one is effectively taking their risk above and beyond what even the bravest investors on Wall Street would be able to bear.

Gambling on a margin is a terrible idea, regardless of the security one seeks to invest in

Personally, I think it’s not advisable to go into debt to buy any sort of investment, even one that one deems as severely undervalued and long overdue for some sort of upside correction. While I’m not against speculating with a small part of your disposable income, provided you understand what you stand to lose, I just don’t think there’s a need to go into debt to do so.

In fact, I think one should already have a good amount of savings invested in index ETFs before one even thinks about pursuing a high-risk, high-reward type of opportunity that could easily go in either direction. When it comes to shares of MSTY, which are quite volatile, with shares more than doubling or getting cut in half on numerous occasions over the past two years, there’s a high risk of getting dinged on a “margin call” if one seeks to invest with borrowed money.

Indeed, forced liquidation can be like getting a sprinkle of salt in your wounds. You’re already deep in the red on a position, and the broker is coming up to you with the threat of forced liquidation. This could leave you sidelined once the next big recovery in the shares occurs. Personally, I think trading the MSTY can be a wise move for seasoned traders who understand the odds and use their own money that they can afford to part with. 

A piece of advice from Warren Buffett and Charlie Munger on the dangers of leverage

If one’s keen on trading an ultra-high-yielder like MSTY, I’d suggest avoiding margins at all costs. As the great Oracle of Omaha, Warren Buffett, once put it in a televised interview with CNBC, “It’s insane to risk what you have and need for something you don’t really need.”

Indeed, the late, great Charlie Munger, Buffett’s right-hand man, stated that leverage was one of three ways to go broke. And in the case of the individual who’s considering going into margin, I’d strongly advise against going against the words of Buffett and Munger, especially since the fees, forced selling, and other penalties could be stiff if a margin bet goes sideways over the near-term. Even if an MSTY trade were to go right over the medium term, a short-term fluctuation could be enough to spark a margin call, effectively standing in the way of what would have been an otherwise successful swing trade.

In short, I’d avoid levering up to make a trade at all costs, regardless of the security. Spend less, save money, and you’ll be able to invest or trade without having to run the risk of running face-first into a margin call, one of the worst calls a trader can get.