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As I mentioned in my previous blog entry about margin, I tried a little experiment to see if I could come out ahead by using a credit card balance transfer offer at 3.99% fixed APR. This APR would stay fixed at 3.99% until the balance was paid off in full and hence there were no immediate time constraints and I did not have to worry about margin calls.
I invested this amount in three stocks and one Exchange Traded Fund (ETF). I picked one international stock, one high dividend yielding stock and one high risk/return stock. All three stocks were featured in previous editions of InsideArbitrage. The high risk/return stock I picked was VA Software (LNUX) and it has provided the best returns to date with a gain of over 150%.
For the high dividend paying stock I picked Pfizer (PFE), which had already lost a third of its value and had just declared a 26% dividend increase. For the international stock I picked the Indian automobile company Tata Motors (TTM), which was featured in my December 2005 investment newsletter. While Tata Motors did not sport as high a dividend yield as Pfizer, its dividend yield of 2.3% (back then) was more than the average dividend yield of the S&P 500.
To add some diversification, I also bought the PowerShares Value Line Timeliness Select Portfolio (PIV) ETF, which I discussed in this blog entry. This ETF is the only investment of the four that I picked that is showing a modest loss right now. Given below is a table that has all the details of how this experiment has generated a return of 50% in little less than 9 months.
| Investment | Symbol | Purchase Price and Date | Portion Invested | Price Now (8/25/2006) | Change |
| VA Software | LNUX | $1.77 (Jan 4, 06) | 15.98% | $4.62 | 161.02% |
| Tata Motors | TTM | $12.08 (Dec 7, 2005) | 33.39% | $18.45 | 52.73% |
| Pfizer | PFE | $21.05 (Dec 12, 2006) | 29.12% | $27.23 | 29.26% |
| Value Line ETF | PIV | $15.52 (Dec 8, 2005) | 21.51% | $14.30 | -7.86% |
| Total Returns Including Dividends and Trading Costs ** | 50.25% | ||||
** I sold 46% of my stake in VA Software on May 23, 2006 @ $4.55/share
While my little experiment turned out well, using any kind of leverage is dangerous without understanding all the costs involved and what it really takes to break even or make a profit. After paying interest on your borrowed money and trading costs, you still have to pay capital gains tax on any profits you make. And finally there is a time cost involved, which depending on your situation can make or break the deal.