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Should You Ever Use Margin?
Percy writes, “Is it ever justifiable to use margin short term until you can inject necessary dollars in order to take advantage of a great buying opportunity?”
Margin is when you borrow money against the value of your brokerage account. You’re just borrowing money, and paying interest to your broker (instead of some banker). Some investors, but mostly traders, use margin in order to buy even more stocks than
they normally could afford.
In general, we counsel strongly against it at The Motley Fool. You’re going to borrow more money than you have, in order to put that into stocks, and in our experience most people (I’m going to say 89%) who do that are motivated by a gambler’s mentality. If and when that stock doesn’t work out, they’re really in trouble at that point; low on both dollars and credit, they end up having to sell out some other good positions to pay back their margin loan.
So no, we don’t generally advise using margin.
That said, it can be an effective tool when used dispassionately by people with experience and deeper pockets. For example, if in your well diversified portfolio you fully own all the stocks and cash in it and then borrow a small amount against that (say, 5% of the account’s total value), you are not substantially endangering individual positions or the account at large…. Are you doing so conservatively, and to further diversify the portfolio (as opposed to load up on one position)…? Are you extremely confident you will not be swayed by exaggerated up or down cycles in the markets?!
If so, this approach would juice your long-term returns through most market environments, and almost certainly over the course of a lifetime of investing. It’s simple math.
Dear reader, look again at Percy’s question kicking off this short essay: Which type of investment do you think Percy is contemplating? Which type of investor above is Percy?
(Do you see that phrase “short term”?)
That language to me is suspect. Percy, I don’t know you personally, but I’m guessing I’d count you among the 89%….
Percy writes, “Is it ever justifiable to use margin short term until you can inject necessary dollars in order to take advantage of a great buying opportunity?”
Margin is when you borrow money against the value of your brokerage account. You’re just borrowing money, and paying interest to your broker (instead of some banker). Some investors, but mostly traders, use margin in order to buy even more stocks than
they normally could afford.
In general, we counsel strongly against it at The Motley Fool. You’re going to borrow more money than you have, in order to put that into stocks, and in our experience most people (I’m going to say 89%) who do that are motivated by a gambler’s mentality. If and when that stock doesn’t work out, they’re really in trouble at that point; low on both dollars and credit, they end up having to sell out some other good positions to pay back their margin loan.
So no, we don’t generally advise using margin.
That said, it can be an effective tool when used dispassionately by people with experience and deeper pockets. For example, if in your well diversified portfolio you fully own all the stocks and cash in it and then borrow a small amount against that (say, 5% of the account’s total value), you are not substantially endangering individual positions or the account at large…. Are you doing so conservatively, and to further diversify the portfolio (as opposed to load up on one position)…? Are you extremely confident you will not be swayed by exaggerated up or down cycles in the markets?!
If so, this approach would juice your long-term returns through most market environments, and almost certainly over the course of a lifetime of investing. It’s simple math.
Dear reader, look again at Percy’s question kicking off this short essay: Which type of investment do you think Percy is contemplating? Which type of investor above is Percy?
(Do you see that phrase “short term”?)
That language to me is suspect. Percy, I don’t know you personally, but I’m guessing I’d count you among the 89%….
Market Capitalization
Do you already know and understand the boring title of today’s blog? If so, pass Go and (Monopoly-style) collect $200. In other words, you’re outta here. See you tomorrow.
If you don’t… this blog’s for you.
Market caps are the real price tags of companies. The math is simple. You multiply two numbers:
Market capitalization = Share Price x Total Number of Shares Outstanding
Most people only focus on share prices. Like Meta Platforms today, they see: “$752.” But that’s just one multiplicand! How many shares of ownership exist? (Look it up at Fool.com: $META has 2.51 billion shares*.)
Ready to do your first market cap?
$752 x 2,510,000,000 = $1.89 trillion
Meta Platforms, the former Facebook, is a trillion-dollar company. And now you know why. It’s as simple as realizing that every pie slice is a certain size (e.g., “752”), but what’s critical is: How many slices are there? This is where novices fall down. They don’t even know to ask.
Market cap gives you a quick read on every company’s size. You may see two stocks trading at $752 a share, but one may have a $1 trillion market cap, the other just $1 billion. Most people only see the $752, not recognizing that one of the companies has 1,000 times more shares and is thus 1,000 times larger than the other. They’ve never learned market capitalization.
Indeed, when investing greenhorns see “$752,” they’ll often think “too expensive” and opt instead to buy some penny stock trading at 75.2 cents. That’s the number one reason people buy crummy stocks, because they supposedly look “cheap.” Only looking at the share price and thinking “buy low,” they spend their precious savings on junk.
I favor Rule Breakers with a market cap sweet spot of $5B-$25B. They’re still small enough to have big growth ahead, but big enough to actually realize that growth! I would so rather buy a $100 billion market cap, than a $100 million one.
So now you know, please know, your market caps!
(Help yourself out; come join us and play The Market Cap Game Show.)
*All numbers are as of August 26, 2025.
Why Investing & Money Are Undertaught
Having spun 57 full revolutions around our sun, I believe I am now sufficiently experienced to reflect on…
… Education.
I received it. I have paid for it. I have watched it, and provided it. Let’s talk about it:
Education.
What we are teaching our children. What we may not be teaching our children.
From our earliest day starting The Motley Fool, it was evident that our key focus — Investing & Money — was even more important because of the dearth of education on these key lifetime topics.
Why aren’t Investing & Money consistently taught or made compulsory at any level, nationwide? Feels outrageous. A huge miss. Very few topics seem more important for our whole lives as well as the prosperity and health of our families and our society than Investing & Money.
“Why do we not teach this to our kids?!” we asked as part of our Fool Community Foundation research. We studied that. We now know:
Because not enough teachers feel sufficiently educated and competent on the subject to teach it.
That is what we’ve learned: We’re not preparing our kids for financial success in their lives because, in essence, we adults don’t ourselves understand this…
Ouch!
Fortunately, there are many ways to self-educate about every Investing & Money topic under the sun. You could use our free resources at Fool.com, you could just Google any term you’re unfamiliar with, you could page around Wikipedia or Investopedia, you could have a chat with ChatGPT. And these are just the free stuff. There are premium experiences around any topic — from picking a better credit card to doing your will — that are very helpful and in some cases entirely necessary. Not the kind of thing you’d ask a school to teach.
In my follow-up to today’s blog, I want to move from Financial Education (my focus today) to a list of a dozen or so other topics that absolutely should be taught in school… but don’t seem to be. Let’s call it not School, but The Un-School.
What topics not taught today in schools should be? What’s the curriculum for The Un- School?
The Friend of My Friend Igor
Fool HQ once had a summer investing intern named Igor. Igor was a very talented Russian American who brought along his own investing smarts. I wish every 19-to-20-year-old was as thoughtful, as energized, and as wise beyond his years about money.
I asked him, “How’d you get started, Igor?”
“I had a mentor who got me started investing. He was a guy a year ahead of me at college… The funny thing is, he’s no longer investing!”
His friend had exhibited two distinctive tendencies with his investing, Igor conveyed: The first was he loved to find very early, so-called “development-stage companies.” These are companies that not only don’t have profits, but in some cases they don’t even have revenues. His friend’s passion about these kinds of companies had inspired him to teach others — like Igor — about investing.
The second was he loved to go almost all in when he invested. He was a so-called focused investor. He had very few companies. When he found something that he liked and he believed in, he would pile what you and I might think of as an alarmingly high percentage of his money into those few ideas.
I replied, “I’m not surprised that your mentor is no longer still in the game.”
Play that approach forward a bit — that system — and it doesn’t take too long to see what happens. Highly focused development-stage investors might get it right a few times… but when they get it wrong, they lose a lot of money. And when they’re specifically targeting early-stage, development-stage companies, it’s highly likely that a few of those aren’t going to play out so very well. Which means: They’re no longer investing.
Which is a shame! Because you have to love the passion. Young people are so advantaged in that the wealth they’re building will compound their whole lives long.
Picture a four-quadrant matrix where the vertical Y axis labeled “Company” goes from “development-stage” to “mature.” The X axis, labeled “Investor” goes from “all-in” to “diversified.”
Where is Igor’s mentor plotted?
Ah, but now we’re talking STYLE-BOXING. That deserves its own blog.
Style-Boxing
So, back to that 2×2 style-box explicated in the story of Igor’s friend: Its Y axis (labeled “Company”) goes upward from “development-stage” to “mature,” and its X axis (labeled “Investor”) goes rightward from “focused” to “diversified”…
Igor’s friend was a “focused investor” investing in “development-stage companies,” otherwise known as a recipe for disaster. There are other choices in that matrix. For instance, there’s a ton of money in big index funds today that track indices like the S&P 500. Those are obviously “diversified” investors — highly so — concentrating their capital in “mature” companies. That’s the very opposite of the matrix from Igor’s friend. On the other hand, venture capitalists invest in development-stage (or at least, earlier-stage) companies, but they diversify. That’s the box I identify with.
But that’s just one type of style-box.
You can invent your own. Morningstar did, and became a billion-dollar enterprise, in part, because of that. Famously, Morningstar created a 3×3 matrix for stock funds, gauging the size of market cap on one axis (small, midsize, large) and what it terms a fund’s “investment style” on the other (“value,” “blend,” or “growth”). While I often inveigh against “value vs. growth,” we certainly can’t argue with the overall helpfulness of Morningstar’s innovation. It’s ubiquitous, and has made the whole complicated world of investment choices a lot more intelligible.
As I say, you can invent your own style box. An entire industry of business consultants has done it, and the cliché is that often you want to be in the upper-right box, “the good one.” The Myers-Briggs women did it, building an industry of their own premised on 16 personality types.
And in my own way I have done it too, a simple 2×2 matrix that explains simply and clearly what makes the Rule Breaker investing approach tick, and why it wins. Creating simple style boxes is a worthy and illuminating exercise! So put on your Morningstar; summon your inner Myers-Briggs. And tune in next time for the secret style box of Rule Breaker Investing!
(Any guesses, dear reader, as to how my two axes are labeled?)
The Three Reasons I Sell Stocks
There are three reasons that I sell stocks. The first two are happy. The third one’s sad.
First, happily selling stock to buy a house, or put a child through school, or retire to financial freedom: That’s why we invest. ’Nuff said.
Second, sometimes I sell stock because I have something I like even more. We all have limited funds — we all have finite (but, one hopes, growing) resources. If there’s a stock outside your portfolio that you think would be great inside your portfolio (superior to something else presently in your portfolio!) that’s a great reason happily to sell.
That’s precisely what I wrote for the chapter on selling in our original book, The Motley Fool Investment Guide: Sell when you have a better place to put your money. I was in my twenties back then, and feel just the same in my fifties. You are operating here with a portfolio-level mentality. You’re thinking in terms of optimizing your portfolio, not getting caught up in the weeds of individual positions or target prices. Good on you.
“Are you invested today optimally going forward?”
That question helps some people decide to sell some loser stock they were hoping would get back to even. Instead, they redeploy the money into a much more promising company they’ve been jonesing for. The second happy reason to sell.
The sad, third reason I sell stock is very simply when the company has failed to live up to my past expectations and the expectations I have of that company going forward.
For example, in our Motley Fool Rule Breakers service we recommended ExOne, a small-cap company trying to do something really difficult (that’s not a good combo, by the way!): 3D printing in metallics. As the quarters wheeled past and the results and stock kept declining, we saw the error of our ways. Sadly, we sold.
It’s not easy, right? But the proof is usually in the pudding. If you decide, “Looking forward, I don’t think this is going to work out,” that’s a great (sad) reason to sell.
Three simple considerations becoming actions.
“Stocks Always Go Down Faster…”
“Stocks always go down faster than they go up, but they always go up more than they go down.”
Today’s thought — too long for a gravestone? — is one of my epitaph prospects.
It starts: “Stocks always go down faster than they go up…”
Whether in a day (October 19, 1987) or a month (the Covid crash of March 2020), market drops happen fast. With our instincts toward loss avoidance, we tend to panic out of things.
By contrast, bullishness — or, the persistent willingness of lots of people to propel a stock upward — isn’t triggered by single events. We need evidence to build over time. And so stocks go down faster than they go up.
But then there’s the second part, “… they always go up more than they go down.” Look at any graph of the American or global markets over time and the line runs lower left to upper right. The longer your view, the bigger the mountain.
That is the stock market’s truth… not over the last year perhaps, or the next, or some era cherrypicked by a market bear. That is the market’s truth over the period that matters: the long term. Your lifetime.
Yes, stocks go down! The average bear market, studies show, lasts about 18 months… usually a very un-fun 18 months. But two years in three, the market rises (… one year in three, it declines). You do the math… and play it forward! That’s why the average bull market lasts for years.
F. Scott Fitzgerald wrote, “If you can keep two opposed truths in your mind at the same time, that’s genius.” Today’s food for thought, bolded at top, asks each of us with Fitzgerald to show some genius.
The best way most of us are going to make the most money in our lives is to invest in the stock market, leave it in the market, and add more as we save going forward. That’s just as true today as 50 or 100 years ago.
Stocks always go down faster than they go up, but they always go up more than they go down.
The Rule Breaker’s Lonely Style Box
Last time I teased the style box that helps explain why Rule Breaker investing wins. Remember that style boxes oversimplify; they’re cartoonish views of the world. But when we make things as simple as we can (Einstein: “But no simpler”), we give ourselves a clarity that many others lack.
Here’s the style box I use to explain why Rule Breaker Investing works:
The Y axis, labeled “Timeframe,” goes upward from “short-term” to “long-term.” This is the holding period of your investing, with traders at the bottom and investors at the top.
The X axis, labeled “Company Type,” goes rightward from “predictable” to “innovative.” “Predictable” companies predominate the world of business, whether they’re operating oil fields or selling Dunkin Donuts. These companies stay within the defined lines of their industries and their core businesses. The “innovators” are the rare Rule Breakers.
For “Timeframe,” well more than half the financial world operates in a short-term timeframe. So if you’re fishing in the “long-term” pond, you’re already feeling lonely. For “Company Type,” well more than half the corporate world is not only predictable, most of it strives to be even more so! Businesses at scale that challenge the status quo, or completely unravel it, are few and far between.
Thus, if you’re investing in the quadrant of “long-term” and “innovative,” you are among a tiny subset of investors. Most of the long-term capital out there (e.g., the Buffett crowd) has been actively coached and reinforced to avoid innovation. Meantime, most of the “innovator” company stocks are highly volatile, “overpriced.” “Make your money fast before they blow up,” short-termers say, treating them as a “trade.”
Malcolm Gladwell has shown: The best way for David (here, individual investors) to beat Goliath (institutional investors) is by playing the game completely differently. Rule Breaker investors ironically serve as lonely fishers at the market’s most stocked pond. The fish swimming here are the world’s great innovators who’ll provide the most market-crushing long-term returns.
I love this pond, this style box! It’s enriched me, so much, in part because so few find their way here… to our quadrant.