According to a WSJ report, John Foley, the co-founder and former chief executive of Peloton faced repeated margin calls on money he borrowed against his Peloton holdings before he left the fitness company’s board last month. Peloton’s stock peaked in December 2020 at $160+ and is now trading around $9 today, an almost 95% drop.
In recent years, under the low interest rate environment, many people have used margin loans to finance large purchases or to make more investments. On paper, it’s a great idea. People can avoid paying taxes, keep control of their company and still buy all the shiny toys they want. They can also make their money work harder for them by leveraging up. But if it sounds too good to be true, it probably is. Things start to crumble when interest rates start to go up as rising interest rates put pressure on asset prices. And in the case of 2022, skyrocketing interest rates basically burst the asset bubbles.
People with margin loan balances are now facing a double whammy of high interest payments and a crashing net worth as the twice leveraged portfolio is crashing twice as hard. In the case of Peloton, their current stock price of $9 is not only a fraction of their peak price of $160 but is also way below their IPO price of $29 a share. In retrospect, having margin loans on volatile IPO stocks is a really bad idea. I personally know a good number of people who did not adequately diversify in the past few years and didn’t feel any danger until 2022. For them, it’s hard to take profits and pay taxes but it’s even harder to take losses and start anew. Their brokers might eventually do that for them and they are going to be wiped out. This really feels like a replay of 2000-2002. I was a junior engineer at Yahoo! (Yahoo! stock went down 95% during the period.) The stories I heard were almost exact parallels to what I am hearing today: Irrational exuberance and rampant speculation followed by margin calls, austerity and regrets. This time if the story follows what I have experienced in 2000-2002, things are probably going to get worse from here.
My portfolio crashed 80% back in 2000-2002. It turned out to be one of the best things that have ever happened to me. It taught me a great lesson of risk when I only had a 5-figure net worth. Things can really go down 80%, 90% or 100% and never come back up!! Seeing so many tech people losing so much money around me was gut wrenching. My main takeaway there was to not take risks for the money I don’t need and to not dwell on the past over the lost fortune. Losing money is not a big deal as long as people don’t lose their spirit. I believe 2022 will turn out to be a great year for many people in retrospect as going through the storms makes us stronger and wiser.
I lost all my capital in 2000 as a 16 year old all in on tech stocks. I learned only buy value names.
Then in 2008, my first year after university, I lost all my money buying the dip on an amazingly priced value stock that was pumping out cash, no debt and could literally buy itself at 2x price with cash on hand. How? Margin.
Another valuable lesson.
Ultimately, buy good names with staying power. Don't leverage yourself as it increases complexity of problem by introducing the element of time and market volatility.
Thanks for sharing your story and keeping this journal. I hope it helps save people some hard earned capital