Congratulations on what I consider the best question so far.
Let's consider some debt/margin points :
1) Limit Margin
-although my broker allows me 70% margin, I work with a self imposed 40% limit
-Buffett advises to have either little or no margin, in order to avoid a forced sale at a temporary low price
-investors that are retired with no working income should have zero margin (which is NOT what I have seen in some retired clients who came to me from pedlars !)
-consider buying Riocan at $27 using 70% margin which is the typical investor strategy - compare that high risk to the significantly lower risk of buying at $12.15 using 40% margin
-low price combined with low margin = LOW risk
2) Monthly Cash Flow Portfolio's
-one of my primary investment criteria is to only buy investments that yield a minimum of 5%, ideally higher, ie pure growth investments such as RIM will never be found in my portfolio
-such a strategy over time, results in a portfolio throwing off significant cash every month
-during opportunities such as now, this cash is directed to low price / low margin buying
-as stock prices rise, monthy cash flow no longer goes to buying, but instead goes 100% to margin reduction
-ie by using limited margin, you are "pre-buying" stocks ahead of what you can afford today in cash, but getting today's prices
3) 8% Cutoff Point
-8%, which is my sustainable rate point that started this debate, also happens to be my cutoff point on Riocan (cut off points can vary by specific REIT)
-at $1.38 divided by 8% = $17.25, my clients and I will stop buying Riocan on margin, and instead focus 100% monthly cash flow on margin repayment
-even if my margin rate is still 5.5%, buying Riocan at less than 8% cash yield just does not provide enough "margin of safety" (key principle of Benjamin Graham who taught Buffett everything he knows)
-obviously, interest rates can rise, and even 40% margin buying involves some risk
-however, Mark Carney advised this week that short term rates are stable for more than 1 year ?
Great questions, great debate !
Bob Novoselac B.Admin., C.A.