Buying stocks with borrowed money doesn’t make anything a better investment or increase the probability of gains.

It merely magnifies whatever gains or losses may materialize. And then, leverage brings destruction if things go bad…really bad. And they often do.

Nassim Taleb says that we should judge people by the costs of the alternative, that is if history played out in another way.

As he wrote in his brilliant book Fooled by Randomness – “Clearly, the quality of a decision cannot be solely judged based on its outcome, but such a point seems to be voiced only by people who fail (those who succeed attribute their success to the quality of their decision).”

In the same way, be very careful of judging your stock market success by the outcome you achieve, but by the decision you made.

“Leverage can help me magnify my returns” is a great statement to make. But more often now, leverage – which is a result of arrogance created by good short-term returns or a result of survivorship bias, which is concentrating on the people or things that “survived” some process and inadvertently overlooking those that did not – will not only your destroy your savings and sleep, it will also destroy your reputation. (more…)