TD Ameritrade Holding Corp. (AMTD): 1 Big Problem With Margin Trading

Where’s Rick Guerin?

Have you ever wondered what happened to Warren Buffett and Charlie Munger’s third partner, Rick Guerin? Or maybe he’s so long gone that you’ve never even heard his name? Leverage had its way with him. As value investor Mohnish Pabrai told the Motley Fool in an interview, Buffett told him that “Rick was just as smart as us, but he was in a hurry.” Levered with margin loans, Rick’s ambition was his downfall.

What does Warren Buffett think about margin? The two lessons Pabrai took away from his lunch with Buffett both seemed to directly defy margin trading:

1). Avoid leverage.

2).Be patient.

Too bad Guerin didn’t understand these important principles. Forced to sell his class-A Berkshire Hathaway shares at a fire-sale price of less than $40 due to a margin call, he sold the very stocks he probably desired to load up on.

And who was there in the 1973 and ’74 downturn to buy Guerin’s undervalued Berkshire stock? None other than Warren Buffett himself. Free of leverage, he had cash on hand to load up on the shares he thought were a good deal.

Patience wins in the end

Margin kills. Margin prevents investors from having cash when it’s most useful. Don’t invest on margin. Instead, be patient. In doing so, you’ll empower yourself to buy when everyone else is selling.

I can’t think of any better motivation to avoid margin’s tempting lure than the advice Buffett shared with Pabrai: “If you’re even a slightly above-average investor who spends less than they earn, over a lifetime you cannot help but get rich if you are patient.”

The article 1 Big Problem With Margin Trading originally appeared on Fool.com and is written by Daniel Sparks.

Fool contributor Daniel Sparks owns shares of Apple. The Motley Fool recommends Apple, Berkshire Hathaway, and TD AMERITRADE. The Motley Fool owns shares of Apple, Berkshire Hathaway, and TD AMERITRADE.

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