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The core of the discussion revolves around investment leverage, specifically the use of margin debt in brokerage accounts. John explains that margin allows investors to borrow money to buy stocks, potentially amplifying gains but significantly increasing risk. A major risk is the potential for margin calls during market downturns, which can lead to substantial losses or even being wiped out. While other forms of leverage exist (like options), Uncommon Sense Investing primarily discusses and uses margin.
John emphasizes that Uncommon Cents Investing uses margin cautiously and only for select clients. These clients typically have already maximized retirement savings and have extra money they do not need, understanding the risk of losing the entire margined investment. He notes that tax law changes have reduced the ability to deduct margin interest. John advises that understanding the risks and being able to handle asset fluctuation is crucial before using leverage. The firm also highlights its use of individual stocks to minimize fees and differentiates strategies between retirement and non-retirement accounts based on tax implications.