Back in March, longtime Fool Selena Maranjian told you how margin calls can hurt. Well, her examples are peanuts compared to the pain inflicted upon one of Fooldom's favorite CEOs in the midst of last week's meltdown.
Toward the end of the week, pretty much all E&P companies, from XTO Energy
I casually mentioned to some of my colleagues that Aubrey could be facing margin calls, because it was the only explanation I could come up with for the shares' savage treatment. I'm unhappy to say that I was exactly right.
Warren Buffett is quite well known for having virtually all his wealth tied up in Berkshire Hathaway
Those holdings -- and the well-deserved wealth underlying them -- have largely evaporated, as Chesapeake's steady share-price collapse ultimately required Aubrey to sell almost everything in order to meet loan calls. The volume of his selling without question triggered something of a vicious cycle.
Since co-founding the company with SandRidge Energy's
I think the lesson here for small investors is clear, but it’s worth making explicit: No matter how well you think you know a company, and regardless of how cheap it appears to be, buying on margin is a dangerous game.
Fool contributor Toby Shute doesn't have a position in any company mentioned. Berkshire Hathaway is a Stock Advisor selection and an Inside Value recommendation. Chesapeake is also an Inside Value pick.
The Motley Fool owns shares of Berkshire Hathaway. The Fool's disclosure policy will never face a margin call.