EC Picking Up Nickels In Front Of A Steamroller

Income investing is hard.

Let’s say you buy twenty bonds. Each of them yields 5%. Nineteen out of twenty mature at par and you get your money back, with interest. One of them defaults. You are back where you started!

It is said that income investing is a negative art. Your goal isn’t to pick the winners—it’s to avoid the losers. You want to pick winners, invest in stocks. Have you seen a chart of Beyond Meat (BYND)? Bonds generally don’t do that.

It is also said that income investing is like picking up nickels in front of a steamroller. You’re earning a 4-5% coupon, and you could get whacked pretty much any day, just like what happened at Toys “R” Us. It is a bit like selling puts.

My friend Jason Brady wrote the book on income investing. No really, he did write the book on income investing: Income Investing: An Intelligent Approach to Profiting from Bonds, Stocks and Money Markets. I have done a pretty good job summarizing it so far, but if I were you, I’d take the time to read the whole thing.

As a negative art, bond investing has become more and more difficult. Yields are slender, and they are not what I would call “safe.” We are at the peak of the cycle, the default rate is virtually zero, and getting 3% on XYZ high-grade corporate bond fund does not sound like a great idea. This is one reason why there has been such a historic rally in municipal bonds, pension nonsense notwithstanding.

Bond investors allegedly think about what could go wrong. I am a dour/pessimistic person, so I was always a bit out of place on the ETF desk.

What Could Go Wrong

I am far from the first person to worry about the corporate credit cycle. Nine months ago, people were flipping their lids about the preponderance of BBB credits and the potential ginormous migration to junk.

Never happened.

I know a few smart hedge funds who bet against all the paranoia. They did quite well.

The credit cycle will turn eventually. It will take a skilled portfolio manager to avoid the turds.

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