Add This 'Crash Proof' Technique to Your Investing Toolbox
Editor's note: As 2025 draws to a close, we're celebrating the holidays by revisiting some of our favorite essays from our editors at Stansberry Research. They're full of timeless market wisdom and advice about how to grow as an investor. In today's Weekend Edition, we're kicking things off with help from our colleague Mike DiBiase...
In this piece, which we last shared in DailyWealth in December 2019, Mike explains one strategy every investor should know – and reveals why it can produce safer and even higher returns than investing in stocks.
Are you worried about where the stock market is headed next?
Do you think we're long overdue for a market crash? Or if not, do you wonder how to shield your portfolio from a sudden correction?
If you're anything like me, you do.
You can still stay invested for the upside while using a number of techniques to protect yourself against the potential downside.
You've read about many of them here in DailyWealth. They include things like raising cash... adding short positions to your portfolio... buying high-quality, capital-efficient companies... and closely following your trailing stops.
But today, I want to offer you another way to protect your wealth. Used correctly, it's another valuable tool to put in your investing "toolbox"...
How to Grow Your Wealth With Corporate Bonds
I'm talking about buying corporate bonds.
Before you stop reading, bear with me... I know bonds in general aren't considered "sexy." But I'm not talking about buying U.S. Treasury bonds or corporate bonds with sleepy 4% to 5% yields that barely keep up with inflation.
I'm talking about a little-known strategy that many of the world's wealthiest investors use. It's a way to earn equity-like returns with far less risk than investing in stocks. Most investors have never heard about this strategy, let alone considered using it.
You don't have to worry at all about a looming stock market collapse or an upcoming bear market, which could last for years.
The state of the stock market has absolutely no effect on the returns you can earn with corporate bonds.
That might be hard to believe. But with this strategy, you can sleep extremely well at night knowing your capital isn't at risk based on the market's whims.
Here's what I mean...
Simply put, a corporate bond is a loan made to a company. Companies need capital to run and grow their businesses. To raise capital, they can either issue new shares of their stock or borrow money. One way to borrow money is by issuing bonds.
Usually, bonds are initially sold in increments of $1,000. That's called their face value, or "par." So a company looking to raise $500 million will issue 500,000 bonds, each with a par value of $1,000 per bond. The company must pay back the full $1,000 par value – also known as the bond's "principal" – on the bond's stated maturity date.
Not only that, but the company also must pay you interest along the way. (Investors would have no incentive to lend money to companies if they received only their initial capital later.)
Interest is determined by each bond's stated coupon rate. The coupon rate is based on the par value. It's a fixed rate that doesn't change. For example, by purchasing a bond with an 8% coupon, you're entitled to receive interest of $80 every year ($1,000 par value x 8% = $80).
Bondholders are typically paid interest twice per year... So in this example, you'd receive $40 interest payments every six months.
Just like with stocks, individual investors can purchase many bonds in their brokerage accounts. And bonds don't necessarily require a large investment. You can often buy as few as two bonds ($2,000 face value) through your brokerage account.
Here's where it gets interesting...
Just like stocks, a bond's market price fluctuates. It can trade for far more or far less than its $1,000 par value.
But here's an important difference to remember: Unlike a stock, once you buy a bond, you are locking in your return. So the price fluctuations are less important after your purchase. That's the beauty of this strategy.
This is possible because investing in corporate bonds is vastly different from investing in stocks.
With a stock, the company doesn't legally owe you anything... not even a dividend.
But the company is legally obligated to repay a bond. It must pay you the entire $1,000 par value of every bond at maturity, regardless of how much you paid for the bond. It's also legally obligated to pay you all the interest owed along the way, and on time. It must pay... or it can be forced into bankruptcy.
This legal obligation and fear of bankruptcy is what separates bonds from stocks... and it makes them much, much safer.
Another important difference is that bonds are higher in the capital structure than stocks. That just means that even if a company is going through bankruptcy, bond investors get paid before stock investors from the sale of the company's assets (historically, they tend to recover around $0.40 on the dollar in these scenarios). Meanwhile, stock investors almost always get completely wiped out.
If you've been paying attention, two things should be crystal clear by now: One, the downside of bonds is much lower than that of stocks – because bonds rarely go to zero, even in a bankruptcy. And two, the upside of bonds is generally lower than that of stocks.
But here's the best part of the strategy: the very best time to buy corporate bonds is when the markets are tanking and fear is in the air.
In these circumstances, corporate bonds are extremely cheap, and you can enjoy the stock-like upside potential with none of the stock-like downside...
Remember... the bond issuer is legally obligated to pay you the full $1,000 principal, plus interest. But some bonds trade for big discounts to par – $800, $700, $600, or even less.
By buying bonds at distressed prices like this – what we call "penny bonds" – you can generate huge returns... as long as the company pays off the bond in full. Many of the world's wealthiest investors – like Howard Marks, David Tepper, and Seth Klarman – buy penny bonds to earn stock-like returns.
On top of that, you earn steady, predictable interest payments along the way. And here's another secret: The effective interest rate on penny bonds is much higher than the bond's stated coupon rate.
In other words, if you buy a bond for $800 that pays an 8% coupon, your effective interest rate on the bond isn't 8%... It's 10%. That's the $80 in annual interest payments divided by your $800 purchase price.
The key to this strategy is finding the safe distressed bonds... the bonds where the market got it wrong. That's what my colleague Bill McGilton and I do. We scour thousands of corporate bonds every month, looking for the one or two safe bonds that are trading at distressed prices and offering large yields.
The average annualized return of our closed positions in Stansberry's Credit Opportunities since November 2015 is 10%. That's not bad. It handily beats the high-yield bond market's 6.5% return.
But during market turmoil, our strategy really shines...
We were able to recommend 13 positions during two periods when the markets were collapsing. The average annualized return of those recommendations was 42%. That includes eight bonds we recommended during the COVID-19 crisis that produced annualized returns of 59%.
Investing in penny bonds is one tool every investor should have in their toolbox. It's a way to earn safe, outsized returns no matter what the market is doing. And it really shines when there is fear and turmoil in the markets...
Good investing,
Mike DiBiase
Editor's note: One subscriber was able to retire early at 52 thanks to one straightforward investment technique that has an 82% win rate since 2015. It's a dramatically less risky way to make money with some of the best companies in the world – all without touching stocks, options, or cryptos. And today, you can access a one-time offer to get started with this strategy for the lowest price in our firm's history.