A Safe, Lucrative Investment Your Broker Isn't Telling You About
Editor's note: It's one of the great mysteries of our business...
Buying bonds is safer than stocks. And done right, it can make you more money... a lot more money.
Yet, despite our pleas, the vast majority of our readers will never do it.
Today's Masters Series is adapted from the February 16 Digest. In it, Porter discusses a real-life trade that led to 86% annualized returns for Stansberry's Credit Opportunities subscribers earlier this year...
A Safe, Lucrative Investment Your Broker Isn't Telling You About
How do I know that you can make more money, with less risk, buying bonds instead of stocks?
Well, because we've done it.
Our Stansberry's Credit Opportunities research product primarily recommends "penny" bonds – bonds that trade at large discounts to par value – and structures trades around opportunities that originate in the corporate-bond market.
Stansberry's Credit Opportunities shows you how to buy these bonds the right way... avoiding risky, overpriced bonds and instead searching for "outliers" – bonds that trade at large discounts to par value but are much safer than their price would suggest. These bonds offer large, safe capital gains in addition to the interest you get paid.
We launched this product in the fall of 2015 and gave it a well-deserved "A+" in our most recent Report Card. We've made 24 recommendations since then, closing 15 positions so far, with 13 winners (87%). The average annualized return on these closed positions is 33%. If you had bought the S&P 500 Index instead of the bonds we recommended at the same times, your annualized return would have been about half that (17%).
In other words, you could have nearly doubled the returns in stocks by using our bond research. You would have taken far less risk, too. The highest win percentage among our traditional stock-research products last year was True Wealth's incredible 70% winning percentage. But of course, Steve Sjuggerud is a truly rare and exceptional investor. Most folks buying stocks aren't going to see a 70% win rate.
And so, I'll put the question to you: If you know that you can make far better returns in bonds than in stocks... with far less risk... why aren't you primarily investing in bonds?
There's no good answer. But what most people will say is: "I don't know how to buy bonds."
And think about that for a second. A virtually unlimited number of brokers are happy to help you buy just about any stock you want, no matter how risky. They spend millions and millions of dollars advertising to you on TV and online to try their trading platforms. They urge you to trade early and often. Again and again. Always stocks.
Have you ever seen them advertise bonds? No.
And trust me, when you tell your broker that you want to buy a bond, even one that we've recommended and that you know a lot about, they will try their hardest to talk you out of it. They will even tell you that you're not qualified to buy. (So just ask them why they're willing to sell you the stock of the exact same company, a security that's by definition far riskier.)
Nobody will ever encourage you to buy bonds. Nobody will ever make it easy. Why is that? Just think about it. I'm sure the answer will come to you.
And there's another reason... Most individual investors don't buy individual bonds because they don't have the expertise to read all of the legal documents or to figure out the seniority of the different bonds. Well, problem solved. We do all of that hard work for you in Stansberry's Credit Opportunities.
You may be wondering, "How do we find good bonds to buy?"
We spend a fortune buying all of the data available in the capital markets. We've built our own proprietary database that includes each of the 40,000 separately traded corporate debentures. We focus on the 6,000 or so securities that have a large enough size and trading volume to be tradable. That's our universe.
We then assign each of these securities our own proprietary credit rating – yes, really. And then we look for anomalies between how we rate each security and how the major agencies (like Moody's and Standard & Poor's) rate them. About 97% of our ratings are the same. But every now and then, we find big differences.
That's how we found the Iconix bond I mentioned yesterday. We'd been watching that bond for almost two years. And we consistently rated it much more highly than the major credit-rating agencies. Why?
Well, as we told subscribers to Stansberry's Credit Opportunities, the unique and high-quality characteristics of the underlying business meant that it was extremely likely that additional financing could be found and that the bond in question would pay off at par.
Here's what we wrote back in early November...
Even though the price of our bond has recovered some from its Halloween collapse to around $770 today, the market clearly thinks Iconix is at risk of not being able to repay the full $236 million of principal of our bond. We're not nearly as worried...
We believe it's extremely unlikely that Iconix will file for bankruptcy...
By recommending this bond, we're betting that Iconix can come up with the additional $125 million it needs under the bank's conditions by next March.
With Iconix's portfolio of brands and strong cash flows, that shouldn't be a problem. The company can secure the $125 million in any number of ways... we believe Iconix will most likely attempt to sell some of its brands. Remember, the company has already sold some brands to reduce debt...
If Iconix sold all of its remaining brands [on the same terms], the company would net more than $2 billion.
That's enough to pay off all of its debt two times over. So we know selling assets is a strategy that will work.
We were exactly right... In February, a month before the bond matured, Iconix announced new financing. Subscribers who bought the bond were repaid in full. Folks who followed our advice made 31% on this bond in about four months – an annualized return of 86%.
And that's my biggest point. Investing in stuff that you can fully understand, that has defined timelines, precisely specific risks, and excellent opportunities for real profits... well... it's a much different kind of investing than most people are used to.
It's not like driving a race car. There aren't any big curves. It's more like a chauffeured limo. It's quiet. There's nothing to worry about. You don't even need to know where you're going. You're going to get paid, no matter what.
If you never take any other advice from me, do this: Try Stansberry's Credit Opportunities. It is the best, most valuable research we produce. And when you see how easy it can be to trounce the stock market's returns without taking anything like stock market risks, you'll never, ever, want to buy a stock again.
By the way... I'm sure you'll think this is all an exaggeration. It's not. We've transformed the investment lives of thousands of people with this product. Here's one of our Alliance members, Robert R., who wrote in about Stansberry's Credit Opportunities...
I want to highlight a recent recommendation from Credit Opportunities that is a prime example of the very high quality, high value add research that Stansberry provides.
Iconix, which has bonds maturing in March 2018, have been recently trading in the mid-$0.70s and was first recommended last November. After extensive research on this company, Stansberry concluded it was very likely the debt would be repaid. This morning [February 12] a plan was announced. The bonds will get paid at par on March 15th.
I started buying the bonds in November in the mid-$80s and bought all the way down to mid-$70s for about 25% return in a few months (annualized well north of 100%). It is quite impressive for Stansberry to sniff out an opportunity where one can make that kind of return and not take that much risk in the process. My Alliance Membership was one of the best investments I have made and this is just another reason why that is the case. Thanks for all of the great work!
If you're at all interested in bonds, the first thing to understand is that bonds have two qualities that make them much easier for outside investors to understand and profit from.
First and foremost, unlike common-stock investors, bondholders have strong legal rights to both their principal and their coupons (the interest payments).
Companies that try to screw over bondholders get completely destroyed.
Every corporate asset can be seized by a bankruptcy court and liquidated to benefit bondholders. Bondholders are no joke.
As a common-stock holder, you have virtually no protections from self-dealing boards and executives. The dividends you receive, if any, are completely at the whim of the board of directors. Bondholders, on the other hand, have a contract with the corporation that requires they be paid, or else.
Secondly, bonds are "binary." That is, there are only two possible outcomes for bondholders. The bonds will either pay off, in full, at maturity or else they will default. So their final price is either going to be "par" – typically $1,000 per bond – at maturity or some amount of capital in a recovery. As I mentioned, the average recovery on defaulted corporate bonds is about $0.45 on the dollar, or about $450 per bond.
In my mind, dealing with binary outcomes is a lot like "training wheels" for investors. No, you're not likely to make 10 times your money on a bond. But you're also not likely to lose everything either, provided of course, that you know what you're doing. Folks who treat bonds like penny stocks are likely to be sorely disappointed. You've got to know what you're buying, just with any other investment. But the risk-to-reward setup that's possible in bonds is frequently far superior to stocks.
Here's just one example of why... If a stock has crashed from $100 to $10, it probably isn't any safer to buy. Obviously, something is seriously wrong with the business. If the problem isn't fixed, it will go to zero.
But when a bond goes from, say, par to a "distressed" price of $0.50 on the dollar, it probably is a lot safer to buy, assuming an average recovery. Also, like Iconix shows, if the company has high-quality underlying finances, a bond can turn around a lot faster than a stock. It might take a stock that's fallen from $100 to $10 a decade to reach a new high. But that can happen for a bond overnight, as soon as new financing is established.
That's the power of being in a binary investment. And it's a big advantage for investors who understand how to use it.
All right... that's it. That's the best I can do. If you want a quieter, safer, and more rewarding path as an investor, consider studying bonds. Start with our research and branch out as you gain more experience and knowledge. You'll end up far wealthier than stock investors. The only trouble will be managing your boredom. Learn more about Stansberry's Credit Opportunities right here.
Horse, meet water.
Regards,
Porter Stansberry
Editor's note: As Porter explained in today's essay, Stansberry's Credit Opportunities readers made 31% in about four months on the Iconix bond. And they've identified another similar setup today that could return 50% in 10 months... regardless what happens to a "trade war" between the U.S. and China... or the rest of the stock market. Porter's team just put together a video presentation describing how these types of setups are possible in penny bonds just like Iconix. You can watch it right here.