The Year I Didn't Buy Stocks

Editor's note: The Federal Reserve finally cut interest rates last week. Now, the No. 1 question on every investor's mind is... What happens next?

As frustrating as it may be, it's too early to know where stocks are headed from here. But the good news for investors is that we don't need to know.

That's because today's setup is creating an ideal opportunity in an entirely different type of investment... one that's much lower risk than equities... and comes with a guaranteed income stream while you wait to get paid.

Today, we're sharing an updated version of a classic essay from Director of Research Rob Spivey. He details one of the most successful investments from his hedge-fund days... and how it led him toward a world of extraordinary opportunities outside of stocks.

The world was burning... and my portfolio manager looked like a kid in a candy store.

In late 2008, I was working on the 16th floor of a hedge fund in New York City. My portfolio manager's office had a massive floor-to-ceiling window that looked over New York Harbor, from Battery Park to the Statue of Liberty and on to Staten Island.

Sometimes, he'd call me into his office and we'd watch thunderstorms roll in from New Jersey. You could see the rain running across the water from one side of the harbor to the other.

But this time, the storm was coming from the opposite direction... just two blocks over and a little ways up the road from our offices, at the headquarters of the New York Stock Exchange.

Another analyst and I walked into the portfolio manager's office. And as I sat down and looked out those massive windows, he declared we needed to make a massive pivot.

Most of our time had been devoted to stocks thus far. But this approach just didn't look promising anymore...

In late 2008, stocks were in free fall. Lehman Brothers had gone under and AIG was in need of rescue. The stock market was a sea of red for months.

If memory serves me correctly, my portfolio manager had gotten a call from our broker at one of the big investment banks. They were desperate to move some high-yield bonds that no one was bidding on.

That was enough to pique his interest. You don't top the list of the world's best money managers 16 times by missing massive opportunities when they fall in your lap. So he sent my fellow analyst and me into the bond market to take advantage of the opportunity.

Since those days, I've come to learn setups like this only happen once or twice a decade... if that. And importantly, as I'll explain today, we're gearing up for a similar situation right now.

From September 2008 to March 2009, it felt like there was no bottom in the stock market...

The sky might as well have been falling for equity investors. And the bond market seized up, too... at first.

In November 2008, the average high-yield ("junk") bond yielded 19.6%. The U.S. government was borrowing at 2.3% during the same time.

Said another way, the market was betting that one out of every seven bonds would go bankrupt in the next five years. That hasn't happened in the past century – not even during the Great Depression.

The Lehman crash kicked off the craziest 45 days for the financial markets in almost a century. It took a moment for bond investors to catch their breath.

But once they did, they looked around... and saw paradise.

The S&P 500's average annual return has been a little less than 12% since its inception. Bond investors could now make almost twice as much. Better yet, unlike with stocks, their returns were legally guaranteed.

When the hedge fund I was working at saw this amazing setup, we completely shifted our strategy...

We found bargains left and right... like a bond from health insurer Coventry Health Care that paid a 6.3% coupon and matured in 2014. The bond traded for $0.59 on the dollar in the midst of the crisis. It yielded around 19%.

You were getting paid 11% per year from the coupon payment alone. As long as Coventry didn't go bankrupt, it was a guaranteed return equal to the S&P 500.

This wasn't a fly-by-night, unregulated shadow bank whose funding had dried up... or a small oil and gas company battling plunging energy prices. It was a regulated health insurance business with plenty of capital and a reliable customer base.

Coventry would have no issues making its interest payments and paying off its bonds. It had great asset backing if it ran into any problem.

And yet, it was trading like a company with a 1-in-7 chance of going under.

By 2012, the Coventry bond was trading well above par value... the original "face value" of the bond. Anyone who bought it at the height of the crisis more than doubled their money.

That included our hedge fund.

The Coventry bond was just one of many extraordinary opportunities during the 2008 financial crisis. And here's where it gets exciting...

It wasn't a once-in-a-lifetime setup.

In any recession, investors panic. They sell stocks and bonds blindly – both the ones that deserve it and those that don't.

A credit-market setup like this happens once or twice a decade...

And if you're patient, you can find incredible opportunities buried under the rubble.

We're headed toward another recession. The Fed just started cutting rates to stimulate the economy. Corporate defaults are rising. Consumers are struggling to make payments.

Banks are making it harder to borrow... and many corporations will need to borrow soon. If they don't, they'll go bankrupt.

The setup in stocks will get worse from here. But bond opportunities, like the one from Coventry Health Care in 2008, are already showing up. Investors who are willing to explore the world beyond stocks have a chance at healthy income streams and equity-like capital gains.

A year ago, we launched a research service completely focused on credit investments.

It's called Credit Cashflow Investor. And our approach is based on one simple tenet... With the right market conditions, it's possible to earn stock-like returns or better in the bond market.

As we go to press, three of our open positions are up double digits... while paying us a steady income stream as we wait for them to mature. (Of course, if they appreciate enough before maturity, we're happy to "ring the cash register" early.)

Plus, as I mentioned, bondholders' returns are backed by legal protections. So those high returns come with much less risk and a higher degree of predictability than you'd find in stocks.

I've been investing in and researching the credit market for a decade and a half... and it's clear to me that we're in one of the best bond-buying opportunities since the Great Recession.

If you're worried about where the economy and the stock market are going – and based on the signals we're seeing, you should be – this is the No. 1 place to put your money today. Click here to get started with Credit Cashflow Investor for 50% off the regular price.

Smart investors won't panic about the coming collapse in the equity markets. They won't be pulling their money out of every investment, content to sit on the sidelines. And they won't let their portfolio be dragged down alongside all the people who didn't see this crisis coming.

Instead, they'll be patiently waiting to pounce in the credit market... like my boss did back in 2008.

Regards,

Rob Spivey
September 27, 2024