Trade Options on High-Quality Companies With These Traits
Summary
Options Income: Guest advocates systematic put-selling on high-quality stocks for steady income, treating it like underwriting insurance with strict risk controls.
Concrete Examples: He highlights repeatedly selling puts on Caterpillar (CAT) and Ford (F), detailing strike selection, premium capture, and favorable outcomes.
High Yield Credit: Emphasis on hunting mispriced credit across preferreds, bonds, and BDC debt, prioritizing downside protection and fundamentals over speculation.
Brookfield Opportunity: He spotlights discounted Brookfield-linked baby bonds, noting parent guarantees from Brookfield Corporation (BN) and attractive pricing tied to Brookfield Infrastructure Partners (BIP).
Baby Bonds & Infrastructure: Retail-tradable “baby bonds” tied to long-lived infrastructure assets offer compelling yields and potential capital gains as rates normalize.
Risk Management: Warns against chasing double-digit yields without understanding sources (e.g., return of capital, derivatives) and stresses deep diligence on credit and structure.
Macro Context: Discusses yield curve dynamics and how rate moves impact REITs and long-duration assets, using this framework to time credit opportunities.
Transcript
Hello and welcome to the Stansbury Investor Hour. I'm Dan Ferris. I'm the editor of Extreme Value and the Ferris Report, both published by Stanberry Research. And I'm Cory McLaclin, editor of the Stansberry Daily Digest. Today we talk with Stephen Hester, editor at our corporate affiliate, Widemote Research. Stephen is awesome. He knows all about options trading for income and he knows all about high yield securities. Two great areas. I know a lot of people are concerned with income as they should be. And this is the guy to talk to. And let's do that now. Let's talk with Stephen Hester. Let's do it right now. Stephen, welcome to the show. Glad you could be here. >> Thank you, Jeff. >> You bet. Uh Corey and I are going to pepper you with some questions for a while here this morning. And uh let's start out though with the ultimate question for our listener who is saying, "Hm, Stephen is a new guest. Haven't seen him before." Maybe you could just tell them a little bit about what you're doing now and how you got there. A little bit about your background. >> Yeah, happy to. It's been a fun adventure. Um, as of right now, I manage two of the three back-end products uh for Widemote Research. So, my partner Brad Thomas, he's definitely the figurehead. I go on camera every once in a while, so a few people have have probably seen me, but he's he's definitely the star of the show. Um, but I run an option service, not a speculative. In fact, I'd call it the opposite, believe it or not. We'll probably get into that maybe later. Um, but yeah, I have a an option service and then a high yield service where I try my best to have the uh you can have your cake and eat it too. We know there's no real one of those, right? It's a matter of how far you can push in that direction. Um, so yeah, it's two interesting ways to get income that I think uh the average retail investor and I think u understandably so has some hesitancy around, right? And so as much as I try to uh give them really good like investing opportunities, it's also about teaching them. So long after they're reading my stuff, they'll still, you know, have those those skills and uh and that knowledge. And we've been at a marketwise in one form or another for probably four four going on maybe five years. So a little bit of time. Um less than some other people on the podcast, but we've been here for a little bit. And uh prior than that, prior to that, >> mostly Dan. Yeah. >> Yeah. Exactly. Yeah. Dan's he's we're talking multiples today. There there would be the first multiple of of the conversation. >> Um >> but both Brad and I wrote a lot on Seeking Alpha and that's how we met. And I was a little guy uh compared to Brad. But as we'll probably also talk about a little bit today, I specialized in alternative investments. So uh real estate uh private credit in the case of the public markets, right? business development companies and then also because of my hedge fund background and just uh most of my career and still a little bit to this day is on complex investment uh due diligence. And so that lets me take like what is this preferred or this little goofy thing that yields too good to be true? You know, how do I understand what the risks are, right? How do I kind of peel back the layers of the onion and figure this out? And my skill set, frankly, is better in that area. Uh, and so I kind of apply that institutional skills that I developed over the past 20 years or so to help subscribers today. Um, and more abstract, you know, asset classes like interesting parts of high yield options, etc. >> All right, that's cool. There's a there's a lot going on here, which I love because I love tearing into, you know, complex situations. I have a question about one of these high yield areas later, but we can get into some other stuff first. But >> yeah, for sure. >> Yeah. Yeah, we have I have a a question just to, you know, start it from the top down a little bit here. Um I'll I'll just make I'll phrase the question in the simplest most primitive terms possible and Stephen, you just, you know, go with it wherever it goes. >> Sure. Um, so in the in the most primitive terms possible, real estate lending is a long-term proposition, right? Mortgage loans are a long-term proposition, >> right? >> Um, now the Federal Reserve likes to uh, you know, manipulate the shorter end of the of the yield curve. >> They certainly do. >> They certainly do. And sometimes, um, as we were talking just before we hit the record button, sometimes the longer end of the curve, 10 years and out, doesn't really like it very much, which is to say for our listeners sake, sometimes the Fed cuts rates on the short end and the longer term rates go up, not down. Um, presumably this dynamic is important to a fellow in your uh in your niche. Yeah. So, first um first I'll be the first to say that it is pretty hard for anyone to figure out how all these levers work. So, starting with a little bit of humility there. Um I try to focus on what I can determine is true. Uh I definitely probably about as good as anyone at kind of predicting the future, etc. Um but even knowing that you don't know something, right, is still very valuable. Maybe that means you go through a floating rate option, right, or something if you just don't know. Um, but in terms of the interest rates in the Fed, it's kind of an interesting dynamic, right? So, the Federal Reserve does not have I won't say power because that's that's probably not the right word for it. It doesn't have as direct influence over interest rates as people think. And it's not that they're really wrong or they didn't observe something correctly. It's that in many times in the past when they have pulled their one lever, it's it's gone through the whole credit markets. So, it certainly looks like it, right? Like they pulled the lever, they put interest rates to zero and it worked right throughout the whole yield curve, meaning fiveyear bonds, 10-year bonds, 30-year mortgages all went down, >> right? >> But they really only have control over the front curve because they were dealing with banks in a very particular way um on kind of like short-term credit. Um, interestingly, and I think we're literally seeing this today, is if you push interest rates low and that through a ripple effect uh increases expectations for inflation, well, then a 10year or 15year uh, you know, obligation, right? They're going to price that higher because you're sitting over here like, "Well, shoot. If inflation goes back up to peak, I'm only making a 100 basis point spread, you know, onepoint spread. That's not very economic, right? What's the point of that?" Well, I'm getting, you know, inflation expectations are going up. Federal Reserve is is kind of uh throttling the the early part of the, you know, the the interest rate uh kind of yield curve. Not to use I'm not trying to use fancy language. just think of the yield curve as just interest rates today on like a six-month CD versus a 10 or 20, right? That's all that that curve means. If they make it too cheap in the beginning, um that that absolutely all things equal, you know, causes inflation. And people who have long-term fixed rate, you know, debt, if you're buying it, it's going to make you more nervous about where inflation is going to be in five years or 10 years. And so I think literally I saw new data today, Dan, on uh mortgage rates popping up a little and I've got a home I'm trying to sell and so, you know, I'm looking at it through like two lenses here from the investment one and the uh great, you know, interest rates are going up over there. So it's definitely a challenge um that to just give one more point there from you asked me about kind of an investment perspective when you're looking at um let's use real estate investment trust. that's the publicly traded real estate vehicle for most people. Um, >> it is it isn't as I think as simple as as as you might think, including some of the CEOs of those firms to do what we'll call the right approach because some of the best REITs stacked their uh, >> you know, they made their debt pretty short term, >> which means it rolled over quickly and they got exposed to interest rates sooner. and now they're looking around and they're like, well, >> uh, long-term debt isn't cheap either, you know, and they're kind of stuck. Um, so at least you can you can look at, you know, the balance sheet of the company, and it's not unique to Reese necessarily, but any long-term debt and just think, okay, is this actually a prudent move? What risk does this create for the firm? And you can it also helps explain sometimes, especially with real estate, um, whenever rates do move unexpectedly, you'll often look at your portfolio and be like, man, what the heck is going on with this stock or that stock? And oftentimes the answer lies in uh they structured their their finances in like a way hoping for this and it looks like we're actually going in the other direction. So it can be pretty useful. >> All right. Um I I I like the the fact that you started off talking about humility and the inability to predict. That's I just want our listeners to know that's how you know you're sort of that's one of the things that tells you you're talking to the right guy. >> Totally. Yeah. Well, one of them. Don't worry. You know, we got more more to talk about. Yeah. But but it's really important because people can't predict that kind of stuff. And and it's the the job becomes management and strategy and not prediction. >> That's right. I I think too many investors I I I hammer on this point even though it may seem a little you know laborious because I know for a fact that a lot of investors, individuals who are managing their own accounts who aren't necessarily financial professionals, they they get an idea about being able to predict things kind of stuck in their heads early on. Um I think a lot of people start out with that idea. So, I just anytime I can disabuse people of that idea, I I take the time to do it. It's that important to us, I think. >> Um, so let's talk about let's let's go at one of these one of these buckets that you play in. >> Sure. >> Um, how about options? I love the fact that you said these aren't speculative positions. Um, and I assume you're like, you know, selling options and selling spreads and things for income and and what are your I'm really curious to know because I do this all the time myself. I'm I'm curious to know like what your favorite >> what your favorite strategies are and how you how you think about it from the top down and then how you go about it from the bottom up. >> Yeah. No, happy to. Um so when I traded, it wasn't for long, but I traded for for a few years and I uh was right out of UT Austin, you know, where I still live in Austin and Mexico City, but I'm in Austin right now. on when I was here. Um, I was finishing up undergrad and was working at a hedge fund. And the reason I bring that up is because I was not very good at trading what the other guys traded. >> They were doing like momentum. They were they're doing technicals, not in the way most people understand it, but more like orderflow analysis using really advanced software. >> And they were they were pretty good at that. But, um, I was, you know, mediocre at best. I was better at risk management and better at doing due diligence. you know, no surprise, you know, at this point, whatever, 15, 20 years later. Um, what I found was that illliquid securities have like a structural benefit, meaning if you play it correctly, illlquid securities, um, can benefit people who understand them well. And the flip side's true, too. If you don't know what you're doing, illquid securities pay like charge you a tax. >> Yeah. >> Well, I love collecting that tax, and it takes a lot of strategy. Um, it takes some experience, for sure. But options compared to equities at least, one of the benefits for me is they're illlquid. And what that means is it's not unusual at all that you know I like selling put options to answer one of your questions directly. Well, on a put option, you know, the let's say it's a it's a it's a given contract, doesn't really matter. And maybe the premium is $3 and then some news comes out, the market moves a little. It's not unusual at all for that premium to go to $5. >> Mhm. >> Well, that's a dramatic increase, right? 75 whatever percent increase. Pretty remarkable. Um in the equity markets that's that's doesn't happen very often, right? I mean you have to go really aggressive into crypto or something with leverage or whatever. And the point being is if you're patient like on on my backend service, we do one trade a month. So I have a kind of a big framework that as it's getting close to when I want to, you know, make that publication, it's narrowing down the opportunity set. And typically, you know, we'll say like, "Oh, wow. This is interesting. Uh I have tools that I use and the premium is currently 50% more than it should be all things equal. And if you guys want to go through what that means practically speaking, I can I can do that. Um so not only is the uh is the put option attractive, but since it's illquid, the price moves very quickly. I mean, if you're using limit orders and you're very disciplined, other people's kind of aggressive behavior or knee-jerk reactions actually transfer money into your account uh with without not a lot of uh stuff in between. Um it really does work. And the other component that I think is important is that when you're selling put options on quality companies that you want to own, and that's a very important statement. If you if you remove any of those pieces, it doesn't work. But if it's high quality and it's not a stock you want to own, then you're actually selling insurance is what you're really doing and you're collecting those premiums. And sometimes uh an event happens and you you know you have to pay in the sense you have to buy the stock. Uh and that's okay as long as it's a good asset. But the return profile both from individually and for the service is very much actually like selling insurance where you're being careful on what you underwrite, right? You're not selling insurance on anything. Like, you know, there's probably some teenager with a new Mustang out there. Are you gonna sell them insurance for $10 a month? Well, it sounds laughable, right? Like, that's crazy. Well, what if it was 2,000 a month? Okay. Well, I don't know, right? Even though those numbers are vague, we instinctively realize, >> oh, wait a second, that actually sounds interesting. Um, so a lot of what I do behind the scenes is I run the math and uh do a lot of fundamental analysis is actually the main focus I have on the underlying company, not on the option kind of comes last because if the company isn't rock solid and I don't understand what the key risks are, then you're going to get a nasty surprise when you sell a put option on something you don't understand and it backfires because uh that you know we can talk about it but that will happen a lot you know if you're not careful actually. So that's kind of it in a nutshell, but that's my favorite strategy and uh kind of why it works. >> So selling puts on really high quality companies mostly in the real estate sector or just no or just >> Yeah, def not mostly in the real estate sector. Probably less less than 10%. Um >> okay. >> Yeah, it's pretty sector agnostic. Uh I have done it definitely own a few REITs but um yeah there's certain reasons why REIT premiums generally aren't as good as some other industries but yeah I go where the market uh tells me you know I did a lot a decent amount of AI related companies which normally wouldn't fit my profile but some of them got very cashri and the growth rates were so high I got comfortable with them and actually had some of our and this isn't a sales thing it's more of an indication of how the market works but ended up being some of our best trades because the volatility around some of those names was so high that the risk adjusted made sense, right? Um that volatility can help, >> right? Yeah. And right if you if you sell put if you do it like you're saying, right, consistently. >> Yeah, >> you can do it consistently, right? Over time if when people are seeking income like this is something you can do over and over and over again, right? This is a Yeah, that's a good question, Corey, because yeah, like you know, I do them once a month and people might think, well, yeah, but he, you know, he works very hard. It's his job to find the trade. You know, is it realistic for me? And, you know, you probably won't maybe find the best trade all the time. But I think a pretty practical way for listeners who are, you know, they're in the mix, right? They're in the market and they probably have maybe a watch list. I think a lot of people have that, right? Maybe it's 10 or 15 uh companies. Some of them are new and some of them are maybe like for me with Caterpillar for example, I've been I've sold puts and invest in Caterpillar I don't know how many times dozens of times and I have like almost 100% win rate. Um and that's mostly luck by the way but it just worked out well. So that's on my little list right that I'm kind of looking at. And once a stock kind of comes down to where you almost want to buy it, that's a really good indication that you may want to sell a put option on it because you're going to get, let's say it's Caterpillar 200, which is the old days, but say it's Caterpillar 200 and you're like, man, I would really like to buy it, you know, between 180 and 190. I'm disciplined. I'm going to be patient. Well, one option you can do, no pun intended, is sell a 200 strike call option. Collect, you know, a good premium. Maybe it's $15, right? It wouldn't be unusual in that circumstance. And then there's only two options here. You're either going to own the stock at 200 but at a lower cost basis, right? Because you collected that nice premium about $15 a share in this hypothetical. Or you don't and you just collect the premium. Those are the only two possible outcomes. Now, that doesn't mean that Caterpillar can't go to 150, right? It doesn't that that's that could definitely happen. There's of course risk. Um, however, psychologically, u, I like to think in probability terms. If you were going to buy it anyways at 185, then you were going to buy it anyways at 185. Whether you sold the put option or not, it's irrelevant, right? It it doesn't make any sense, even if emotionally it's a little painful when it goes down. So, that's a really good way when I have uh, like, you know, colleagues and stuff that are asking kind of how to get into it. A great way is, you know, what's your favorite low dollar stock? That way, the capital commitment is low. And let's say Ford is cheap. Ford was beaten up for, you know, years. It would go down to $10 a share and kind of rebound. And I'd say, well, if you're thinking about buying some Ford, the premiums, by the way, on Ford were excellent for a long time. It's kind of recovered now. Um, but for years, the premiums were pretty elevated. And that was a great way for a minimum amount of capital that you could you could sell that option. Typically, what would happen is you could get, just to give a concrete example of why you might do this, you could collect uh potentially maybe one one and a half years of forge dividend, which is a pretty significant dividend, right? In maybe 60 days. Well, if you're an income investor, this this makes sense. As long as you do it correctly, you got to be safe about it, >> right? That's awesome. Yeah, that's a great way. That's a good perspective on it. Yeah. >> Yeah. Because it takes the that strategy like if you almost want to buy the stock, uh it's a great time to sell a put option. That's it's a great way to think of it because it just takes the takes the psychology. It's like a psych psychological cheat, you know? It's like you you just take the decision- making out of it. Um you let the market decide for you. I guess it's it there's always that aha moment like when those sort when you what you're describing to me is like when that some when some decision can be made for you that just benefits you both ways. It's it's refreshing. So yeah. Yeah, it's a good point that way. Yeah, >> it helps you avoid what I really really hype on and the reason again I like examples in my let's say it's a eight page analysis that I send out to subscribers, right? Seven of those is on the fundamentals of the company not on how much money you're going to make theoretically, right? On the option because >> you don't need to know anything about the option if it works correctly. you're you're just going to get money the day you sell the contract and then two months later you're going to think you're a genius or you know whatever. Uh yeah, >> but that is not how it always works. And so the way you describe it, Corey, I think is so valuable is because >> the the temptation to sell a super rich premium on like a GameStop, you know, or whatever. it won't happen because you know that your style is maybe not to do that >> and instead you stick to companies you already know and I think that's like the major risk factor uh doing this because it's tempting you know we have to be honest about that if you sell put options on a couple good companies and you you look up one in the news that's you know being sued or some horrendous problem is happening and yeah the put premium will be high uh but it will be high for a reason >> yeah fall that falls under the general category of chasing yield and I was talking about too the framing the the u option income in terms of the dividend yield is is is it's something option traders do that our listeners might not have known. Just put it that way. >> Yeah. Uh so you were talking about um how where about the premium being where it ought to be you know um before and I wanted to get back to that about the premium being the level where it ought to be or you know at a given time maybe you know it's much higher than it ought to be and you said well we can talk about that later. >> Yeah. >> How do we know u ought to be? How we know how do we know what it ought to be? So there's a bullet down to kind of two factors. One is relative to other stuff. So that that's one metric is so if let's say it's Ford, if we stick with that example, um GM financially is actually not that far off Ford in many ways. Um neither of them are A+ rated, you know, etc. They have pretty similar exposures. They make most their money off trucks and SUVs, you know, we can go on. So you can look around premiums and that's kind of the the the simple market comp looking around. And the second one is relative to the company's fundamentals. And one of the most important aspects of that is um I personally and I don't always succeed in this but I personally try to find like define really attractive opportunities as if you think of um think of a stock price that's moving right but instead of looking at the stock price it's a chart of the valuation and it varies by company. It's not always this simple, but for a standard company, it's a Ccorp, you know, you can do it off net income. Usually, that still requires a little massaging, right? Because of M&A and uh you know, uh it's it's earnings is an accounting number more than a financial number. So, some companies, it's one and the same. Like the earnings is just how much money the company made. It's that simple. Other times, it's not. But on companies that are steady, which long-term dividend paying companies generally are, right? almost by definition their earnings are reflective of what the company's doing. So that's an important caveat. But whatever the earnings ratio is, if you look at it as a chart, it's going up and down. If it's in the bottom 10% of where it normally, you know, historically trades and it doesn't have some cataclysmic problems, that gets my attention, right? And by definition, 10% of the time it's going to trade down there. It doesn't necessarily mean things wrong. Sometimes it does. Um, if your put contract, if the strike price is, call it the bottom quarter of the valuation of the firm, you're probably going to be okay, right? Even if you put the stock, the company's high quality, you paid a reasonable price, um, you're probably going to be okay. I assume every put option will be put the stock. In fact, I actually welcome it because the ter return should be better actually, right? But if we really did find an undervalued gym, it usually will work out um even better over time. So, it's the valuation relative to what what price you would own it. Just like buying the stock, we look at the same way. And then really looking at the risks, like really spending time looking at the risks facing the company because the probability that it's trading that cheap and there isn't some kind of problems going on at least in the industry or with the company is low. And so a lot of my time, probably over 50% is just going through those risks and trying to get a good understanding. And the market is uh I think it's rarely long long uh rarely wrong long long term. And who am I to say frankly the market's right or wrong, but just based on where their stock goes, right? Uh but it's really it's it's wrong all the time in the short term, which makes investing difficult uh if you if you focus only in the short term. And so there's tons of cases where, you know, an earnings miss happens and then you read through it and they raise guidance. So they're actually anticipating better results over the next 12 months. Um, but a slight miss causes every Wall Street analyst, you know, to hit a massive sell order. The stock drives, you know, drops 10%, the put option premium goes up. Um, assuming it was that simple, you know, that could be like a good setup when I'm talking about kind of analyzing the fundamentals. >> I It fascinates me. I think it's really important to note that you talk like a long-term stock buyer. you know, you look you you talk like a long guy who's buying stocks and holding them for the long term, but you're doing that analysis and you're taking these, you know, shorter term, much shorter term option positions and you're talking like like you said, seven of the eight pages is the fundamentals of the company as though you view, you know, you view you're viewing the stock as ownership in the company. You're not just, you know, trying to uh flip a trade for some technical reason or something. That is re to me that's really cool because I I've made my living for 25 years. Porter hired me 25 in in September of 2000. We were talking about, you know, how long people are have been around uh the company. And um that whole time all I've done is pick stocks. I haven't done any options, you know, trading in not in a newsletter, but I've done it in my, you know, in my own account. Um, and it's this it's it's the almost the identical process of assessing the value of the company and assessing the fundamentals of the company and assessing the risk in the way in the sort of detailed manner that you say, but except one little difference. I want to hold the stock for 10 years. you want to trade an option for two months. That's fascinating to me. >> Yeah, it's interesting. And this kind of um it aligns with a core thesis I have which whether you're even doing like hedge fund due diligence like I or private equity or these things that all seem like, you know, very different from each other, very abstract. Um, for me at least, even if it's a short-term options trade or like a 10-year hold on a really good tech play, you know, whatever, the actual underwriting to me shouldn't change a ton because the truth is, if we're being very honest, like nobody predicts the Great Recession very well. And even if they did, they don't know how it's going to happen exactly, right? We we it's just too many human uh random human events that are going to be involved. So the point is if I can do a reasonably good job of protecting the downside by looking very closely at it then in the event which it's going to happen we've definitely been put stocks and the the win rate rates pretty good on those um not everyone but pretty good then I'll be minimizing losses where instead of a 50% loss maybe it's five or 10% because they've missed earnings and it's like you know what this this company doesn't earn my money anymore the fundamentals that we reviewed it's the trajectory is not very good anymore. Um, and then if there is a crash, which is always coming, right, we don't know which sector, we don't we don't know how it's going to work exactly. Um, you want to be in a company who understand well that you can either make a decision, hey, it's time to jump ship and go, you know, move our allocator capital somewhere else or hey, I'm not going to panic on a draw down, right? That's we're all susceptible to that. And and the more kind of retail focused you are, I think that uh it just human nature, you know, tends to override it. And the more confident you are in what you own, the less susceptible you will be to a panic move that you regret, right? I mean, look at COVID. That's probably the most extreme example. >> That's right. >> But yeah, you just that helps me and the and my newsletter uh customers, right, is they're like, you know what, I know this company. I'm not terrified. I'm not going to sell just because we put the stock. Because most of the time that's it's just market volatility. Yep. Yeah. That people wonder um you know, how do you know that you want to you know how the stock's down 20 or 25%. How do you know to keep hanging on to it? Like well remember that eight to 10 pages of stuff I sent you like two months ago. It's all that >> that hasn't changed. Yeah. >> Yeah. >> And if it has, that's okay, too. You know, we'll acknowledge that >> and we can move on. Um, >> yeah. >> But yeah, I mean it it this is kind of a funny way to look at it, but I think it can help people psychologically. Pull up whatever company you want. The chart goes like this, >> you know, Nvidia, whatever you want. It may be more like this than this, but you get the idea. There's huge pullbacks. And the truth is most the time, >> um, if you did some valuation work, you know, that can help you get in the right range kind of on the chart, so to speak. But overall, did the company's uh outcomes like change massively as the chart? I mean, no, not really. Probably not. And yet, if someone had bad luck and bought at one of those little peaks, they're depressed when it goes down. And if someone got a little lucky and bought at the bottom of one of the troughs, they feel like a genius. Well, the decision- making is the same. Yep. >> Right. It's roughly the same. Um, and yes, we can add some alpha, so to speak, by being very disciplined, like when we buy. Um, but overall if you know if if company stocks just went like this or maybe like Visa, you know, for years Visa just kind of went like this. Okay, fine. But there's a reason I said Visa. There aren't really any others. Pretty much everyone's very volatile, right? And uh it doesn't mean you're wrong just because you didn't time it perfect. >> Right. And and perfect timing, let's face it, it's mostly luck anyway. Nobody nobody h nobody has it. >> Yeah. >> Um like we said at the beginning, you know, you need a dose of humility when you do all that. You can't predict anything but you can do the the point is though you can't predict anything but you can do the fundamental work. You can absolutely learn to identify what is a really great business and what is not. And once you like once you get the basics of that they tend to hit you over the head. You know they call themselves out to you when you're looking at the fundamental when you're looking at the the business and when you're reading the filings and when you're looking at the financials. It's like, okay, consistent margins, gushing cash, great balance sheet, you know, raise the dividend every year for 50 years or something, you know, whatever it is, right? Whatever it is. >> Yeah. >> All right. Um, so let's I want to talk about high yield now. >> Sure. >> Um because like um we had Harley Bassman on the show and um you know, he he seamlessly talks about bonds and options. I mean, it's all kind of a a flow for him. So, it doesn't surprise me at all that you're the high yield guy and you're the options guy. Um, maybe actually maybe that's a place to start. I hadn't planned on doing this, but but what is what why is that? Why why do the Bond guys know options so well? They all seem to. >> Well, I don't I haven't experienced that too much personally, but you would have a better view, Dan, than me. >> Okay. >> From your seat. But it does it does make some sense where um I mean you guys tell me but I would say that really you could if we dump all credit into a bucket even though it's very very different. >> It it's in the same bucket isn't it? In most people's mind it's kind of all the same. >> It's not interesting. >> It's it's almost too complicated by how simple it is where someone just sees a yield. Yeah. >> And they go I I don't under I don't understand how this works. Like if the company does well, what happens if it does poorly? Well, nothing. But what if it does really poorly? Oh, you lose all your money, right? Like that's kind of how it works in a nutshell. Um, and so I think they're both considered kind of abstract and they both require um >> I think it I mean you could I think you could argue this argue this at least. It takes a lot of due diligence just to find an opportunity. >> Equities aren't like that at all. Right. You can you can spend two minutes and find a hundred interesting stock positions. >> Yep. >> I challenge you to find that in bond, right? Bonds can be tough. >> Uh especially individual bonds or ones that don't yield, you know, >> 4% and just don't make sense for anyone. You know, just the truth is, right, spending the time to find an individual bond that just pays kind of a quote normal amount, it's a waste of time. It's not very interesting. Um and yet the bond, you know, the fixed income market's also a little illquid. uh things are not priced properly all the time. Some things are really priced well, but you go into kind of the bottom of investment grade. So, think of a quality companies and you're at the bottom. So, you're still quality company, but you're at the bottom. And if you go much lower now, it's questionable, right? Whether you're a quality company, that area is not very effective and the bond prices are are pretty volatile, especially whenever there's a little bit of a crisis. And we've had a great investment opportunity the past few years where we had that regional banking crisis or the Silicon Valley component. um any recession and it causes uh again not like the highest rated bonds but ones kind of in the middle and below to become very volatile and you get some great opportunities. Uh yeah, but for me high yield and I probably don't define it like most people is I'm including you know preferred I'm including bonds uh not treasuries or anything generally speaking but you know whatever may bonds that yield more like uh six to six to nine yield to maturity. So that just means including capital gains you know to maturity um and then even some equities believe it or not. So business, >> you know, business development company, >> EDCs, that's what one I was thinking of. And like REITs, MLPS maybe or no, >> it Yeah, it kind of um it's pretty subjective, frankly. I definitely don't have a perfect definition, but um yeah, if the yield hits kind of a a benchmark, the total return kind of hits a benchmark and the risk is acceptable, >> then I uh I kind of will include it. And the reason is the way that I look at it is, you know, I'm I was blessed to have a reasonably good understanding of these different asset classes that most people don't because I did it for my career for so long. So that means I try to look at all of them. I try to have a big responsible but a big opportunity set so I can try to find the most interesting best risk just returns, you know, for uh for the customer. That's kind of how I look at it. >> Okay, that Yeah, that makes sense to me. That makes sense. Let's face it, it takes some more work to do the bonds and the and and options. >> Thank goodness I enjoy it because it does. Yeah. Most of them result in nothing. So most of them are just been hours and then at the end, you know, I'm like, nah, I you know, this isn't as good as I thought it was and so be it. You just move on to the next one. >> Yeah. The bond option guys I know are all like you and and Harley. It's like deep digging, you know, scouring the market for for opportunities that nobody else seems to be able to find or, you know, most people can't find them. >> Um, that makes a lot of sense, but also there's a math component in there, too, >> right? >> Um, >> you know, very very, you know, good math people are doing both things, it seems like. Anyway, that this is a fetish of mine. and I'll get off of it, but um do you have I mean I feel like we need a concrete example like do you have a name like an equity or anything or even just a company whose bonds you like right now that you can talk about? I know you have subscribers and they probably don't want you giving away their latest greatest stuff. >> Is there a concrete example that we can use that kind of highlights your your style and why it works for you, you know? >> Yeah, I can I can use some. So um Brookfield is I think as the second largest alternative investment manager. So what that means in simple speak is you have like a maybe a Black Rockck and you have these uh other firms that really focus in ETFs and mutual funds. Vanguard for example, >> they don't do a ton of alternative investments. That's more of like a Blackstone, right? Blackstone has the biggest real estate portfolio in the world, right? Stuff like that. >> I was going to say McQuary, but Blackstone Yeah. >> Yeah. They do a ton of consulting. McCquory does too. Um, Blackstone, you know, they're like Strict Belterm Investments and, uh, you know, Brookfield, I think, is the second largest and they're actually a Canadian firm and so they're pretty similar to Blackstone. They just have a little bit different approach. It's actually more heavy in infrastructure. That's kind of what they're known for is I think they're the world's largest owner of infrastructure. Think of uh dams, um, maybe hydroelectric facilities that those kind of go in two categories, right? Um, but they're like the the largest infrastructure owner. Well, Brookfield, I don't know if it really helps the company. Those guys are probably way brighter than me, so I'm going to assume it does. Um, but one of the things that they do is they financial engineer the heck out of their business. There's Brookfield Asset Management, right? There's like I could probably list 10 of them off the top of my head. Um, well, each one of those entities ends up having its own capital structure in a way, meaning their own debt, equity, etc. in a way that Brookfield thinks is like optimal. A lot of firms don't do that. They just have like one company and they want the lowest cost of capital. So, you know, they do that. It almost like if you know, you have a teenage son and you're like, you know what, actually, I'm going to make you get the loan because at least it's lower liability on me. Uh, but your interest rate is going to be double. A lot of people, the parents like, nah, I'm paying for this anyways, right? I'm just going to consolidate it under me. It's a little bit like that. Uh, the difference is that in Brookfield, most of the bonds do have a parental guarantee. It's not the easiest to find. It's not always it's it's actually pretty difficult to find. But not all of them, but most of them do. And because Brookfield is trying to optimize uh everything so much, they have entities in Bermuda. They have entities Cayman Islands. They'll have a bond issuance in Canada. The same company has a bought in somewhere else. And those have no research. There's nothing out there, no coverage. And many of them are actually tradable bonds, meaning they have a ticker. They're like baby bonds is kind of what people call them. >> So again, the financial engineering part, at least this one helps us, right? They made it where you can you can just trade it like you're a Fidelity account. >> Well, these bonds uh are often very long-term because they match the infrastructure. So it's an entity, it has a bunch of infrastructure, you know, and the the lifespan of the infrastructure is whatever 30 or 40 years. So they issue these bonds. Well, because nobody understands most of what I just said, right? Practically speaking, it sounds like gibberish, right? >> Yeah, because it kind of is. And what Brookfield does is so unusual. People just don't put these pieces together. And you know, it's almost like why doesn't Brookfield make this more evident? It would help it would help them. But to give you an example of what happened is they they issued some of these bonds on some of their infrastructure. Uh again, you if you put Brookfield into a like whatever your search bar is on any financial services website, you'll actually see a bunch of bonds pop up and you can go explore those and a lot of them had uh current yields of between like five and five and a half. So not current, it's wrong word for it. Um at par value. So when they issue the bonds, maybe they paid five and a quarter. Whoopdedoo, right? Okay, fine. That's not bad. But whoop-dedoo. Well, many of those uh particularly when I recommended subscribers and they're only a little bit above where that is now. Um they traded, you know, at like 70 cents on the dollar, 65 cents on the dollar. >> Now you're talking. >> Now you're talking, right? Um now you can do a little arithmetic and you go, wait a second, that five now starts with a seven. But it's it's actually much better than that. That's the immediate kind of gratification is wait a second I would I would buy a B now that I understand it right Stephen and Dan Corey helped explain it to me that actually Brookfield is a guarantor all the way down >> a seven handle seven something% yield on this bond super great it is great but it's it's much much better in the sense that if interest rates you know almost win but def but we'll say if interest rates over the next 5 10 year whatever right do come down a that bond is not going to trade at 70 cents or 65 cents on the dollar anymore. Now, I'm not saying it'll go to par necessarily, but it'll probably go to 80, maybe 85. >> So, that 7% yield may not even be the biggest return component. It may actually be the capital gains. And so, that's a really interesting setup where >> it's not obvious when you see this bond and you see the price and you're thinking this Bermuda bond, what the heck is this thing? Um, but I love solving those puzzles and putting the pieces together and uh eventually in my opinion what'll happen is it will trade back to par and then everyone will say how obvious it was. Oh yeah, I can't believe everyone didn't buy these. Didn't you know they're backed by Brookfield and but you know since they're so discounted uh I think it makes people even more suspicious when that's really discount just due to interest rates. It's it's nothing to do with Brookfield or the infrastructure. It's uh it's what we talked about at the very beginning is that they're just trying to discount things and make it work for inflation. But I'll tell you, if you just own that, it just pays you 7% till the bond matures, which by the way, it has to go to par when the bond matures anyways. But >> that's that's not a terrible setup, you know? >> Right. Yeah. Oh, yeah. That's that's it's you've just described one of the beauties of high yield. You know, you get a nice capital gain plus um a great yield. You know, you get paid. I remember I'm trying to think I I I knew Brookfield uh I knew Brookfield way back when um before it was an asset manager. I've recommended too many stocks in Extreme Value since 2002. So I probably can't find it here in the list, but um I know I covered it at least once um when it was BAM, you know, Brookfield Asset Management. >> Yeah. Before it went to BN and the different ones now. Yeah. >> Right. Um, and then but but I knew it before it was BAM even, you know, when it was before it was Brookfield Asset Management. Anyway, what what they've done though, like you're right, if you go to like if our listener just goes to Yahoo Finance or whatever, Google, whatever it likes, just type the word Brookfield and 10 tickers come up. >> Yeah. Overwhelming. Yeah. It's like I don't And the funniest part to me is that they and again I'm grateful for this. They made a lot of them baby bonds. So like you can actually go buy them in $20, literally $20 increments if you want. Yep. >> Which is extremely >> like preferred stock or something. Yeah. >> It's great. And you tend to get less slippage too when you buy the bond. They're not as illquid. You put the limit order and it works great. So it's clearly retail focused >> but nobody knows about them. They're too complicated. I mean Brookfield Infrastructure Partners, that's one you probably seen, Dan. VIP, they the biggest infrastructure owner is an individual entity >> and they have like four different bonds from four different countries and >> you know it's all it's all the same parent. Um, but who's going to figure I mean relist? Who's going to figure that out? They're going to see a 7% yield and again totally justified probably saying, "Eh, >> too good to be true." You know, I'm missing something here. I'm going to go on to something else, >> right? Yeah. Have you ever met Bruce Flatt? >> I don't think so. >> Yeah. I met him a couple times years and years ago, like at Grant's conferences and stuff, and I thought, here's this guy running this massive thing, and I just walked right up to him, started talking to him for 10 or 15 minutes. He's like the most sort of down to earth. Well, he's Canadian, so he's polite as hell, right? >> Friendly. Yeah, there we go. >> Um, but and approachable. Um, but yeah, I just thought, God, this guy is like the, you know, I'm looking around the room. He's like the bloody genius, you know, like I I don't mean this in a derogatory way, but like the paperhanging genius of, you know, of of of Canadian markets. and and and here he is and he just seemed like the most, you know, downto-earth guy. And they're and I'm like, God, they're running this giant complex thing. It's um when you read when you read their filings and you get into all this, it's um it's not easy to to work it all out, is it? >> Not even close. No. The Brookfield one, whenever I've done uh >> you know, really I mean, everything I do has a strong education component. I think that's the I hope at least that's the most valuable thing I actually provide. >> Not that I don't want the investments to work out. That's you guys have heard how much work I put into them. But yeah, >> teaching the person I think is the most important because that's going to help their decision- making, you know, hopefully the next 20, 30, 40 years. >> But I use Go ahead. >> I'm I'm sorry. I just I it just the the what I this is for our listeners sake here, Stephen. Nobody thinks about just identifying the equity pieces and the debt pieces like you you just and and then ownership stakes in all of the other tickers and stuff. You and just working out the capital structure and those ownership stakes is like that's real work for for a company like Brookfield. Anyway, I'm sorry I interrupted you, but >> No, no, you're good. I um that's it was actually really in last what I was going to mention is that >> I've done some uh strictly educational pieces occasionally, you know, just as a kind of a freebie for the >> for, you know, hardworking newsletter subscribers. And uh I've often used Brookfield to explain the concept you just mentioned, Dan, about you know, okay, well, Brookfield, this you know, I'll keep it simple but still effective. Brookfield entity one has equity, preferred, and debt. Which is the best? Well, the there's no best, right? Not really. Um, but if you walk through the pros and cons of them, um, you can often find that it would, you know, I think you mentioned this before, Cory, like it'll jump out to you as no, this is the like this is the best for me because my priority is maybe capital preservation, uh, you know, and maximizing my yield. So, actually, why the heck would I ever do the equity if I can get the preferred that pays the same, maybe even more, right? Or or the bonds. And on the BDC subject, Dan, uh, in the high yield advisor, we still have they're almost back to par now, so we won't be in them for much longer. I think they mature next year. Um, but we bought some bonds during whatever that crisis was maybe like two to three years ago when the high yield sold off. Um, you know, we picked up yield to maturity bonds on investment grade BDC's for like seven to eight, you know, 7 to 8, eight and change. Some of them are eight and change. And then the equity, it yielded higher, do not get me wrong, right? It was yielding kind of normal BDC 10 to 11, but to me risk adjusted for the average person and 8 and a half on investment credit where it's never going to change. Realistically, it's not going to change your portfolio. is just going to go like this, you know, through 2026 versus BDC's which are very volatile. They're primarily, you know, retail investor home. I laid it out, you know, and of course these are just suggestions for people, but I was like, this doesn't happen often, right? When the bond gets this close to the equity, I try to take notice uh because often it's a great opportunity and then they'll correct, right? Like pretty soon it'll go back like, "Oh, I'm not interested in the debt anymore because it yields five." It's like, "Well, yeah, now now you're not. course uh you know it's too far off the the common equity >> right I know you're talking bonds mostly here but I'm going to briefly try to take this into one thing you mentioned before the highly leveraged like crypto right >> there's these high there's these super high yielding you know products out there now like uh you know 30% yields you know and and whatnot and you talk about your hedge fun or um yeah, your hedge fund days and and kind of examining all these, you know, where does the yield come from? What do you make of, you know, not necessarily like a mic a micro strategy, but like there's all there's like a whole there's dozens of them now. Um what do you make of like what should people look out for when they see like these double digit yields and and things like that? >> Yeah. Well, it's it actually it's funny as a reminder because I saw those a couple news articles pop up on those exact funds you're talking about, Cory, and I have not dug into them very deeply, so I won't pretend like I have. Um, but I can talk in generalities that will probably just lead us to the same conclusion. Um, the reason that I spend all that time on that Brookfield, right, weeks maybe, trying to figure it out, is because if you don't understand where the number comes from, whether it's a seven or 8% or whether it's a 30%. There's a good chance it it's not going to work out for you. You just there's there's too many things going on that you're not aware of kind of by definition, right, that can that can cause you problems. And when you don't know what you're doing, and this applies to me as much as it applies to anyone, when that thing that you paid $1,000 for goes to goes to 700, then 600, your pain is going to go up and you're going to hit a breaking point and you're going to sell. You're not going to sell near the bottom. It'll probably be like the print. It'll be right at the bottom, perfectly timed, because you and the other guys are all in the same boat, right? You because you don't really know what's happening. All you know is it's supposed to go up and it's going down. So, anything with a double- digit yield is a this is definitely a shortcut. Anything with double- digit yield you should look at very closely. And I've recommended stuff with, you know, 10 to 11% yields. It doesn't mean that there's a it's a terrible investment or anything, but you got to look at it very very carefully. And then I do think it's safe to say there are certain sectors, crypto is probably the easiest one to kind of uh not attack here, but highlight um where it's very retail focused. People are getting a lot of money when they make up some goofy idea, right? They they come out with a new fund. You mentioned there's like 15 of them. There's not 15 of them because there's 200 grand in each one. It's probably because there's 10 or 20 million dollars in each one. And these guys, if they can come up with a strategy to make a lot of fee income off you, >> they will. Yeah. >> They don't have any responsibility to to like make you do a test that you understand they're offering. >> There is in the private world, by the way. In the private world, there's a lot of paperwork and there's some restrictions. But when it comes to stocks, for better or worse, you can buy whatever you want. So, I I definitely recommend trading very cautiously. And if you can't explain to your spouse or good friend how the 30% yield like comes from that's a good warning sign. >> Yeah, goofy is a polite way of saying crazy I think. So, because I don't I I thought I thought, "Oh, Stephen's going to tell me where the yield comes from." Because Corey was framing his question that way and I was, "Oh, okay. Okay. He doesn't know either." Nobody, you know, I can't get anybody to tell me what is the real true source of those yields. You know, it's it's um and that could be a shortcoming of mine. I I don't say that it isn't, but I think it's it's interesting that we can identify the source of of yields in, you know, preferred and equities and >> bonds and we can't identify the crypto yield. >> Yeah. Well, I'll tell you too that again being totally transparent does not necessarily apply to those. It probably does, Cory to the ones you asked about in crypto, but uh I don't know for sure is that the number one way is return of capital. So there's a lot of high yield plays I've had people send me over the years that yield maybe close to 20 >> and a lot of it's a return of capital. So you put in $100, they're literally sending you back$1 or $2 a month on top of whatever it earned. And they're allowed to do that, by the way. They just have to disclose it. So you can guess where the stock price is probably going to go if they're just literally giving you your money back as a yield. And then the second most common is derivatives. So they're using derivatives taking on one type of risk or another or maybe multiple. And then that's the other way they're kind of engineering uh the high yield. And both of those work out the same way your gut instinct is telling you right now usually. >> Yeah. All right. This is a good place to ask our final question. Um, our final question is the same question for every guest, no matter what the topic, even if it's a non-financial topic. Um, if you've already said the answer to it, feel free to repeat it. >> Um, but the but the financial question is for our listeners sake, if you could leave them with one takeaway or one thought today, and like I said, if you've already said it, that's cool. You can just repeat it. One thought, one takeaway today, what would you like it to be? Um, well, I'll give them maybe a little challenge, uh, maybe a little growth opportunity. I would say that odds are one of the topics that we've talked about today is a little newer to them. >> And I would say, um, my suggestion would be to go research one of these areas and just kind of learn as much as you can about it. And maybe from, uh, you can go back in the podcast and, uh, hopefully have given you maybe a few things kind of what to look for. Um, but I would just encourage you go explore these different parts of high yield. Maybe explore options for the first time. Not even necessarily risk any money. Um, but just go explore them because the truth is a long time ago I didn't know about any of these sectors. And I started as a teenager like 14 15 investing little stocks and I wish I held my $200 in Apple and I didn't. I sold like a chump, you know, I like doubled the money, you know, 20 years ago, whatever. Um, but the point is, you know, you can find people that will help guide you as you get, you know, more into it. That's I also had great teachers, you know, as a due diligence officer for many years. Um, but that would be my suggestion is go find one of these that sounds interesting to you. Put some time and energy into it and then who knows, maybe that really helps your portfolio and your investing, you know, long term. >> Nicely said. Thank you for that. And thanks for being here, man. It was really great to talk with you. >> Yeah, greatly appreciate the invite. You guys had great questions and uh if you want to have me back, happy to help. >> Oh yeah, I'm I' I'm already thinking of questions for having you back, you know. >> Look forward to it. >> Yeah. All right. Thanks a lot, man. >> You're very welcome. >> Hey, I like that guy. I like me some options and I like me some high yield. That was cool. I could have done another two hours of that. Really, honestly. It was great. >> Yeah, you you definitely could just go exploring, you know, income generation, uh, which is on the mind of a lot of people right now, uh, >> within the last five years specifically, you know, I'm thinking of just like inflation and people trying to keep up with with higher prices and everything. And um you know we have you know we have similar products you know in terms of the the put selling uh you know at Stanbury for a reason like it's it's something if you if you know what you're doing and you do it on stocks that you are comfortable owning in the long term like we were talking about. >> Yeah. >> It's kind if you're like looking for income it's kind of a no-brainer to to do to do it. I mean if you have enough capital to put to put to work. Um >> Right. So yeah, and then high yield um opportunities. Yeah, it's really that like you were saying like that math calculus about finding like what what's what's being overlooked here in the market and who's you know and a lot of times it's on the the just stuff that most people aren't looking at, right? And like that's where that's where you find the opportunity if you just like do some some work if you have the time to do it, which not everybody does. And then you find go find someone like Stephen who can do it for you. So >> yeah, and you you mentioned, you know, people were concerned with income. I would go back farther than the last few years. I would go back to taking the Fed taking interest rates to zero and everybody going, I can't own bonds anymore now. What the hell do I do? And the answer is absolutely options. Selling options. Um, and we had another guest on the show, Mike Green, who their their corporate mission seems to be very close to taking all the, you know, complex option strategies out of big institutions and offering them, uh, in the form of, you know, retail ETFs. Um, you know, some of which you may be interested in, some of which you're not. It was it's not a recommendation although I have recommended one of them which I mentioned before um when we had Harley on and I recommended his his mortgage um ETF because he buys recent vintage mortgages which yield 6% instead of you know the older ones which are like 3%. So but yeah Steven's focus in those two areas is very cool and I'm I I didn't know about him. I didn't know he was under the market wise banner. So, um, he's going to be like my, uh, my new, um, you know, he's he's going to be the new guy under Market Wise that I'm fascinated with now. I want to read everything. I want to read all the option stuff. I want to read all the high yield stuff. And knowing that he focuses on the fundamentals of the business. He's not just like a trader. That to me is gold. That's where you get real conviction and and those people like they're the ones I want to know about the people who understand the business and then structure the trade. So anyway, that was awesome. That was a a fun interview and a fun episode of the Stansbury Investor Hour. I hope you enjoyed it as much as we really truly did.
Trade Options on High-Quality Companies With These Traits
Summary
Transcript
Hello and welcome to the Stansbury Investor Hour. I'm Dan Ferris. I'm the editor of Extreme Value and the Ferris Report, both published by Stanberry Research. And I'm Cory McLaclin, editor of the Stansberry Daily Digest. Today we talk with Stephen Hester, editor at our corporate affiliate, Widemote Research. Stephen is awesome. He knows all about options trading for income and he knows all about high yield securities. Two great areas. I know a lot of people are concerned with income as they should be. And this is the guy to talk to. And let's do that now. Let's talk with Stephen Hester. Let's do it right now. Stephen, welcome to the show. Glad you could be here. >> Thank you, Jeff. >> You bet. Uh Corey and I are going to pepper you with some questions for a while here this morning. And uh let's start out though with the ultimate question for our listener who is saying, "Hm, Stephen is a new guest. Haven't seen him before." Maybe you could just tell them a little bit about what you're doing now and how you got there. A little bit about your background. >> Yeah, happy to. It's been a fun adventure. Um, as of right now, I manage two of the three back-end products uh for Widemote Research. So, my partner Brad Thomas, he's definitely the figurehead. I go on camera every once in a while, so a few people have have probably seen me, but he's he's definitely the star of the show. Um, but I run an option service, not a speculative. In fact, I'd call it the opposite, believe it or not. We'll probably get into that maybe later. Um, but yeah, I have a an option service and then a high yield service where I try my best to have the uh you can have your cake and eat it too. We know there's no real one of those, right? It's a matter of how far you can push in that direction. Um, so yeah, it's two interesting ways to get income that I think uh the average retail investor and I think u understandably so has some hesitancy around, right? And so as much as I try to uh give them really good like investing opportunities, it's also about teaching them. So long after they're reading my stuff, they'll still, you know, have those those skills and uh and that knowledge. And we've been at a marketwise in one form or another for probably four four going on maybe five years. So a little bit of time. Um less than some other people on the podcast, but we've been here for a little bit. And uh prior than that, prior to that, >> mostly Dan. Yeah. >> Yeah. Exactly. Yeah. Dan's he's we're talking multiples today. There there would be the first multiple of of the conversation. >> Um >> but both Brad and I wrote a lot on Seeking Alpha and that's how we met. And I was a little guy uh compared to Brad. But as we'll probably also talk about a little bit today, I specialized in alternative investments. So uh real estate uh private credit in the case of the public markets, right? business development companies and then also because of my hedge fund background and just uh most of my career and still a little bit to this day is on complex investment uh due diligence. And so that lets me take like what is this preferred or this little goofy thing that yields too good to be true? You know, how do I understand what the risks are, right? How do I kind of peel back the layers of the onion and figure this out? And my skill set, frankly, is better in that area. Uh, and so I kind of apply that institutional skills that I developed over the past 20 years or so to help subscribers today. Um, and more abstract, you know, asset classes like interesting parts of high yield options, etc. >> All right, that's cool. There's a there's a lot going on here, which I love because I love tearing into, you know, complex situations. I have a question about one of these high yield areas later, but we can get into some other stuff first. But >> yeah, for sure. >> Yeah. Yeah, we have I have a a question just to, you know, start it from the top down a little bit here. Um I'll I'll just make I'll phrase the question in the simplest most primitive terms possible and Stephen, you just, you know, go with it wherever it goes. >> Sure. Um, so in the in the most primitive terms possible, real estate lending is a long-term proposition, right? Mortgage loans are a long-term proposition, >> right? >> Um, now the Federal Reserve likes to uh, you know, manipulate the shorter end of the of the yield curve. >> They certainly do. >> They certainly do. And sometimes, um, as we were talking just before we hit the record button, sometimes the longer end of the curve, 10 years and out, doesn't really like it very much, which is to say for our listeners sake, sometimes the Fed cuts rates on the short end and the longer term rates go up, not down. Um, presumably this dynamic is important to a fellow in your uh in your niche. Yeah. So, first um first I'll be the first to say that it is pretty hard for anyone to figure out how all these levers work. So, starting with a little bit of humility there. Um I try to focus on what I can determine is true. Uh I definitely probably about as good as anyone at kind of predicting the future, etc. Um but even knowing that you don't know something, right, is still very valuable. Maybe that means you go through a floating rate option, right, or something if you just don't know. Um, but in terms of the interest rates in the Fed, it's kind of an interesting dynamic, right? So, the Federal Reserve does not have I won't say power because that's that's probably not the right word for it. It doesn't have as direct influence over interest rates as people think. And it's not that they're really wrong or they didn't observe something correctly. It's that in many times in the past when they have pulled their one lever, it's it's gone through the whole credit markets. So, it certainly looks like it, right? Like they pulled the lever, they put interest rates to zero and it worked right throughout the whole yield curve, meaning fiveyear bonds, 10-year bonds, 30-year mortgages all went down, >> right? >> But they really only have control over the front curve because they were dealing with banks in a very particular way um on kind of like short-term credit. Um, interestingly, and I think we're literally seeing this today, is if you push interest rates low and that through a ripple effect uh increases expectations for inflation, well, then a 10year or 15year uh, you know, obligation, right? They're going to price that higher because you're sitting over here like, "Well, shoot. If inflation goes back up to peak, I'm only making a 100 basis point spread, you know, onepoint spread. That's not very economic, right? What's the point of that?" Well, I'm getting, you know, inflation expectations are going up. Federal Reserve is is kind of uh throttling the the early part of the, you know, the the interest rate uh kind of yield curve. Not to use I'm not trying to use fancy language. just think of the yield curve as just interest rates today on like a six-month CD versus a 10 or 20, right? That's all that that curve means. If they make it too cheap in the beginning, um that that absolutely all things equal, you know, causes inflation. And people who have long-term fixed rate, you know, debt, if you're buying it, it's going to make you more nervous about where inflation is going to be in five years or 10 years. And so I think literally I saw new data today, Dan, on uh mortgage rates popping up a little and I've got a home I'm trying to sell and so, you know, I'm looking at it through like two lenses here from the investment one and the uh great, you know, interest rates are going up over there. So it's definitely a challenge um that to just give one more point there from you asked me about kind of an investment perspective when you're looking at um let's use real estate investment trust. that's the publicly traded real estate vehicle for most people. Um, >> it is it isn't as I think as simple as as as you might think, including some of the CEOs of those firms to do what we'll call the right approach because some of the best REITs stacked their uh, >> you know, they made their debt pretty short term, >> which means it rolled over quickly and they got exposed to interest rates sooner. and now they're looking around and they're like, well, >> uh, long-term debt isn't cheap either, you know, and they're kind of stuck. Um, so at least you can you can look at, you know, the balance sheet of the company, and it's not unique to Reese necessarily, but any long-term debt and just think, okay, is this actually a prudent move? What risk does this create for the firm? And you can it also helps explain sometimes, especially with real estate, um, whenever rates do move unexpectedly, you'll often look at your portfolio and be like, man, what the heck is going on with this stock or that stock? And oftentimes the answer lies in uh they structured their their finances in like a way hoping for this and it looks like we're actually going in the other direction. So it can be pretty useful. >> All right. Um I I I like the the fact that you started off talking about humility and the inability to predict. That's I just want our listeners to know that's how you know you're sort of that's one of the things that tells you you're talking to the right guy. >> Totally. Yeah. Well, one of them. Don't worry. You know, we got more more to talk about. Yeah. But but it's really important because people can't predict that kind of stuff. And and it's the the job becomes management and strategy and not prediction. >> That's right. I I think too many investors I I I hammer on this point even though it may seem a little you know laborious because I know for a fact that a lot of investors, individuals who are managing their own accounts who aren't necessarily financial professionals, they they get an idea about being able to predict things kind of stuck in their heads early on. Um I think a lot of people start out with that idea. So, I just anytime I can disabuse people of that idea, I I take the time to do it. It's that important to us, I think. >> Um, so let's talk about let's let's go at one of these one of these buckets that you play in. >> Sure. >> Um, how about options? I love the fact that you said these aren't speculative positions. Um, and I assume you're like, you know, selling options and selling spreads and things for income and and what are your I'm really curious to know because I do this all the time myself. I'm I'm curious to know like what your favorite >> what your favorite strategies are and how you how you think about it from the top down and then how you go about it from the bottom up. >> Yeah. No, happy to. Um so when I traded, it wasn't for long, but I traded for for a few years and I uh was right out of UT Austin, you know, where I still live in Austin and Mexico City, but I'm in Austin right now. on when I was here. Um, I was finishing up undergrad and was working at a hedge fund. And the reason I bring that up is because I was not very good at trading what the other guys traded. >> They were doing like momentum. They were they're doing technicals, not in the way most people understand it, but more like orderflow analysis using really advanced software. >> And they were they were pretty good at that. But, um, I was, you know, mediocre at best. I was better at risk management and better at doing due diligence. you know, no surprise, you know, at this point, whatever, 15, 20 years later. Um, what I found was that illliquid securities have like a structural benefit, meaning if you play it correctly, illlquid securities, um, can benefit people who understand them well. And the flip side's true, too. If you don't know what you're doing, illquid securities pay like charge you a tax. >> Yeah. >> Well, I love collecting that tax, and it takes a lot of strategy. Um, it takes some experience, for sure. But options compared to equities at least, one of the benefits for me is they're illlquid. And what that means is it's not unusual at all that you know I like selling put options to answer one of your questions directly. Well, on a put option, you know, the let's say it's a it's a it's a given contract, doesn't really matter. And maybe the premium is $3 and then some news comes out, the market moves a little. It's not unusual at all for that premium to go to $5. >> Mhm. >> Well, that's a dramatic increase, right? 75 whatever percent increase. Pretty remarkable. Um in the equity markets that's that's doesn't happen very often, right? I mean you have to go really aggressive into crypto or something with leverage or whatever. And the point being is if you're patient like on on my backend service, we do one trade a month. So I have a kind of a big framework that as it's getting close to when I want to, you know, make that publication, it's narrowing down the opportunity set. And typically, you know, we'll say like, "Oh, wow. This is interesting. Uh I have tools that I use and the premium is currently 50% more than it should be all things equal. And if you guys want to go through what that means practically speaking, I can I can do that. Um so not only is the uh is the put option attractive, but since it's illquid, the price moves very quickly. I mean, if you're using limit orders and you're very disciplined, other people's kind of aggressive behavior or knee-jerk reactions actually transfer money into your account uh with without not a lot of uh stuff in between. Um it really does work. And the other component that I think is important is that when you're selling put options on quality companies that you want to own, and that's a very important statement. If you if you remove any of those pieces, it doesn't work. But if it's high quality and it's not a stock you want to own, then you're actually selling insurance is what you're really doing and you're collecting those premiums. And sometimes uh an event happens and you you know you have to pay in the sense you have to buy the stock. Uh and that's okay as long as it's a good asset. But the return profile both from individually and for the service is very much actually like selling insurance where you're being careful on what you underwrite, right? You're not selling insurance on anything. Like, you know, there's probably some teenager with a new Mustang out there. Are you gonna sell them insurance for $10 a month? Well, it sounds laughable, right? Like, that's crazy. Well, what if it was 2,000 a month? Okay. Well, I don't know, right? Even though those numbers are vague, we instinctively realize, >> oh, wait a second, that actually sounds interesting. Um, so a lot of what I do behind the scenes is I run the math and uh do a lot of fundamental analysis is actually the main focus I have on the underlying company, not on the option kind of comes last because if the company isn't rock solid and I don't understand what the key risks are, then you're going to get a nasty surprise when you sell a put option on something you don't understand and it backfires because uh that you know we can talk about it but that will happen a lot you know if you're not careful actually. So that's kind of it in a nutshell, but that's my favorite strategy and uh kind of why it works. >> So selling puts on really high quality companies mostly in the real estate sector or just no or just >> Yeah, def not mostly in the real estate sector. Probably less less than 10%. Um >> okay. >> Yeah, it's pretty sector agnostic. Uh I have done it definitely own a few REITs but um yeah there's certain reasons why REIT premiums generally aren't as good as some other industries but yeah I go where the market uh tells me you know I did a lot a decent amount of AI related companies which normally wouldn't fit my profile but some of them got very cashri and the growth rates were so high I got comfortable with them and actually had some of our and this isn't a sales thing it's more of an indication of how the market works but ended up being some of our best trades because the volatility around some of those names was so high that the risk adjusted made sense, right? Um that volatility can help, >> right? Yeah. And right if you if you sell put if you do it like you're saying, right, consistently. >> Yeah, >> you can do it consistently, right? Over time if when people are seeking income like this is something you can do over and over and over again, right? This is a Yeah, that's a good question, Corey, because yeah, like you know, I do them once a month and people might think, well, yeah, but he, you know, he works very hard. It's his job to find the trade. You know, is it realistic for me? And, you know, you probably won't maybe find the best trade all the time. But I think a pretty practical way for listeners who are, you know, they're in the mix, right? They're in the market and they probably have maybe a watch list. I think a lot of people have that, right? Maybe it's 10 or 15 uh companies. Some of them are new and some of them are maybe like for me with Caterpillar for example, I've been I've sold puts and invest in Caterpillar I don't know how many times dozens of times and I have like almost 100% win rate. Um and that's mostly luck by the way but it just worked out well. So that's on my little list right that I'm kind of looking at. And once a stock kind of comes down to where you almost want to buy it, that's a really good indication that you may want to sell a put option on it because you're going to get, let's say it's Caterpillar 200, which is the old days, but say it's Caterpillar 200 and you're like, man, I would really like to buy it, you know, between 180 and 190. I'm disciplined. I'm going to be patient. Well, one option you can do, no pun intended, is sell a 200 strike call option. Collect, you know, a good premium. Maybe it's $15, right? It wouldn't be unusual in that circumstance. And then there's only two options here. You're either going to own the stock at 200 but at a lower cost basis, right? Because you collected that nice premium about $15 a share in this hypothetical. Or you don't and you just collect the premium. Those are the only two possible outcomes. Now, that doesn't mean that Caterpillar can't go to 150, right? It doesn't that that's that could definitely happen. There's of course risk. Um, however, psychologically, u, I like to think in probability terms. If you were going to buy it anyways at 185, then you were going to buy it anyways at 185. Whether you sold the put option or not, it's irrelevant, right? It it doesn't make any sense, even if emotionally it's a little painful when it goes down. So, that's a really good way when I have uh, like, you know, colleagues and stuff that are asking kind of how to get into it. A great way is, you know, what's your favorite low dollar stock? That way, the capital commitment is low. And let's say Ford is cheap. Ford was beaten up for, you know, years. It would go down to $10 a share and kind of rebound. And I'd say, well, if you're thinking about buying some Ford, the premiums, by the way, on Ford were excellent for a long time. It's kind of recovered now. Um, but for years, the premiums were pretty elevated. And that was a great way for a minimum amount of capital that you could you could sell that option. Typically, what would happen is you could get, just to give a concrete example of why you might do this, you could collect uh potentially maybe one one and a half years of forge dividend, which is a pretty significant dividend, right? In maybe 60 days. Well, if you're an income investor, this this makes sense. As long as you do it correctly, you got to be safe about it, >> right? That's awesome. Yeah, that's a great way. That's a good perspective on it. Yeah. >> Yeah. Because it takes the that strategy like if you almost want to buy the stock, uh it's a great time to sell a put option. That's it's a great way to think of it because it just takes the takes the psychology. It's like a psych psychological cheat, you know? It's like you you just take the decision- making out of it. Um you let the market decide for you. I guess it's it there's always that aha moment like when those sort when you what you're describing to me is like when that some when some decision can be made for you that just benefits you both ways. It's it's refreshing. So yeah. Yeah, it's a good point that way. Yeah, >> it helps you avoid what I really really hype on and the reason again I like examples in my let's say it's a eight page analysis that I send out to subscribers, right? Seven of those is on the fundamentals of the company not on how much money you're going to make theoretically, right? On the option because >> you don't need to know anything about the option if it works correctly. you're you're just going to get money the day you sell the contract and then two months later you're going to think you're a genius or you know whatever. Uh yeah, >> but that is not how it always works. And so the way you describe it, Corey, I think is so valuable is because >> the the temptation to sell a super rich premium on like a GameStop, you know, or whatever. it won't happen because you know that your style is maybe not to do that >> and instead you stick to companies you already know and I think that's like the major risk factor uh doing this because it's tempting you know we have to be honest about that if you sell put options on a couple good companies and you you look up one in the news that's you know being sued or some horrendous problem is happening and yeah the put premium will be high uh but it will be high for a reason >> yeah fall that falls under the general category of chasing yield and I was talking about too the framing the the u option income in terms of the dividend yield is is is it's something option traders do that our listeners might not have known. Just put it that way. >> Yeah. Uh so you were talking about um how where about the premium being where it ought to be you know um before and I wanted to get back to that about the premium being the level where it ought to be or you know at a given time maybe you know it's much higher than it ought to be and you said well we can talk about that later. >> Yeah. >> How do we know u ought to be? How we know how do we know what it ought to be? So there's a bullet down to kind of two factors. One is relative to other stuff. So that that's one metric is so if let's say it's Ford, if we stick with that example, um GM financially is actually not that far off Ford in many ways. Um neither of them are A+ rated, you know, etc. They have pretty similar exposures. They make most their money off trucks and SUVs, you know, we can go on. So you can look around premiums and that's kind of the the the simple market comp looking around. And the second one is relative to the company's fundamentals. And one of the most important aspects of that is um I personally and I don't always succeed in this but I personally try to find like define really attractive opportunities as if you think of um think of a stock price that's moving right but instead of looking at the stock price it's a chart of the valuation and it varies by company. It's not always this simple, but for a standard company, it's a Ccorp, you know, you can do it off net income. Usually, that still requires a little massaging, right? Because of M&A and uh you know, uh it's it's earnings is an accounting number more than a financial number. So, some companies, it's one and the same. Like the earnings is just how much money the company made. It's that simple. Other times, it's not. But on companies that are steady, which long-term dividend paying companies generally are, right? almost by definition their earnings are reflective of what the company's doing. So that's an important caveat. But whatever the earnings ratio is, if you look at it as a chart, it's going up and down. If it's in the bottom 10% of where it normally, you know, historically trades and it doesn't have some cataclysmic problems, that gets my attention, right? And by definition, 10% of the time it's going to trade down there. It doesn't necessarily mean things wrong. Sometimes it does. Um, if your put contract, if the strike price is, call it the bottom quarter of the valuation of the firm, you're probably going to be okay, right? Even if you put the stock, the company's high quality, you paid a reasonable price, um, you're probably going to be okay. I assume every put option will be put the stock. In fact, I actually welcome it because the ter return should be better actually, right? But if we really did find an undervalued gym, it usually will work out um even better over time. So, it's the valuation relative to what what price you would own it. Just like buying the stock, we look at the same way. And then really looking at the risks, like really spending time looking at the risks facing the company because the probability that it's trading that cheap and there isn't some kind of problems going on at least in the industry or with the company is low. And so a lot of my time, probably over 50% is just going through those risks and trying to get a good understanding. And the market is uh I think it's rarely long long uh rarely wrong long long term. And who am I to say frankly the market's right or wrong, but just based on where their stock goes, right? Uh but it's really it's it's wrong all the time in the short term, which makes investing difficult uh if you if you focus only in the short term. And so there's tons of cases where, you know, an earnings miss happens and then you read through it and they raise guidance. So they're actually anticipating better results over the next 12 months. Um, but a slight miss causes every Wall Street analyst, you know, to hit a massive sell order. The stock drives, you know, drops 10%, the put option premium goes up. Um, assuming it was that simple, you know, that could be like a good setup when I'm talking about kind of analyzing the fundamentals. >> I It fascinates me. I think it's really important to note that you talk like a long-term stock buyer. you know, you look you you talk like a long guy who's buying stocks and holding them for the long term, but you're doing that analysis and you're taking these, you know, shorter term, much shorter term option positions and you're talking like like you said, seven of the eight pages is the fundamentals of the company as though you view, you know, you view you're viewing the stock as ownership in the company. You're not just, you know, trying to uh flip a trade for some technical reason or something. That is re to me that's really cool because I I've made my living for 25 years. Porter hired me 25 in in September of 2000. We were talking about, you know, how long people are have been around uh the company. And um that whole time all I've done is pick stocks. I haven't done any options, you know, trading in not in a newsletter, but I've done it in my, you know, in my own account. Um, and it's this it's it's the almost the identical process of assessing the value of the company and assessing the fundamentals of the company and assessing the risk in the way in the sort of detailed manner that you say, but except one little difference. I want to hold the stock for 10 years. you want to trade an option for two months. That's fascinating to me. >> Yeah, it's interesting. And this kind of um it aligns with a core thesis I have which whether you're even doing like hedge fund due diligence like I or private equity or these things that all seem like, you know, very different from each other, very abstract. Um, for me at least, even if it's a short-term options trade or like a 10-year hold on a really good tech play, you know, whatever, the actual underwriting to me shouldn't change a ton because the truth is, if we're being very honest, like nobody predicts the Great Recession very well. And even if they did, they don't know how it's going to happen exactly, right? We we it's just too many human uh random human events that are going to be involved. So the point is if I can do a reasonably good job of protecting the downside by looking very closely at it then in the event which it's going to happen we've definitely been put stocks and the the win rate rates pretty good on those um not everyone but pretty good then I'll be minimizing losses where instead of a 50% loss maybe it's five or 10% because they've missed earnings and it's like you know what this this company doesn't earn my money anymore the fundamentals that we reviewed it's the trajectory is not very good anymore. Um, and then if there is a crash, which is always coming, right, we don't know which sector, we don't we don't know how it's going to work exactly. Um, you want to be in a company who understand well that you can either make a decision, hey, it's time to jump ship and go, you know, move our allocator capital somewhere else or hey, I'm not going to panic on a draw down, right? That's we're all susceptible to that. And and the more kind of retail focused you are, I think that uh it just human nature, you know, tends to override it. And the more confident you are in what you own, the less susceptible you will be to a panic move that you regret, right? I mean, look at COVID. That's probably the most extreme example. >> That's right. >> But yeah, you just that helps me and the and my newsletter uh customers, right, is they're like, you know what, I know this company. I'm not terrified. I'm not going to sell just because we put the stock. Because most of the time that's it's just market volatility. Yep. Yeah. That people wonder um you know, how do you know that you want to you know how the stock's down 20 or 25%. How do you know to keep hanging on to it? Like well remember that eight to 10 pages of stuff I sent you like two months ago. It's all that >> that hasn't changed. Yeah. >> Yeah. >> And if it has, that's okay, too. You know, we'll acknowledge that >> and we can move on. Um, >> yeah. >> But yeah, I mean it it this is kind of a funny way to look at it, but I think it can help people psychologically. Pull up whatever company you want. The chart goes like this, >> you know, Nvidia, whatever you want. It may be more like this than this, but you get the idea. There's huge pullbacks. And the truth is most the time, >> um, if you did some valuation work, you know, that can help you get in the right range kind of on the chart, so to speak. But overall, did the company's uh outcomes like change massively as the chart? I mean, no, not really. Probably not. And yet, if someone had bad luck and bought at one of those little peaks, they're depressed when it goes down. And if someone got a little lucky and bought at the bottom of one of the troughs, they feel like a genius. Well, the decision- making is the same. Yep. >> Right. It's roughly the same. Um, and yes, we can add some alpha, so to speak, by being very disciplined, like when we buy. Um, but overall if you know if if company stocks just went like this or maybe like Visa, you know, for years Visa just kind of went like this. Okay, fine. But there's a reason I said Visa. There aren't really any others. Pretty much everyone's very volatile, right? And uh it doesn't mean you're wrong just because you didn't time it perfect. >> Right. And and perfect timing, let's face it, it's mostly luck anyway. Nobody nobody h nobody has it. >> Yeah. >> Um like we said at the beginning, you know, you need a dose of humility when you do all that. You can't predict anything but you can do the the point is though you can't predict anything but you can do the fundamental work. You can absolutely learn to identify what is a really great business and what is not. And once you like once you get the basics of that they tend to hit you over the head. You know they call themselves out to you when you're looking at the fundamental when you're looking at the the business and when you're reading the filings and when you're looking at the financials. It's like, okay, consistent margins, gushing cash, great balance sheet, you know, raise the dividend every year for 50 years or something, you know, whatever it is, right? Whatever it is. >> Yeah. >> All right. Um, so let's I want to talk about high yield now. >> Sure. >> Um because like um we had Harley Bassman on the show and um you know, he he seamlessly talks about bonds and options. I mean, it's all kind of a a flow for him. So, it doesn't surprise me at all that you're the high yield guy and you're the options guy. Um, maybe actually maybe that's a place to start. I hadn't planned on doing this, but but what is what why is that? Why why do the Bond guys know options so well? They all seem to. >> Well, I don't I haven't experienced that too much personally, but you would have a better view, Dan, than me. >> Okay. >> From your seat. But it does it does make some sense where um I mean you guys tell me but I would say that really you could if we dump all credit into a bucket even though it's very very different. >> It it's in the same bucket isn't it? In most people's mind it's kind of all the same. >> It's not interesting. >> It's it's almost too complicated by how simple it is where someone just sees a yield. Yeah. >> And they go I I don't under I don't understand how this works. Like if the company does well, what happens if it does poorly? Well, nothing. But what if it does really poorly? Oh, you lose all your money, right? Like that's kind of how it works in a nutshell. Um, and so I think they're both considered kind of abstract and they both require um >> I think it I mean you could I think you could argue this argue this at least. It takes a lot of due diligence just to find an opportunity. >> Equities aren't like that at all. Right. You can you can spend two minutes and find a hundred interesting stock positions. >> Yep. >> I challenge you to find that in bond, right? Bonds can be tough. >> Uh especially individual bonds or ones that don't yield, you know, >> 4% and just don't make sense for anyone. You know, just the truth is, right, spending the time to find an individual bond that just pays kind of a quote normal amount, it's a waste of time. It's not very interesting. Um and yet the bond, you know, the fixed income market's also a little illquid. uh things are not priced properly all the time. Some things are really priced well, but you go into kind of the bottom of investment grade. So, think of a quality companies and you're at the bottom. So, you're still quality company, but you're at the bottom. And if you go much lower now, it's questionable, right? Whether you're a quality company, that area is not very effective and the bond prices are are pretty volatile, especially whenever there's a little bit of a crisis. And we've had a great investment opportunity the past few years where we had that regional banking crisis or the Silicon Valley component. um any recession and it causes uh again not like the highest rated bonds but ones kind of in the middle and below to become very volatile and you get some great opportunities. Uh yeah, but for me high yield and I probably don't define it like most people is I'm including you know preferred I'm including bonds uh not treasuries or anything generally speaking but you know whatever may bonds that yield more like uh six to six to nine yield to maturity. So that just means including capital gains you know to maturity um and then even some equities believe it or not. So business, >> you know, business development company, >> EDCs, that's what one I was thinking of. And like REITs, MLPS maybe or no, >> it Yeah, it kind of um it's pretty subjective, frankly. I definitely don't have a perfect definition, but um yeah, if the yield hits kind of a a benchmark, the total return kind of hits a benchmark and the risk is acceptable, >> then I uh I kind of will include it. And the reason is the way that I look at it is, you know, I'm I was blessed to have a reasonably good understanding of these different asset classes that most people don't because I did it for my career for so long. So that means I try to look at all of them. I try to have a big responsible but a big opportunity set so I can try to find the most interesting best risk just returns, you know, for uh for the customer. That's kind of how I look at it. >> Okay, that Yeah, that makes sense to me. That makes sense. Let's face it, it takes some more work to do the bonds and the and and options. >> Thank goodness I enjoy it because it does. Yeah. Most of them result in nothing. So most of them are just been hours and then at the end, you know, I'm like, nah, I you know, this isn't as good as I thought it was and so be it. You just move on to the next one. >> Yeah. The bond option guys I know are all like you and and Harley. It's like deep digging, you know, scouring the market for for opportunities that nobody else seems to be able to find or, you know, most people can't find them. >> Um, that makes a lot of sense, but also there's a math component in there, too, >> right? >> Um, >> you know, very very, you know, good math people are doing both things, it seems like. Anyway, that this is a fetish of mine. and I'll get off of it, but um do you have I mean I feel like we need a concrete example like do you have a name like an equity or anything or even just a company whose bonds you like right now that you can talk about? I know you have subscribers and they probably don't want you giving away their latest greatest stuff. >> Is there a concrete example that we can use that kind of highlights your your style and why it works for you, you know? >> Yeah, I can I can use some. So um Brookfield is I think as the second largest alternative investment manager. So what that means in simple speak is you have like a maybe a Black Rockck and you have these uh other firms that really focus in ETFs and mutual funds. Vanguard for example, >> they don't do a ton of alternative investments. That's more of like a Blackstone, right? Blackstone has the biggest real estate portfolio in the world, right? Stuff like that. >> I was going to say McQuary, but Blackstone Yeah. >> Yeah. They do a ton of consulting. McCquory does too. Um, Blackstone, you know, they're like Strict Belterm Investments and, uh, you know, Brookfield, I think, is the second largest and they're actually a Canadian firm and so they're pretty similar to Blackstone. They just have a little bit different approach. It's actually more heavy in infrastructure. That's kind of what they're known for is I think they're the world's largest owner of infrastructure. Think of uh dams, um, maybe hydroelectric facilities that those kind of go in two categories, right? Um, but they're like the the largest infrastructure owner. Well, Brookfield, I don't know if it really helps the company. Those guys are probably way brighter than me, so I'm going to assume it does. Um, but one of the things that they do is they financial engineer the heck out of their business. There's Brookfield Asset Management, right? There's like I could probably list 10 of them off the top of my head. Um, well, each one of those entities ends up having its own capital structure in a way, meaning their own debt, equity, etc. in a way that Brookfield thinks is like optimal. A lot of firms don't do that. They just have like one company and they want the lowest cost of capital. So, you know, they do that. It almost like if you know, you have a teenage son and you're like, you know what, actually, I'm going to make you get the loan because at least it's lower liability on me. Uh, but your interest rate is going to be double. A lot of people, the parents like, nah, I'm paying for this anyways, right? I'm just going to consolidate it under me. It's a little bit like that. Uh, the difference is that in Brookfield, most of the bonds do have a parental guarantee. It's not the easiest to find. It's not always it's it's actually pretty difficult to find. But not all of them, but most of them do. And because Brookfield is trying to optimize uh everything so much, they have entities in Bermuda. They have entities Cayman Islands. They'll have a bond issuance in Canada. The same company has a bought in somewhere else. And those have no research. There's nothing out there, no coverage. And many of them are actually tradable bonds, meaning they have a ticker. They're like baby bonds is kind of what people call them. >> So again, the financial engineering part, at least this one helps us, right? They made it where you can you can just trade it like you're a Fidelity account. >> Well, these bonds uh are often very long-term because they match the infrastructure. So it's an entity, it has a bunch of infrastructure, you know, and the the lifespan of the infrastructure is whatever 30 or 40 years. So they issue these bonds. Well, because nobody understands most of what I just said, right? Practically speaking, it sounds like gibberish, right? >> Yeah, because it kind of is. And what Brookfield does is so unusual. People just don't put these pieces together. And you know, it's almost like why doesn't Brookfield make this more evident? It would help it would help them. But to give you an example of what happened is they they issued some of these bonds on some of their infrastructure. Uh again, you if you put Brookfield into a like whatever your search bar is on any financial services website, you'll actually see a bunch of bonds pop up and you can go explore those and a lot of them had uh current yields of between like five and five and a half. So not current, it's wrong word for it. Um at par value. So when they issue the bonds, maybe they paid five and a quarter. Whoopdedoo, right? Okay, fine. That's not bad. But whoop-dedoo. Well, many of those uh particularly when I recommended subscribers and they're only a little bit above where that is now. Um they traded, you know, at like 70 cents on the dollar, 65 cents on the dollar. >> Now you're talking. >> Now you're talking, right? Um now you can do a little arithmetic and you go, wait a second, that five now starts with a seven. But it's it's actually much better than that. That's the immediate kind of gratification is wait a second I would I would buy a B now that I understand it right Stephen and Dan Corey helped explain it to me that actually Brookfield is a guarantor all the way down >> a seven handle seven something% yield on this bond super great it is great but it's it's much much better in the sense that if interest rates you know almost win but def but we'll say if interest rates over the next 5 10 year whatever right do come down a that bond is not going to trade at 70 cents or 65 cents on the dollar anymore. Now, I'm not saying it'll go to par necessarily, but it'll probably go to 80, maybe 85. >> So, that 7% yield may not even be the biggest return component. It may actually be the capital gains. And so, that's a really interesting setup where >> it's not obvious when you see this bond and you see the price and you're thinking this Bermuda bond, what the heck is this thing? Um, but I love solving those puzzles and putting the pieces together and uh eventually in my opinion what'll happen is it will trade back to par and then everyone will say how obvious it was. Oh yeah, I can't believe everyone didn't buy these. Didn't you know they're backed by Brookfield and but you know since they're so discounted uh I think it makes people even more suspicious when that's really discount just due to interest rates. It's it's nothing to do with Brookfield or the infrastructure. It's uh it's what we talked about at the very beginning is that they're just trying to discount things and make it work for inflation. But I'll tell you, if you just own that, it just pays you 7% till the bond matures, which by the way, it has to go to par when the bond matures anyways. But >> that's that's not a terrible setup, you know? >> Right. Yeah. Oh, yeah. That's that's it's you've just described one of the beauties of high yield. You know, you get a nice capital gain plus um a great yield. You know, you get paid. I remember I'm trying to think I I I knew Brookfield uh I knew Brookfield way back when um before it was an asset manager. I've recommended too many stocks in Extreme Value since 2002. So I probably can't find it here in the list, but um I know I covered it at least once um when it was BAM, you know, Brookfield Asset Management. >> Yeah. Before it went to BN and the different ones now. Yeah. >> Right. Um, and then but but I knew it before it was BAM even, you know, when it was before it was Brookfield Asset Management. Anyway, what what they've done though, like you're right, if you go to like if our listener just goes to Yahoo Finance or whatever, Google, whatever it likes, just type the word Brookfield and 10 tickers come up. >> Yeah. Overwhelming. Yeah. It's like I don't And the funniest part to me is that they and again I'm grateful for this. They made a lot of them baby bonds. So like you can actually go buy them in $20, literally $20 increments if you want. Yep. >> Which is extremely >> like preferred stock or something. Yeah. >> It's great. And you tend to get less slippage too when you buy the bond. They're not as illquid. You put the limit order and it works great. So it's clearly retail focused >> but nobody knows about them. They're too complicated. I mean Brookfield Infrastructure Partners, that's one you probably seen, Dan. VIP, they the biggest infrastructure owner is an individual entity >> and they have like four different bonds from four different countries and >> you know it's all it's all the same parent. Um, but who's going to figure I mean relist? Who's going to figure that out? They're going to see a 7% yield and again totally justified probably saying, "Eh, >> too good to be true." You know, I'm missing something here. I'm going to go on to something else, >> right? Yeah. Have you ever met Bruce Flatt? >> I don't think so. >> Yeah. I met him a couple times years and years ago, like at Grant's conferences and stuff, and I thought, here's this guy running this massive thing, and I just walked right up to him, started talking to him for 10 or 15 minutes. He's like the most sort of down to earth. Well, he's Canadian, so he's polite as hell, right? >> Friendly. Yeah, there we go. >> Um, but and approachable. Um, but yeah, I just thought, God, this guy is like the, you know, I'm looking around the room. He's like the bloody genius, you know, like I I don't mean this in a derogatory way, but like the paperhanging genius of, you know, of of of Canadian markets. and and and here he is and he just seemed like the most, you know, downto-earth guy. And they're and I'm like, God, they're running this giant complex thing. It's um when you read when you read their filings and you get into all this, it's um it's not easy to to work it all out, is it? >> Not even close. No. The Brookfield one, whenever I've done uh >> you know, really I mean, everything I do has a strong education component. I think that's the I hope at least that's the most valuable thing I actually provide. >> Not that I don't want the investments to work out. That's you guys have heard how much work I put into them. But yeah, >> teaching the person I think is the most important because that's going to help their decision- making, you know, hopefully the next 20, 30, 40 years. >> But I use Go ahead. >> I'm I'm sorry. I just I it just the the what I this is for our listeners sake here, Stephen. Nobody thinks about just identifying the equity pieces and the debt pieces like you you just and and then ownership stakes in all of the other tickers and stuff. You and just working out the capital structure and those ownership stakes is like that's real work for for a company like Brookfield. Anyway, I'm sorry I interrupted you, but >> No, no, you're good. I um that's it was actually really in last what I was going to mention is that >> I've done some uh strictly educational pieces occasionally, you know, just as a kind of a freebie for the >> for, you know, hardworking newsletter subscribers. And uh I've often used Brookfield to explain the concept you just mentioned, Dan, about you know, okay, well, Brookfield, this you know, I'll keep it simple but still effective. Brookfield entity one has equity, preferred, and debt. Which is the best? Well, the there's no best, right? Not really. Um, but if you walk through the pros and cons of them, um, you can often find that it would, you know, I think you mentioned this before, Cory, like it'll jump out to you as no, this is the like this is the best for me because my priority is maybe capital preservation, uh, you know, and maximizing my yield. So, actually, why the heck would I ever do the equity if I can get the preferred that pays the same, maybe even more, right? Or or the bonds. And on the BDC subject, Dan, uh, in the high yield advisor, we still have they're almost back to par now, so we won't be in them for much longer. I think they mature next year. Um, but we bought some bonds during whatever that crisis was maybe like two to three years ago when the high yield sold off. Um, you know, we picked up yield to maturity bonds on investment grade BDC's for like seven to eight, you know, 7 to 8, eight and change. Some of them are eight and change. And then the equity, it yielded higher, do not get me wrong, right? It was yielding kind of normal BDC 10 to 11, but to me risk adjusted for the average person and 8 and a half on investment credit where it's never going to change. Realistically, it's not going to change your portfolio. is just going to go like this, you know, through 2026 versus BDC's which are very volatile. They're primarily, you know, retail investor home. I laid it out, you know, and of course these are just suggestions for people, but I was like, this doesn't happen often, right? When the bond gets this close to the equity, I try to take notice uh because often it's a great opportunity and then they'll correct, right? Like pretty soon it'll go back like, "Oh, I'm not interested in the debt anymore because it yields five." It's like, "Well, yeah, now now you're not. course uh you know it's too far off the the common equity >> right I know you're talking bonds mostly here but I'm going to briefly try to take this into one thing you mentioned before the highly leveraged like crypto right >> there's these high there's these super high yielding you know products out there now like uh you know 30% yields you know and and whatnot and you talk about your hedge fun or um yeah, your hedge fund days and and kind of examining all these, you know, where does the yield come from? What do you make of, you know, not necessarily like a mic a micro strategy, but like there's all there's like a whole there's dozens of them now. Um what do you make of like what should people look out for when they see like these double digit yields and and things like that? >> Yeah. Well, it's it actually it's funny as a reminder because I saw those a couple news articles pop up on those exact funds you're talking about, Cory, and I have not dug into them very deeply, so I won't pretend like I have. Um, but I can talk in generalities that will probably just lead us to the same conclusion. Um, the reason that I spend all that time on that Brookfield, right, weeks maybe, trying to figure it out, is because if you don't understand where the number comes from, whether it's a seven or 8% or whether it's a 30%. There's a good chance it it's not going to work out for you. You just there's there's too many things going on that you're not aware of kind of by definition, right, that can that can cause you problems. And when you don't know what you're doing, and this applies to me as much as it applies to anyone, when that thing that you paid $1,000 for goes to goes to 700, then 600, your pain is going to go up and you're going to hit a breaking point and you're going to sell. You're not going to sell near the bottom. It'll probably be like the print. It'll be right at the bottom, perfectly timed, because you and the other guys are all in the same boat, right? You because you don't really know what's happening. All you know is it's supposed to go up and it's going down. So, anything with a double- digit yield is a this is definitely a shortcut. Anything with double- digit yield you should look at very closely. And I've recommended stuff with, you know, 10 to 11% yields. It doesn't mean that there's a it's a terrible investment or anything, but you got to look at it very very carefully. And then I do think it's safe to say there are certain sectors, crypto is probably the easiest one to kind of uh not attack here, but highlight um where it's very retail focused. People are getting a lot of money when they make up some goofy idea, right? They they come out with a new fund. You mentioned there's like 15 of them. There's not 15 of them because there's 200 grand in each one. It's probably because there's 10 or 20 million dollars in each one. And these guys, if they can come up with a strategy to make a lot of fee income off you, >> they will. Yeah. >> They don't have any responsibility to to like make you do a test that you understand they're offering. >> There is in the private world, by the way. In the private world, there's a lot of paperwork and there's some restrictions. But when it comes to stocks, for better or worse, you can buy whatever you want. So, I I definitely recommend trading very cautiously. And if you can't explain to your spouse or good friend how the 30% yield like comes from that's a good warning sign. >> Yeah, goofy is a polite way of saying crazy I think. So, because I don't I I thought I thought, "Oh, Stephen's going to tell me where the yield comes from." Because Corey was framing his question that way and I was, "Oh, okay. Okay. He doesn't know either." Nobody, you know, I can't get anybody to tell me what is the real true source of those yields. You know, it's it's um and that could be a shortcoming of mine. I I don't say that it isn't, but I think it's it's interesting that we can identify the source of of yields in, you know, preferred and equities and >> bonds and we can't identify the crypto yield. >> Yeah. Well, I'll tell you too that again being totally transparent does not necessarily apply to those. It probably does, Cory to the ones you asked about in crypto, but uh I don't know for sure is that the number one way is return of capital. So there's a lot of high yield plays I've had people send me over the years that yield maybe close to 20 >> and a lot of it's a return of capital. So you put in $100, they're literally sending you back$1 or $2 a month on top of whatever it earned. And they're allowed to do that, by the way. They just have to disclose it. So you can guess where the stock price is probably going to go if they're just literally giving you your money back as a yield. And then the second most common is derivatives. So they're using derivatives taking on one type of risk or another or maybe multiple. And then that's the other way they're kind of engineering uh the high yield. And both of those work out the same way your gut instinct is telling you right now usually. >> Yeah. All right. This is a good place to ask our final question. Um, our final question is the same question for every guest, no matter what the topic, even if it's a non-financial topic. Um, if you've already said the answer to it, feel free to repeat it. >> Um, but the but the financial question is for our listeners sake, if you could leave them with one takeaway or one thought today, and like I said, if you've already said it, that's cool. You can just repeat it. One thought, one takeaway today, what would you like it to be? Um, well, I'll give them maybe a little challenge, uh, maybe a little growth opportunity. I would say that odds are one of the topics that we've talked about today is a little newer to them. >> And I would say, um, my suggestion would be to go research one of these areas and just kind of learn as much as you can about it. And maybe from, uh, you can go back in the podcast and, uh, hopefully have given you maybe a few things kind of what to look for. Um, but I would just encourage you go explore these different parts of high yield. Maybe explore options for the first time. Not even necessarily risk any money. Um, but just go explore them because the truth is a long time ago I didn't know about any of these sectors. And I started as a teenager like 14 15 investing little stocks and I wish I held my $200 in Apple and I didn't. I sold like a chump, you know, I like doubled the money, you know, 20 years ago, whatever. Um, but the point is, you know, you can find people that will help guide you as you get, you know, more into it. That's I also had great teachers, you know, as a due diligence officer for many years. Um, but that would be my suggestion is go find one of these that sounds interesting to you. Put some time and energy into it and then who knows, maybe that really helps your portfolio and your investing, you know, long term. >> Nicely said. Thank you for that. And thanks for being here, man. It was really great to talk with you. >> Yeah, greatly appreciate the invite. You guys had great questions and uh if you want to have me back, happy to help. >> Oh yeah, I'm I' I'm already thinking of questions for having you back, you know. >> Look forward to it. >> Yeah. All right. Thanks a lot, man. >> You're very welcome. >> Hey, I like that guy. I like me some options and I like me some high yield. That was cool. I could have done another two hours of that. Really, honestly. It was great. >> Yeah, you you definitely could just go exploring, you know, income generation, uh, which is on the mind of a lot of people right now, uh, >> within the last five years specifically, you know, I'm thinking of just like inflation and people trying to keep up with with higher prices and everything. And um you know we have you know we have similar products you know in terms of the the put selling uh you know at Stanbury for a reason like it's it's something if you if you know what you're doing and you do it on stocks that you are comfortable owning in the long term like we were talking about. >> Yeah. >> It's kind if you're like looking for income it's kind of a no-brainer to to do to do it. I mean if you have enough capital to put to put to work. Um >> Right. So yeah, and then high yield um opportunities. Yeah, it's really that like you were saying like that math calculus about finding like what what's what's being overlooked here in the market and who's you know and a lot of times it's on the the just stuff that most people aren't looking at, right? And like that's where that's where you find the opportunity if you just like do some some work if you have the time to do it, which not everybody does. And then you find go find someone like Stephen who can do it for you. So >> yeah, and you you mentioned, you know, people were concerned with income. I would go back farther than the last few years. I would go back to taking the Fed taking interest rates to zero and everybody going, I can't own bonds anymore now. What the hell do I do? And the answer is absolutely options. Selling options. Um, and we had another guest on the show, Mike Green, who their their corporate mission seems to be very close to taking all the, you know, complex option strategies out of big institutions and offering them, uh, in the form of, you know, retail ETFs. Um, you know, some of which you may be interested in, some of which you're not. It was it's not a recommendation although I have recommended one of them which I mentioned before um when we had Harley on and I recommended his his mortgage um ETF because he buys recent vintage mortgages which yield 6% instead of you know the older ones which are like 3%. So but yeah Steven's focus in those two areas is very cool and I'm I I didn't know about him. I didn't know he was under the market wise banner. So, um, he's going to be like my, uh, my new, um, you know, he's he's going to be the new guy under Market Wise that I'm fascinated with now. I want to read everything. I want to read all the option stuff. I want to read all the high yield stuff. And knowing that he focuses on the fundamentals of the business. He's not just like a trader. That to me is gold. That's where you get real conviction and and those people like they're the ones I want to know about the people who understand the business and then structure the trade. So anyway, that was awesome. That was a a fun interview and a fun episode of the Stansbury Investor Hour. I hope you enjoyed it as much as we really truly did.