How To Survive the Next Crash AND Still Win I Steven Bavaria
Summary
Investment Strategy: Steve Bavaria introduces the concept of the Income Factory, an investment approach focusing on generating returns through high-yield credit and income-producing assets, rather than relying on capital gains from equities.
Market Volatility: The strategy aims to reduce stress and volatility associated with traditional equity investing, particularly during economic downturns, by focusing on predictable income streams from credit investments.
Asset Classes: The Income Factory utilizes funds that invest in senior loans, high-yield bonds, and preferred stocks, offering a more stable return profile compared to equities.
Risk Management: Despite the risks associated with high-yield credit, Bavaria argues that defaults are predictable and manageable, making credit a viable alternative to equities for achieving long-term returns.
Investment Horizon: The strategy is suitable for long-term investors looking to compound returns over decades, with a focus on reinvesting income to achieve growth.
Current Market Conditions: In light of recent macroeconomic uncertainties, Bavaria emphasizes the resilience of credit markets, suggesting they are better positioned to weather economic shocks compared to equities.
Accessibility: While direct investment in high-yield credit is typically institutional, retail investors can access these markets through closed-end funds, which offer diversification and potential discounts.
Philosophical Approach: The Income Factory is presented as a way to "play not to lose," focusing on steady income generation rather than speculative capital gains, aligning with the practices of institutional investors like pension funds and insurance companies.
Transcript
Everybody can invest in the S&P 500, but doesn't it make you nervous sometimes the volatility? I've invited a guest today that will explain to us how we can generate similar returns with a lot of less hassle. His name is Steve Bavaria. He's the author of the income factory and I'm really looking forward to the discussion with him because who doesn't want to invest stressfree. Let's see how we can achieve this in a time where it's so much uncertainty. So, welcome to Sore Financially where we discuss the macro to understand the micro. My name is Kai Hoffen and I'm your host of this channel. I'm really looking forward to this discussion. But before I switch over to my guest, hit that like and subscribe button. Helps us out tremendously. And uh if you haven't noticed, we're back in the studio. We've been on the road for 6 weeks. We are back and we've got lots planned for this fall. So hit that subscribe button. You won't regret it. So thanks so much for doing that. Now, Steve, it is great to have you on the program. Thank Thank you so much for joining us. >> Thank you, Kai, for inviting me. It's a pleasure to be here. >> Yeah, really looking forward to this. uh looking forward to learning a new investment angle and uh a different approach to investing. Stephen, before we get started and talk about macroeconomic situation in general, run us a bit through the income factory. What is it and uh yeah, run run us through it. How how can we duplicate it? Well, the income factory is a kind of clever name I came up with for my for my book that I wrote about five years ago, but it was a way of investing that I evolved over time that was it's really classic income investing of the sort institutional investors like insurance companies and pension funds and other uh big entities like that have been doing for generations. And I learned about it as a banker many many years ago. And then I became a journalist. And as I retired and started investing my own uh money mostly in an IRA, um I found that uh it was tough. It was very stressful, as you said, to try to do classic indexing or dividend growth investing because when you're investing in growth stocks or even just normal S&P 500 type equities, you're basically expecting a yield of about 1 and a.5% because that's what the S&P 500 pays. And if you want to make your nine or 10% average equity return, which has been the equity return over the last century, basically you're really betting on getting an additional seven or 8% capital gain on average every year in addition to your 1 and a.5% or so dividend. And you know, you don't get that every year. So you have these ups and downs and it's tough to sit through the downs while you're waiting for the ups to come again. And not everyone has the, you know, true grit sort of uh patience to do that. And I had a lot of trouble, especially, you know, you hit the great uh recession of 18 years ago or so and then the more recent COVID thing. It's so easy to lose your nerve and say, "Hey, I'm going to move to the sidelines and wait till things get better." And of course, if you do that, often experts will say you miss the train when it leaves the station. and there's no conductor saying, "Hey, the market's about to go up again. Get back on the train." So, I found investing in credit and high yielding types of mostly credit, also some utilities and things that equities that pay extra high yields where you're not depending much if at all on growth, but you're getting your entire 8 n 10% or so. Lately, it's been a little more in yield. And if you can get that, if you're in a if you're younger and saving for retirement, you just reinvest and compound at that rate, uh you will do just as well. Even though the the the conventional market and I've written about this and I got treated like a heretic when I proposed this 10 or 12 years ago and started doing it and wrote about it on Seeking Alpha, but you double and redouble your money. If you're reinvesting it at 9 10% every 8 to 9 years, you know, you do that for 30 years, 40 years, you're going to do just as well as if you did an index fund, you know, and made your 10 12% average uh on equities because some years you'd have a minus five, other years you'd have a plus three, others you'd have a plus 12, etc., etc. But it math is math and it comes out the same. So my that's my basic shtick my philosophy and I've start I do it it's not without stress I mean you still have even in the credit markets uh you can be invested in a portfolio of senior loans you know they're funds that I invest in senior loans and high yield bonds and other credit corporate credit instruments where you know you're going to it's very predictable what you're going to get you can even predict levels of default that are statist statistically demonstrate that are statistically uh calculated over the last 40 years. So we know we know what defaults are going to be in normal years and recession years and super bad recession years. But even when you crank all that in, you pretty much know what you're going to what you're going to get over time, which you don't know in an equity portfolio. And it just does make it easier to sleep at night um even during periods like this. And that's what we'll get into. It's not without stress, but it's a there's always stress unless you want to put your money in high, you know, in government bonds and things like that. But if you want to make an equity type return, there's going to be stress. It's what sort of stress and I find credit risk and that sort of thing is a lot easier to project and live with than the volatility of the equity markets. >> Yeah, abs. Absolutely. And nothing is stress free if you invest in public markets. I might have exaggerated a little bit in my opening here, Stephen, but um you you when you ran through sort of the the asset classes and things you're investing in, like besides utilities, like how recession proof is is the investment the investing strategy here, Stephen. Um how can we sort of put that into a framework that we're currently? >> Yeah, pardon. I'm a bit nerdy. That's why I got into I was a banker. I studied law. I worked I worked in fields where you spent a lot of time thinking about what could go wrong, you know? I mean, my wife finds me a bit nerdy that way, but boy, >> it's >> might be your German heritage, >> but in Yeah, maybe. But it comes it uh it, you know, it's valuable in investing. avoiding the huge mistakes is a bigger is is going to help you better in the long term I think than trying to hit the big win here and there and that's why you know most uh oh Nobel prizes have been won by people explaining that you know everybody can't beat the average if more people than 50% or well the median will for you stati statistitians out there I want to get it right but you know if if everybody body beat the average, it wouldn't be the average. And that that's why an index fund, if you have the if you have the patience to just stick with an index fund through thick and thin, an equity index fund, you'll do fine. My income factory is basically an alternative to that. And the kind of asset classes we tend to use would be funds that buy senior loans, high yield bonds, even preferred stock as a form of credit more than equity. And what you what you're betting on is that you're going to get back that that close to 100% of those companies, those issuers are going to pay back their debt on time. That's what you're betting on, that companies are going to pay their debt on time. And you know, or we know that if you've got a portfolio, if you invest in a portfolio of loans through say a closedend fund, there are a lot of senior loan funds and and they're paying you a distribution of 9 10% let's say that that reflects their portfolio, what it's doing, you know, inside the fund. And in a default, well, let's start with normal times. In in normal economies, you're going to have you're going to have default rates of maybe 1% 2%, you know, and then in a recession, an garden garden variety recession of the sort, you know, the d the hard landing they were predicting a couple years ago that we still may not get or might who knows what post tariff is going, you know, with the tariffs and everything. We don't know what the total impact's going to be, but even in a sort of ordinary downturn recession might go up to four, five%, 6% defaults, and then in a really bad recession like the so-called great recession of 2008 or so, maybe it goes up to 11%, 12%. What people don't realize, they see these default headlines, you know, and they get really scared about high yield this and that. loans are well secured and over time typically they repay 60 65%. So your loss if you have defaults on corporate loans is about let's say 35 to even 40% of your default rate. 40 you know you have a 40% loss on 5% of your of your portfolio. That's 2% 40 40% of 5% be a 2% loss on your portfolio. You're collecting say 9 10 11% in interest on it. So the total loss comes out of the reduction in your interest for that year. So maybe you have only six 7% or 8%. That's a lot different than what would be happening in the equity market with that same uh garden variety recession taking place. you have a really bad one of, you know, like we had 18 years ago or whatever. And that was we had like 11 12% defaults, but again, oh, and on a high yield bond, you'd lose a little more. So, you might have 50 to 60% losses on high yield bonds because they're unsecured, 30 to 40% losses on senior loans because they're secured. Put it all together, maybe you lose 50% of your high yield portfolio. So even 50% of that 12% in a horrible horrible recession, the worst since the 1930s, and you're still only losing what 6% of your portfolio, but you've you're making again 9 10 11% per year in interest. So you take out your loss from your interest component. You're not even touching capital. That is such a different sort of expectation than you'd have going into any of those scenarios in an equity portfolio. So it doesn't mean there isn't some stress, but people get so excited negatively many of them and including many writers and media types about high yield, how ex you know how dangerous and risky high yield credit is. But what many of them don't realize, people who, you know, swear, oh, I'd never buy a high yield fund, a high yield bond fund or high yield loans, those same people, if they look in their portfolios probably have an allocation to midcap and small cap stocks. And yet, if you look, almost all mid all small cap stocks would be non-investment grade, i.e. they'd be junk, you know, so-called. most midcap stocks, I mean very very few midcap stocks would be investment grade. So anyone who's got those stocks in their portfolio, which most investors do, already is investing in the equity of these companies whose debt they say they'd never buy. And of course, if you're a company doesn't pay off its debt, it goes bust and its equity is worthless. So, it took me a while to kind of get this idea across to my own readers and and as my in my my my inside the income factory, which is my my investor group within Seeking Alpha. Um, now they all understand it and and you know, the the idea has gotten out there more and more uh that credit is, you know, it's a very predictable sort of asset. Yes, with high yield credit, you do have defaults to kind of concern yourself with. If you buy no, there's there's very high quality credit, you know, like government bonds and investment grade debt, but it only pays you maybe two, three, four, 5% at the most. And if you're looking to make an equity return of nine or 10%, it's better to invest in real credit risk where you get paid for it by buying high yield credit than to than to take all the interest rate risk that you take with long-term low yield bonds that don't pay you don't take much credit risk. You don't get paid for any, but you don't get paid much at all for the interest rate. You you you know, like what's 30-year credit I saw the other day? government bonds is like in the four to 5% range and 10 years is probably around four. I wouldn't lend my money to anyone even if I knew I were going to get it back for 4% for 10 years or more, you know. So, you can get real you can get actual payment for taking real risk with credit. I tell people it's like going to a racetrack and being able to to bet on horses to just finish the race. You know, just be in the field, get around, not die on the track and get back and finish the race. That's what betting on credit is. You know, betting on stocks is like betting on your horses to do better than average. So, you know, to win or place or show, it's a very different bet. And if I can get paid almost as much to just bet on the horses to make it around the track, you know, to me that's a that's a pretty good pretty good bet. >> Yeah, absolutely. You invest not to lose, right? Like there are two different strategies. Like when you're gambling as well, you either play to win or you play not to lose. And of course, >> two different strategies, right? If you're more into stocks, I'm guessing you're more into play to win. But uh if you're into following the income factory strategies more, you play not to lose, but still achieve. >> Yeah. And look at the the whole banking industry, JP Morgan, you know, they've been making money, you know, City Bank, they've they've been making money for generations essentially doing that, you know, within a corporate structure and um as I said, pension funds and insurance companies, they've been doing this for all of our lives and you know, just cranking out the money. Yeah, but but Stephen, maybe to simplify a little bit because we're using a lot of big words here. Like it sounds a bit scary quite honestly like talking high yield credit and we all seen the wall Wolf of Wall Street and all those different type of movies about you know bubbles popping and all of that. Like >> how do we simplify it? Everybody knows to how to invest a stock. You open your Robin Hood your your app and just buy buy your stocks but >> buying high yield credit like does everybody have access to it and how simple is it to replicate it? Like how do we take that fear out of it? >> Yeah. Well, first of all, I only buy funds and because I'm not a major institution, you cannot buy senior loan, corporate loans or high yield bonds for the most part, you know, uh unless you're investing a lot of money and which is why these are mostly institutional investing asset classes that have been brought to the retail market through funds. So there plenty of there are high yield funds that you know high yield bond funds have been around for a long time. the major players, you know, Fidelity and others have them. But there's also the closedend fund market, which many investors are not as familiar with, but those who are tend to really like it. I use it all the time. Closed end funds of course unlike ordinary open-end mutual funds you have you buy the fund on the in the market just like a stock and then you sell it when you want to get out of it in the market again like a stock. So it's like invest think of a fund as an investing company. So with closedend funds you're investing in and there are hundreds and hundreds of them and uh you're investing in in a in a uh fund whose net asset value you know the value of any fund is its total value divided by you know if you liquidated it and sold all the all the assets in it that would be its net asset value. The net asset value of a closedend fund can vary from its market value because you're buying and selling shares of it on the open market. So you can actually by being paying attention, being careful, you can buy into a lot of closed end funds that are in the senior loan category, the high yield bond category, preferred stocks, those are as well as utilities and other high yielding stocks. But you can buy them when they're at discounts where you'd actually have more assets working for you than you had to pay for. So, so you might buy a fund whose whose return its yield on its net asset value. It's the natural yield of the of the assets in the fund might only might only be 9 and a half or 10%. But because you're buying that fund, you you you wait, you're patient enough and buy it when it's at a discount, you're you're getting a higher yield on those assets because you paid less for them than their actual natural yield. And that actually that has a lot of advantages too because usually the higher the yield, the greater the risk. So if you can buy assets whose natural yield is a little bit lower is a little bit Yes. a little bit lower, but you're getting a higher yield on your investment because you paid less than 100% of their book value, their net asset value. You know, that extra half percent or whatever you get again over a 20 30 year investment program really makes really a difference. So there that's where that's where I tend to look into the closed end fund market. And so I'm only buying these assets in widely in highly diversified funds. you know, I'll buy a fund that buys senior loans or or high yield bonds or whatever, and then I'll buy several funds because I I like the diversification not only of the underlying uh comp the issuers, but I like to have different managers when I I I think of myself as a portfolio manager, so not so much an analyst. So, I'm looking at these I'm I'm making a choice about which managers I really like, you know, that have long histories that are and and which asset classes I really like. And if I find a manager who seems really solid with a good record and an asset class that seems really solid, then I don't worry so much about the ups and downs, you know, if I'm going to own it for the long term. I don't mind if it goes up. If it I never mind if something goes up, but if if these things go down because markets are are a little crazy, you reinvest and you're actually reinvesting at a bargain price. So, you're growing your income faster when you're um you know, if your uh assets are are down and it'll wash out in the long run. >> What should be the investment horizon to follow your strategy? You've touched on 20, 30 years. Like a when do I start and b how long should I be following that strategy? Stephen, >> well, um I'd say anyone who when they get to be my age wants to be retired, uh ought to start as soon as they can, you know, saving money and taking advantage if their if their employer offers 401ks or anything like that. Uh you know, get money out there and invest it. And frankly, if you're there, there there's nothing wrong with just say in a 401k or an IRA or whatever you have, putting it into uh index funds or large cap funds of which you know, Schwab and Fidelity and so there's so many around where you can just put your money into a large cap fund and then try to forget about it, which is easier to do if you're if you're working and you don't need that money to live on yet. uh it's best to invest it in solid funds and then kind of you know if you you can I don't mean you never look at it but forget about it to a certain extent. Rick Van Winkle would have made a great investor in that sense. Um the income factory is an alternative to that for people who do want to look at it regularly and will get a little upset if it during the down during the down swings. That's when if you're managing your own money and you have access to an income to income factory type choices that's when you know an income factory where you're making most of your return and compounding it creating your own growth I call it by compounding that's where that kind of a my sort of a strategy makes sense and it makes sense if you're prepared to do that and that fits your psychological you know makes it emotionally easier to be patient and sort sit there and watch the grass grow in terms of in your investment philosophy. Then an income factory makes sense at any age. Um uh it used to be the I used to hear this all the time. Well, if you're 35 years old and want need growth for the next 30 years, you have to invest in growth stocks. And I would say again, well, yeah, but if you can make that same nine or 10%, if you think you're such a great investor that you can do better than average, then go for it, you know, but most people can't. As I said, it wouldn't be the average if everybody could beat it. So, absolutely. >> Yeah. So if you're if you're going to be content, and I think you ought to be with making 8 n 10% continually for 30 40 years and, you know, letting it double and redouble, you know, every 8, nine years, whatever, then an income factories just as good an alternative as as a as a growth portfolio. The key is whichever one you choose to stick with it. uh once you get to retirement actually an income factory you know if you've got your capital that's creating an income that you're reinvesting say for 30 years or whatever to and compounding once you get to whatever 60 65 70 where you need to start taking some of it and living on it now you that's when having an investment philosophy where you're never touching your capital you're just letting because you're getting 8 n 10% cash income from it all the time. At at a certain point where you need to take some of that cash income and instead of reinvesting it for additional growth, you now need to start living on it. Income factories avoid a common thing called sequencing risk which you have if you've got an equity portfolio yielding one to 2% and counting on growth and you have to take some of it out every year because now you're you gotten old and you start to need to take out some retirement. You need to create your own pension with it so to speak. you have the risk that in a down year you still have to take money out which means you're now invading your seed capital. You know if you have to sell in a down year if you're retired because you need that 5% or 6% or whatever you're taking out. Now if you're if you're not retired yet, you don't care about a downyear in stocks because you're just going to hang in there and it's going to come back up. But you don't want to have to start liquidating capital during down years because then you're permanently invading the money you're counting on to create your future income. So at a once you're into the retirement uh part of your life then then an income factory is probably a real advantage because of that sequencing risk. >> Absolutely. Like Steve, maybe let's get a bit to the here and now or let's discuss the last 6 months and uh so all the macro shocks that we've seen like how have they impacted your strategy and how should uh investors that have been duplicating your portfolio strategy or your income factory strategy adapt to those like frequent changes and the uncertainty that you're seeing in the market. >> Yeah, it's um there is a lot of uncertainty. I think what's the disconnect you sometimes find in in the market and and something you have to be aware of if you're an income investor is that you know when you have uncertainty and without getting into the politics of it I think we'd all agree there's plenty of uncertainty right now here in the here in the US especially and um you know we don't know what the impact of tariff tariffs is ultimately going to be in terms of how you know whether it's going to drive up prices and inflation and and whether this move to lower interest rates could be a short-term thing if in fact inflation starts to uh you know come come back stronger in the next few months. We don't know about that. We don't know whether the impact of tariffs and some of the other things that they're unfortunately they've done about cutting you know the planned cuts in Medicaid and other social services and education. These are going to impact mostly our you know lower income part of our country. But, you know, I mean, it's we're all in this together and it's it could be very I don't know if it's going to cause some a downturn or recession or what. Uh, on the other hand, the market seems very confident. The stock market seems very confident and there seems to be a feeling I guess among the investor class in America that whatever is going to impact the overall economy will not impact the more affluent part of our economy which is the the one that owns stocks and and other investments. So it's hard to figure out how that's all going to happen. But what I believe uh and what strengthens my commitment to actually credit markets if you have to be in the investment I'm not going to come out I'm not going to go to the sidelines to wait for this to happen because that's how you you know I need the income. So I if I'm choosing between credit and equity right now, I think the choice becomes even more of a credit uh choice being the right one because I think one thing we've learned through the great crash of back in you know 18 years ago and the COVID situation is that and I've written books actually about CEO pay and and and and and some of the challenges of of the way we compensate our seniormost corporate people. They sit on each other's boards, set each other's pay. It's not the way capitalism is really supposed to work. But what it does do is the people who run corporate America and corporate world, if you will, have enormous skin in the game and they are going to do everything they possibly can, even if their stock tanks, if the economy tanks, what I think we've seen that the people who run our companies have so much in at stake that they will find a way to muddle through, keep their corporations alive, even if their stock stock tanks, even if the economy tanks, the, you know, the people that run it will keep it going. And that means they're going to pay their debts. They're not going to let their companies go bust even if their stock does, you know, really go into the hopper or wherever it goes. Um, but I that's why for me I think credit really is a good is is the for me it's the way to go to kind of get through u whatever lies ahead. Now if I'm wrong and if the stock market really you know shoots up although a lot of people think it's been kind of over over uh valued anyway. So if I can get my nice um you know nine 10% return surviving the next year or two or whatever however long this takes and you know the global economy is being so shaken up. I mean we're sending such negative messages to our countries that have been our friends for you know my entire lifetime. I mean it's so sad to see. Uh and I don't know what the impact of that's going to be longer term. Um, so anyway, credit, you know, where you're just betting on those corporate horses to make it around the track >> and make it to the finish line seems like a better bet than ever in this current u environment. >> Fantastic. Steve, >> Steve, that that's the perfect way to end the conversation here is we're already 30 minutes we've been chatting. It's been absolutely phenomenal. Really interesting to learn about your income factory here and how we can sort of duplicate u your your your strategy in general. Where can we send our audience to follow more of your work and we'll get you back by the end of the year by the way set up for 2026. Well, if any of them are readers, if they go on the worldwide website seeking Alpha and just Google, you know, if they Google my name or Google the income factory, uh either just googling it generally or going on Seeking Alpha, they'll they'll find their way to a number they'll have a number of links that'll get get them to uh my uh my service. >> Sounds good. Fantastic. Steve, really appreciate you joining us. >> Oh, sure. Thank you. >> It was really insightful. We'll have to catch up later this year, see how policies changed and how your your income strategy is working out in terms of yield and what what it is yielding and what your performance was in 2025. We'll see how far the S&P will run from here. As you said, we're on shaky ground, so we'll see where it goes. It's an adventure. I tell all my readers, I'm on a steep learning curve with every with all of them. >> Absolutely. No, Stephen, thank you very much. Uh, really appreciate it. And everybody else, thanks so much for tuning into Soore Financially. Really informational, really educational what we just discussed here with Steve Bavaria and really looking forward to getting him back on at the end of the year to see how his strategy worked for 2025 and of course we need to talk about his performance overall. So really curious and uh if you haven't done so, hit that like and subscribe button. Helps us out tremendously and uh it's free. Thank you so much for tuning in. We'll be back with lots more. Take care out there. [Music]
How To Survive the Next Crash AND Still Win I Steven Bavaria
Summary
Transcript
Everybody can invest in the S&P 500, but doesn't it make you nervous sometimes the volatility? I've invited a guest today that will explain to us how we can generate similar returns with a lot of less hassle. His name is Steve Bavaria. He's the author of the income factory and I'm really looking forward to the discussion with him because who doesn't want to invest stressfree. Let's see how we can achieve this in a time where it's so much uncertainty. So, welcome to Sore Financially where we discuss the macro to understand the micro. My name is Kai Hoffen and I'm your host of this channel. I'm really looking forward to this discussion. But before I switch over to my guest, hit that like and subscribe button. Helps us out tremendously. And uh if you haven't noticed, we're back in the studio. We've been on the road for 6 weeks. We are back and we've got lots planned for this fall. So hit that subscribe button. You won't regret it. So thanks so much for doing that. Now, Steve, it is great to have you on the program. Thank Thank you so much for joining us. >> Thank you, Kai, for inviting me. It's a pleasure to be here. >> Yeah, really looking forward to this. uh looking forward to learning a new investment angle and uh a different approach to investing. Stephen, before we get started and talk about macroeconomic situation in general, run us a bit through the income factory. What is it and uh yeah, run run us through it. How how can we duplicate it? Well, the income factory is a kind of clever name I came up with for my for my book that I wrote about five years ago, but it was a way of investing that I evolved over time that was it's really classic income investing of the sort institutional investors like insurance companies and pension funds and other uh big entities like that have been doing for generations. And I learned about it as a banker many many years ago. And then I became a journalist. And as I retired and started investing my own uh money mostly in an IRA, um I found that uh it was tough. It was very stressful, as you said, to try to do classic indexing or dividend growth investing because when you're investing in growth stocks or even just normal S&P 500 type equities, you're basically expecting a yield of about 1 and a.5% because that's what the S&P 500 pays. And if you want to make your nine or 10% average equity return, which has been the equity return over the last century, basically you're really betting on getting an additional seven or 8% capital gain on average every year in addition to your 1 and a.5% or so dividend. And you know, you don't get that every year. So you have these ups and downs and it's tough to sit through the downs while you're waiting for the ups to come again. And not everyone has the, you know, true grit sort of uh patience to do that. And I had a lot of trouble, especially, you know, you hit the great uh recession of 18 years ago or so and then the more recent COVID thing. It's so easy to lose your nerve and say, "Hey, I'm going to move to the sidelines and wait till things get better." And of course, if you do that, often experts will say you miss the train when it leaves the station. and there's no conductor saying, "Hey, the market's about to go up again. Get back on the train." So, I found investing in credit and high yielding types of mostly credit, also some utilities and things that equities that pay extra high yields where you're not depending much if at all on growth, but you're getting your entire 8 n 10% or so. Lately, it's been a little more in yield. And if you can get that, if you're in a if you're younger and saving for retirement, you just reinvest and compound at that rate, uh you will do just as well. Even though the the the conventional market and I've written about this and I got treated like a heretic when I proposed this 10 or 12 years ago and started doing it and wrote about it on Seeking Alpha, but you double and redouble your money. If you're reinvesting it at 9 10% every 8 to 9 years, you know, you do that for 30 years, 40 years, you're going to do just as well as if you did an index fund, you know, and made your 10 12% average uh on equities because some years you'd have a minus five, other years you'd have a plus three, others you'd have a plus 12, etc., etc. But it math is math and it comes out the same. So my that's my basic shtick my philosophy and I've start I do it it's not without stress I mean you still have even in the credit markets uh you can be invested in a portfolio of senior loans you know they're funds that I invest in senior loans and high yield bonds and other credit corporate credit instruments where you know you're going to it's very predictable what you're going to get you can even predict levels of default that are statist statistically demonstrate that are statistically uh calculated over the last 40 years. So we know we know what defaults are going to be in normal years and recession years and super bad recession years. But even when you crank all that in, you pretty much know what you're going to what you're going to get over time, which you don't know in an equity portfolio. And it just does make it easier to sleep at night um even during periods like this. And that's what we'll get into. It's not without stress, but it's a there's always stress unless you want to put your money in high, you know, in government bonds and things like that. But if you want to make an equity type return, there's going to be stress. It's what sort of stress and I find credit risk and that sort of thing is a lot easier to project and live with than the volatility of the equity markets. >> Yeah, abs. Absolutely. And nothing is stress free if you invest in public markets. I might have exaggerated a little bit in my opening here, Stephen, but um you you when you ran through sort of the the asset classes and things you're investing in, like besides utilities, like how recession proof is is the investment the investing strategy here, Stephen. Um how can we sort of put that into a framework that we're currently? >> Yeah, pardon. I'm a bit nerdy. That's why I got into I was a banker. I studied law. I worked I worked in fields where you spent a lot of time thinking about what could go wrong, you know? I mean, my wife finds me a bit nerdy that way, but boy, >> it's >> might be your German heritage, >> but in Yeah, maybe. But it comes it uh it, you know, it's valuable in investing. avoiding the huge mistakes is a bigger is is going to help you better in the long term I think than trying to hit the big win here and there and that's why you know most uh oh Nobel prizes have been won by people explaining that you know everybody can't beat the average if more people than 50% or well the median will for you stati statistitians out there I want to get it right but you know if if everybody body beat the average, it wouldn't be the average. And that that's why an index fund, if you have the if you have the patience to just stick with an index fund through thick and thin, an equity index fund, you'll do fine. My income factory is basically an alternative to that. And the kind of asset classes we tend to use would be funds that buy senior loans, high yield bonds, even preferred stock as a form of credit more than equity. And what you what you're betting on is that you're going to get back that that close to 100% of those companies, those issuers are going to pay back their debt on time. That's what you're betting on, that companies are going to pay their debt on time. And you know, or we know that if you've got a portfolio, if you invest in a portfolio of loans through say a closedend fund, there are a lot of senior loan funds and and they're paying you a distribution of 9 10% let's say that that reflects their portfolio, what it's doing, you know, inside the fund. And in a default, well, let's start with normal times. In in normal economies, you're going to have you're going to have default rates of maybe 1% 2%, you know, and then in a recession, an garden garden variety recession of the sort, you know, the d the hard landing they were predicting a couple years ago that we still may not get or might who knows what post tariff is going, you know, with the tariffs and everything. We don't know what the total impact's going to be, but even in a sort of ordinary downturn recession might go up to four, five%, 6% defaults, and then in a really bad recession like the so-called great recession of 2008 or so, maybe it goes up to 11%, 12%. What people don't realize, they see these default headlines, you know, and they get really scared about high yield this and that. loans are well secured and over time typically they repay 60 65%. So your loss if you have defaults on corporate loans is about let's say 35 to even 40% of your default rate. 40 you know you have a 40% loss on 5% of your of your portfolio. That's 2% 40 40% of 5% be a 2% loss on your portfolio. You're collecting say 9 10 11% in interest on it. So the total loss comes out of the reduction in your interest for that year. So maybe you have only six 7% or 8%. That's a lot different than what would be happening in the equity market with that same uh garden variety recession taking place. you have a really bad one of, you know, like we had 18 years ago or whatever. And that was we had like 11 12% defaults, but again, oh, and on a high yield bond, you'd lose a little more. So, you might have 50 to 60% losses on high yield bonds because they're unsecured, 30 to 40% losses on senior loans because they're secured. Put it all together, maybe you lose 50% of your high yield portfolio. So even 50% of that 12% in a horrible horrible recession, the worst since the 1930s, and you're still only losing what 6% of your portfolio, but you've you're making again 9 10 11% per year in interest. So you take out your loss from your interest component. You're not even touching capital. That is such a different sort of expectation than you'd have going into any of those scenarios in an equity portfolio. So it doesn't mean there isn't some stress, but people get so excited negatively many of them and including many writers and media types about high yield, how ex you know how dangerous and risky high yield credit is. But what many of them don't realize, people who, you know, swear, oh, I'd never buy a high yield fund, a high yield bond fund or high yield loans, those same people, if they look in their portfolios probably have an allocation to midcap and small cap stocks. And yet, if you look, almost all mid all small cap stocks would be non-investment grade, i.e. they'd be junk, you know, so-called. most midcap stocks, I mean very very few midcap stocks would be investment grade. So anyone who's got those stocks in their portfolio, which most investors do, already is investing in the equity of these companies whose debt they say they'd never buy. And of course, if you're a company doesn't pay off its debt, it goes bust and its equity is worthless. So, it took me a while to kind of get this idea across to my own readers and and as my in my my my inside the income factory, which is my my investor group within Seeking Alpha. Um, now they all understand it and and you know, the the idea has gotten out there more and more uh that credit is, you know, it's a very predictable sort of asset. Yes, with high yield credit, you do have defaults to kind of concern yourself with. If you buy no, there's there's very high quality credit, you know, like government bonds and investment grade debt, but it only pays you maybe two, three, four, 5% at the most. And if you're looking to make an equity return of nine or 10%, it's better to invest in real credit risk where you get paid for it by buying high yield credit than to than to take all the interest rate risk that you take with long-term low yield bonds that don't pay you don't take much credit risk. You don't get paid for any, but you don't get paid much at all for the interest rate. You you you know, like what's 30-year credit I saw the other day? government bonds is like in the four to 5% range and 10 years is probably around four. I wouldn't lend my money to anyone even if I knew I were going to get it back for 4% for 10 years or more, you know. So, you can get real you can get actual payment for taking real risk with credit. I tell people it's like going to a racetrack and being able to to bet on horses to just finish the race. You know, just be in the field, get around, not die on the track and get back and finish the race. That's what betting on credit is. You know, betting on stocks is like betting on your horses to do better than average. So, you know, to win or place or show, it's a very different bet. And if I can get paid almost as much to just bet on the horses to make it around the track, you know, to me that's a that's a pretty good pretty good bet. >> Yeah, absolutely. You invest not to lose, right? Like there are two different strategies. Like when you're gambling as well, you either play to win or you play not to lose. And of course, >> two different strategies, right? If you're more into stocks, I'm guessing you're more into play to win. But uh if you're into following the income factory strategies more, you play not to lose, but still achieve. >> Yeah. And look at the the whole banking industry, JP Morgan, you know, they've been making money, you know, City Bank, they've they've been making money for generations essentially doing that, you know, within a corporate structure and um as I said, pension funds and insurance companies, they've been doing this for all of our lives and you know, just cranking out the money. Yeah, but but Stephen, maybe to simplify a little bit because we're using a lot of big words here. Like it sounds a bit scary quite honestly like talking high yield credit and we all seen the wall Wolf of Wall Street and all those different type of movies about you know bubbles popping and all of that. Like >> how do we simplify it? Everybody knows to how to invest a stock. You open your Robin Hood your your app and just buy buy your stocks but >> buying high yield credit like does everybody have access to it and how simple is it to replicate it? Like how do we take that fear out of it? >> Yeah. Well, first of all, I only buy funds and because I'm not a major institution, you cannot buy senior loan, corporate loans or high yield bonds for the most part, you know, uh unless you're investing a lot of money and which is why these are mostly institutional investing asset classes that have been brought to the retail market through funds. So there plenty of there are high yield funds that you know high yield bond funds have been around for a long time. the major players, you know, Fidelity and others have them. But there's also the closedend fund market, which many investors are not as familiar with, but those who are tend to really like it. I use it all the time. Closed end funds of course unlike ordinary open-end mutual funds you have you buy the fund on the in the market just like a stock and then you sell it when you want to get out of it in the market again like a stock. So it's like invest think of a fund as an investing company. So with closedend funds you're investing in and there are hundreds and hundreds of them and uh you're investing in in a in a uh fund whose net asset value you know the value of any fund is its total value divided by you know if you liquidated it and sold all the all the assets in it that would be its net asset value. The net asset value of a closedend fund can vary from its market value because you're buying and selling shares of it on the open market. So you can actually by being paying attention, being careful, you can buy into a lot of closed end funds that are in the senior loan category, the high yield bond category, preferred stocks, those are as well as utilities and other high yielding stocks. But you can buy them when they're at discounts where you'd actually have more assets working for you than you had to pay for. So, so you might buy a fund whose whose return its yield on its net asset value. It's the natural yield of the of the assets in the fund might only might only be 9 and a half or 10%. But because you're buying that fund, you you you wait, you're patient enough and buy it when it's at a discount, you're you're getting a higher yield on those assets because you paid less for them than their actual natural yield. And that actually that has a lot of advantages too because usually the higher the yield, the greater the risk. So if you can buy assets whose natural yield is a little bit lower is a little bit Yes. a little bit lower, but you're getting a higher yield on your investment because you paid less than 100% of their book value, their net asset value. You know, that extra half percent or whatever you get again over a 20 30 year investment program really makes really a difference. So there that's where that's where I tend to look into the closed end fund market. And so I'm only buying these assets in widely in highly diversified funds. you know, I'll buy a fund that buys senior loans or or high yield bonds or whatever, and then I'll buy several funds because I I like the diversification not only of the underlying uh comp the issuers, but I like to have different managers when I I I think of myself as a portfolio manager, so not so much an analyst. So, I'm looking at these I'm I'm making a choice about which managers I really like, you know, that have long histories that are and and which asset classes I really like. And if I find a manager who seems really solid with a good record and an asset class that seems really solid, then I don't worry so much about the ups and downs, you know, if I'm going to own it for the long term. I don't mind if it goes up. If it I never mind if something goes up, but if if these things go down because markets are are a little crazy, you reinvest and you're actually reinvesting at a bargain price. So, you're growing your income faster when you're um you know, if your uh assets are are down and it'll wash out in the long run. >> What should be the investment horizon to follow your strategy? You've touched on 20, 30 years. Like a when do I start and b how long should I be following that strategy? Stephen, >> well, um I'd say anyone who when they get to be my age wants to be retired, uh ought to start as soon as they can, you know, saving money and taking advantage if their if their employer offers 401ks or anything like that. Uh you know, get money out there and invest it. And frankly, if you're there, there there's nothing wrong with just say in a 401k or an IRA or whatever you have, putting it into uh index funds or large cap funds of which you know, Schwab and Fidelity and so there's so many around where you can just put your money into a large cap fund and then try to forget about it, which is easier to do if you're if you're working and you don't need that money to live on yet. uh it's best to invest it in solid funds and then kind of you know if you you can I don't mean you never look at it but forget about it to a certain extent. Rick Van Winkle would have made a great investor in that sense. Um the income factory is an alternative to that for people who do want to look at it regularly and will get a little upset if it during the down during the down swings. That's when if you're managing your own money and you have access to an income to income factory type choices that's when you know an income factory where you're making most of your return and compounding it creating your own growth I call it by compounding that's where that kind of a my sort of a strategy makes sense and it makes sense if you're prepared to do that and that fits your psychological you know makes it emotionally easier to be patient and sort sit there and watch the grass grow in terms of in your investment philosophy. Then an income factory makes sense at any age. Um uh it used to be the I used to hear this all the time. Well, if you're 35 years old and want need growth for the next 30 years, you have to invest in growth stocks. And I would say again, well, yeah, but if you can make that same nine or 10%, if you think you're such a great investor that you can do better than average, then go for it, you know, but most people can't. As I said, it wouldn't be the average if everybody could beat it. So, absolutely. >> Yeah. So if you're if you're going to be content, and I think you ought to be with making 8 n 10% continually for 30 40 years and, you know, letting it double and redouble, you know, every 8, nine years, whatever, then an income factories just as good an alternative as as a as a growth portfolio. The key is whichever one you choose to stick with it. uh once you get to retirement actually an income factory you know if you've got your capital that's creating an income that you're reinvesting say for 30 years or whatever to and compounding once you get to whatever 60 65 70 where you need to start taking some of it and living on it now you that's when having an investment philosophy where you're never touching your capital you're just letting because you're getting 8 n 10% cash income from it all the time. At at a certain point where you need to take some of that cash income and instead of reinvesting it for additional growth, you now need to start living on it. Income factories avoid a common thing called sequencing risk which you have if you've got an equity portfolio yielding one to 2% and counting on growth and you have to take some of it out every year because now you're you gotten old and you start to need to take out some retirement. You need to create your own pension with it so to speak. you have the risk that in a down year you still have to take money out which means you're now invading your seed capital. You know if you have to sell in a down year if you're retired because you need that 5% or 6% or whatever you're taking out. Now if you're if you're not retired yet, you don't care about a downyear in stocks because you're just going to hang in there and it's going to come back up. But you don't want to have to start liquidating capital during down years because then you're permanently invading the money you're counting on to create your future income. So at a once you're into the retirement uh part of your life then then an income factory is probably a real advantage because of that sequencing risk. >> Absolutely. Like Steve, maybe let's get a bit to the here and now or let's discuss the last 6 months and uh so all the macro shocks that we've seen like how have they impacted your strategy and how should uh investors that have been duplicating your portfolio strategy or your income factory strategy adapt to those like frequent changes and the uncertainty that you're seeing in the market. >> Yeah, it's um there is a lot of uncertainty. I think what's the disconnect you sometimes find in in the market and and something you have to be aware of if you're an income investor is that you know when you have uncertainty and without getting into the politics of it I think we'd all agree there's plenty of uncertainty right now here in the here in the US especially and um you know we don't know what the impact of tariff tariffs is ultimately going to be in terms of how you know whether it's going to drive up prices and inflation and and whether this move to lower interest rates could be a short-term thing if in fact inflation starts to uh you know come come back stronger in the next few months. We don't know about that. We don't know whether the impact of tariffs and some of the other things that they're unfortunately they've done about cutting you know the planned cuts in Medicaid and other social services and education. These are going to impact mostly our you know lower income part of our country. But, you know, I mean, it's we're all in this together and it's it could be very I don't know if it's going to cause some a downturn or recession or what. Uh, on the other hand, the market seems very confident. The stock market seems very confident and there seems to be a feeling I guess among the investor class in America that whatever is going to impact the overall economy will not impact the more affluent part of our economy which is the the one that owns stocks and and other investments. So it's hard to figure out how that's all going to happen. But what I believe uh and what strengthens my commitment to actually credit markets if you have to be in the investment I'm not going to come out I'm not going to go to the sidelines to wait for this to happen because that's how you you know I need the income. So I if I'm choosing between credit and equity right now, I think the choice becomes even more of a credit uh choice being the right one because I think one thing we've learned through the great crash of back in you know 18 years ago and the COVID situation is that and I've written books actually about CEO pay and and and and and some of the challenges of of the way we compensate our seniormost corporate people. They sit on each other's boards, set each other's pay. It's not the way capitalism is really supposed to work. But what it does do is the people who run corporate America and corporate world, if you will, have enormous skin in the game and they are going to do everything they possibly can, even if their stock tanks, if the economy tanks, what I think we've seen that the people who run our companies have so much in at stake that they will find a way to muddle through, keep their corporations alive, even if their stock stock tanks, even if the economy tanks, the, you know, the people that run it will keep it going. And that means they're going to pay their debts. They're not going to let their companies go bust even if their stock does, you know, really go into the hopper or wherever it goes. Um, but I that's why for me I think credit really is a good is is the for me it's the way to go to kind of get through u whatever lies ahead. Now if I'm wrong and if the stock market really you know shoots up although a lot of people think it's been kind of over over uh valued anyway. So if I can get my nice um you know nine 10% return surviving the next year or two or whatever however long this takes and you know the global economy is being so shaken up. I mean we're sending such negative messages to our countries that have been our friends for you know my entire lifetime. I mean it's so sad to see. Uh and I don't know what the impact of that's going to be longer term. Um, so anyway, credit, you know, where you're just betting on those corporate horses to make it around the track >> and make it to the finish line seems like a better bet than ever in this current u environment. >> Fantastic. Steve, >> Steve, that that's the perfect way to end the conversation here is we're already 30 minutes we've been chatting. It's been absolutely phenomenal. Really interesting to learn about your income factory here and how we can sort of duplicate u your your your strategy in general. Where can we send our audience to follow more of your work and we'll get you back by the end of the year by the way set up for 2026. Well, if any of them are readers, if they go on the worldwide website seeking Alpha and just Google, you know, if they Google my name or Google the income factory, uh either just googling it generally or going on Seeking Alpha, they'll they'll find their way to a number they'll have a number of links that'll get get them to uh my uh my service. >> Sounds good. Fantastic. Steve, really appreciate you joining us. >> Oh, sure. Thank you. >> It was really insightful. We'll have to catch up later this year, see how policies changed and how your your income strategy is working out in terms of yield and what what it is yielding and what your performance was in 2025. We'll see how far the S&P will run from here. As you said, we're on shaky ground, so we'll see where it goes. It's an adventure. I tell all my readers, I'm on a steep learning curve with every with all of them. >> Absolutely. No, Stephen, thank you very much. Uh, really appreciate it. And everybody else, thanks so much for tuning into Soore Financially. Really informational, really educational what we just discussed here with Steve Bavaria and really looking forward to getting him back on at the end of the year to see how his strategy worked for 2025 and of course we need to talk about his performance overall. So really curious and uh if you haven't done so, hit that like and subscribe button. Helps us out tremendously and uh it's free. Thank you so much for tuning in. We'll be back with lots more. Take care out there. [Music]