Are you drawn to exorbitant earnings? If you have to aim for yield, at least be reasonably smart about it.
“Achieving return is really stupid,” Warren Buffett said in an interview with CNBC in 2020. “If you need to get 3% and you only get 1%, the answer is [give up on] the 3%, so as not to try to get the 1 to 3. “
Three percent? This is for the biters. How about reaching 6%, 7% or 9% or – hold your horses – 16%? Below is an overview of four very high yielding investments. For each, I will suggest a substitute investment, something comparable risky but with better terms or information. If you just can’t resist, buy the substitutes and buy in small quantities.
1. Get 6% Bitcoin!
The effervescent world of virtual currency creates many opportunities for savvy traders to attract yield hungry. The problem isn’t stuff like Ponzi schemes, although there have been some notable scams that cost a few billion dollars. The problem is what’s legal.
You put in capital that is loaned to a bitcoin speculator. If the coins go up in value, you get some interest. If they break down, your principal is in danger.
Not a good deal, says Bill Singer, securities lawyer and former stock broker. This is how he describes the crypto loan: “Beggars outside the casino” taking your money inside.
Consider BitcoinIRA, a company that wants to help you invest your retirement savings in virtual coins and / or a bitcoin player loan called Genesis. With the latter choice, you deposit dollars and earn 6% interest.
Legitimate? Obviously, yes. The singer takes his hat off to BitcoinIRA’s lawyers, who have carefully structured the arrangement so that the entity taking your money is only a middleman, and not an investment advisor, broker, bank, or company. investment. Thus, BitcoinIRA does not have to register with the Securities & Exchange Commission or publish a prospectus.
BitcoinIRA sends your money to Genesis Global Trading, which describes itself as “the world’s largest lender of digital assets”. Genesis talks about its multibillion dollar loan program, attention to guarantees, and risk management. It is part of a digital conglomerate that includes the very successful Grayscale Bitcoin Trust.
But wait. Surely it would be easier for Genesis to borrow 6% money from the institutional market, a few hundred million dollars all at once, than to mess with BitcoinIRA and its $ 10,000 retail clients. What is happening?
One could perhaps deduce that the institutions are reluctant to lend money to Genesis at 6%. Whatever hesitation comes with a glance at Genesis’ track record, one can only guess. If Genesis publishes a balance sheet for the benefit of potential customers of BitcoinIRA, it is very difficult to find.
Do you want to achieve a 6% return while taking risks in bitcoin? Here’s a better way to take that risk.
Deposit $ 100,000 into a brokerage account and write a June 2022 put option, with a strike price of $ 240, against Coinbase. Coinbase is an exchange whose fortunes are closely tied to the prices of digital currencies. Coinbase shares recently closed at $ 286, so the selling buyer is unlikely to force you to buy 100 shares for $ 24,000, but it could happen by June.
To write this option you will be paid something like $ 3,000. Repeat in six months, writing a second option with an appropriately adjusted strike price. You will earn an additional $ 3,000. You will also earn a small amount of interest on the portion of your $ 100,000 that is not used as collateral for your put options. In total, you will earn 6% on your $ 100,000.
With these knockouts, you are making a modestly bullish bet on the future of digital currency, just as you would if you let Genesis borrow $ 100,000 from you. If bitcoin is successful, you will pocket 6%. If not, you could end up owning 100 or maybe 200 Coinbase stocks that you don’t particularly want. But the maximum you can lose from your $ 100,000 stake is $ 48,000, and only if Coinbase shares reach $ 0.
With Coinbase, you get an SEC registered company with elaborate public financial statements; when you sell options on this one, you are trading in a very informed market with knowledgeable investors on both the long side and the demand side. With BitcoinIRA, you send money to an obscured pool.
2. Get 7% old common stocks and bonds!
Hot spot on Wall Street: the ETF Strategy Shares Nasdaq 7 Handl. In the past six months, its assets have tripled to $ 1.4 billion.
What is the attraction? A huge gain. The 7% payout yield looks formidable in a world of meager dividends and bond coupons. Sounds great, that is, to people in the lower half of the investor intelligence spectrum drawn by Buffett.
Where does this 7% come from? Not dividends and bond coupons. The portfolio, a collection of other exchange traded funds, only returns 2%. The remaining 5% of the payment represents a liquidation of assets.
It costs a pretty penny to have this fund of funds liquidate assets for you. The underlying ETFs have a composite expense ratio of 0.2%, but buyers of Strategy Shares fund pay five times as much as Strategy adds its own fee of 0.8%.
Here is the alternative investment: buy the underlying funds, which are mostly excellent choices from Schwab, Vanguard and BlackRock. Earn dividends. Also, every year sell 5% of what you just bought. You now have your 7% payout and save a bundle on fees.
3. Get 9% of a mortgage portfolio!
The Vanguard Ginnie Mae fund reports 1%. So a mortgage investment with a 9% return catches your eye.
This fine return is promised on Aspen Income Fund, managed by Aspen Properties Group in Overland Park, Kansas. Payment comes from a portfolio of distressed residential mortgages (primarily second mortgages) purchased at a price below the mortgage balance.
Two factors increase the portfolio’s return above what you see on Vanguard’s very secure Ginnie Maes. The first is that second mortgages have high interest rates. The other is that when things work out, a discounted mortgage generates capital appreciation. The Aspen Fund gets a bargain when a homeowner refinances or sells the property at a decent price.
Minimum investment: $ 50,000. You can’t buy unless you cross a hurdle for equity ($ 1 million) or income ($ 200,000). Aspen is candid about the risks. The right of redemption depends on available liquidity and is only on the basis of best efforts. The 9% payout is ‘preferred’ but is not guaranteed. A 2019 audit, the latest available, shows the fund has mortgages worth $ 14.5 million funded in part by a $ 2.3 million line of credit.
Aspen’s website features flattering podcasts, testimonials about the mortgage-buying skills of the two men who started the fund eight years ago, a graph projecting what 9% can do for you if you let it dial for 15 years and a statement that the fund has never missed a preferred payment. What it doesn’t publish for potential investors is a coverage ratio.
Coverage is the first thing a bond analyst or mortgage loan officer asks for. It compares the income available for debt service to the payment owed. It would be nice to know that Aspen’s payment is from interest and capital gains, not mortgage liquidations, the sale of fund shares or that line of credit.
Aspen co-founder Robert Fraser assures me that the preferred payout has always been covered by profits, not other sources of money. If Aspen Income were registered with the SEC, you might have documents to do so before you send in your $ 50,000. You can view the income statement and calculate the coverage ratio. Unfortunately, it is exempt from registration.
I’m inclined to assume the guys at Aspen are good at what they do. But there are a lot of fish in the sea. Why buy something that is not registered when there is so much to buy that is registered?
Here’s my replacement for the investor keen to hit the moon with mortgages: Chimera Investment Corp. common stocks. Chimera is a $ 16 billion (asset) mortgage buyer and seller with an 8% dividend yield that is amply covered by net income. Its very detailed financial statements are filed with the SEC.
4. Get 16%!
A Forbes reader wrote to me asking for my opinion on his investment idea. He would take out a 4.5% home equity loan and invest the proceeds in Icahn Enterprises, a limited partnership with a dividend of $ 8 per annum at 16% of the share price. This reader, presumably the shrewd CEO of an industrial company, seems to think he has found a way to make money. All he has to do is borrow at 4.5% and invest at 16%.
In addition to being organized as a partnership rather than a taxable corporation, Icahn Enterprises is a bit like Berkshire Hathaway. They’re both a mix of operating companies (in Icahn’s case, some bizarre businesses like fertilizer manufacturing and auto repair) with a passive investment portfolio.
There are big differences. Warren Buffett’s portfolio is doing pretty well; Carl Icahn has been a disaster in recent years. Berkshire Hathaway is trading at a not too high premium to its liquidation value; Icahn Enterprises is trading at 2.5 times its value. Berkshire is profitable; the Icahn company is losing money. So don’t even ask where that $ 8 dividend came from.
My replacement idea, if you are tempted from a distance to buy Icahn Enterprises for its dividend, is to acquire a position in Berkshire Hathaway and then sell 16% of the shares each year.
My opinion of the potential arbitrageur who wrote is the same as what Buffett applies to people looking for yield.