Sometimes I hear people complain that note prices are higher than they were a few years ago. Unfortunately for me I wasn’t investing in notes a few years ago so I didn’t get to enjoy those good times. But the reality is there are always great opportunities out there. The problem is that they are not always obvious at the time, and I personally believe that notes are still a great opportunity.
One my favorite courses I took during my MBA was on negotiation, and I learned about the concept of a BATNA. A BATNA is the Best Alternative to a Negotiated Agreement. In other words, if you don’t take the deal that is on the table, what is your best alternative? If your alternatives are better, then turn down the deal and go with the alternatives. If the alternatives aren’t better than the deal you are being offered, then you should take the deal.
So let’s take a look at some of the current alternatives to notes. Granted, notes have higher risk than many other investments so they should have a higher return. I’ll start with good old fashioned treasury bonds: (https://www.bloomberg.com/markets/rates-bonds/government-bonds/us) A 30 year bond is currently yielding 2.81%. Hmmmm……
But that’s a supposedly risk free return (its actually not and I may discuss that in a future newsletter). What if you want to bite off a little more risk and step up to corporate bonds? If you want investment grade you can get some sweet AT&T bonds with a 2.75% yield that mature in 2023. Kick the risk up a little more and you can get what’s classified as a high yield bond from Charter Communications maturing in 30 years with a yield of 5.15%.
None of those alternatives are very great in my opinion, especially when inflation is eating up another 1.8% of those already tiny yields. If you are trying to save for retirement or God forbid close to retirement and trying to catch up those options are not going to help you at all.
But what about stocks? They have returned ~7% over the long term. Well, the stock market is at an all time high. I started investing in stocks when I was 19, so I’ve lived through how the cycles work. I was active in stocks for the dot com boom and bust, and also for the 2009 crash. When I look at the stock market I can’t think of any reasons why it shouldn’t continue to rise. The global economy is good. In the US we are lowering taxes and decreasing regulation. There aren’t any fundamental economic problems or headwinds that I can think of. And that scares the crap of me… We are way overdue for the next down cycle, and if you can’t see one coming that means one probably is. The PE for the S&P 500 is currently at the high end of its historical range:
Note that those recent spikes in the average PE occured when the market tanked, not when it was at its peak….
Crypto currencies seem to be the latest fad to get huge returns in exchange for biting off increased risk. Back in 2013 or 2014 I messed around with Bitcoin and actually ended up $1000. I suppose it’s too bad I didn’t just hold on as I missed out on some huge gains. But as a student of history I know about tulip bulbs, the South Sea Company, railroads, land in Florida in the 20’s (and at other more recent times), and internet stocks. So I don’t mind missing that one. It could very well be that the price of Bitcoin will continue its meteoric rise, but I just don’t understand that market well enough to get involved.
That brings us to good old fashioned real estate, which is probably near and dear to your heart if you are receiving this newsletter or reading this blog. I originally started looking at doing traditional single family rentals as an alternative to stocks. But in the Denver area where I live, as well as many other areas of the country, the cap rates you can get in current market just make no sense. Fix and flips never seemed like they were for me, plus everyone and their Mom seems to be in that business and there are fewer and fewer deals out there. Looking for alternative real estate investments is what brought me to notes.
Even with the higher prices, I still believe I can get higher risk adjusted returns with notes than I can other investments. That may well change over time. As an investor you always have to be flexible and willing to adjust your business model to meet the current market conditions. But compared to the alternatives, notes are the best deal out there for me at the present time. Plus I believe market conditions are going to improve for note investors, but I’ll save that for a future newsletter…..
In the meantime, check out my latest video on using Excel for notes. In this video I go over using Excel Tables.
