Income Opportunity Of The Week

CBL and AFSI.

music selection:  “Take Your Whiskey Home” — Van Halen

Each Friday at the raptor, I explore opportunities in income investing. It has become sort of trendy in the FIRE community to go with a 100% allocation to equities. I think this is foolhardy. All the research proves that buy and hold investors are really “buy and fold” investors. You need a bulwark to protect you against your own emotions.

I keep 40% of my portfolio allocated to fixed income and similar instruments. By focusing the remainder on yield producing assets, I have 117.63% of my annual budget met through passive sources. I will never be forced by the market to “sell low” and submarine my early retirement. And this does not mean working extra years and saving for an extreme lean-FIRE. I run a withdrawal rate of 5.32%. You can retire earlier than even most of the FIRE cohort with less risk and lower volatility by taking an income centric approach.

Today, I have two bonds that were recently purchased at a discount to par. First up is the AmTrust Financial (AFSI) 15AUG2023 maturity 6.125 coupon bond (CUSIP: 032359AE1). This is a bond that has long been range bound between 95 cents on the dollar and par. I have had a good till canceled limit order open for months at 95 and it finally cleared the market on Wednesday. If held to maturity, this bond has an annualized yield to maturity of 7.538%.  For me, this is a trading position and I already have a good till canceled limit order open to sell at 99.5000. That will return 4.7% on my capital at risk and will probably take about 3 months so I am expecting an annualized return of around 18.9%. If it takes longer, I am being paid 6.4% in coupon payments to wait for my capital gains. This is a very safe bond. The founding family is still in management and still owns billions in the underlying equity. They have extended credit to the company and appear committed to keeping the doors open. Of course, they personally lose billions if they manage the company such that it fails.

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