Convertible Bonds - A Complete Guide To Earning a 7% Guaranteed with a 10x Upside
Everybody looks for low risk, high return sources of making money. One such interesting avenue is the Convertible Bond - with a nearly 7% guaranteed return with a 10x upside.
You and I are going to flip a coin.
Our bet is $100,000 on one single coin flip.
Except, this coin is different. Very different.
On one side is your traditional ‘heads’. On the ‘tails’ side, it’s blank.
If heads come up, you win. If the blank “tails” side lands, you don’t win. But you don’t lose anything either.
How many times would you like to play this game with me?
Infinitely, is the obvious answer.
This is the exact opportunity that we have with a specific investment that I’m going to teach you today.
If you’ve followed my content even for a short time, you’ve figured out that I don’t bullshit you.
I save my exaggerated stories for close friends and family while consuming adult beverages. If I like you, I tease you with relentless sarcasm.
And this is not one of those times.
I believe that most investors, particularly the fairly new ones, gamble way too much. They put their principal capital, their hard earned, delayed gratification cash, at great risk. I am guilty of this. Most are.
The key to building wealth is to get your initial capital kicking off streams of safe, passive income from multiple asset classes. Then, once you have a steady stream of cash flowing in, take those streams and speculate with them. Go for the 10x, even the 100x type of bets, but do it with the income that will easily replenish itself if the bet doesn’t work out.
But here’s where you need to tighten your reins on your betting.
Never should you go for the 10x bet with your first $50,000. Nor even your first $100,000.
High-return investments are tricky after all. They come with high risk and although you think you’re making smart moves, you’re ultimately putting your money at stake.
I think practically.
If I’m recommending an investment to the broad public, you can be rest assured in most cases that the recommendation is a pretty safe bet. I save the high-reward-higher-risk opportunities for my Premiere Mastermind and 1:1 clients.
Here's a little story for you
Back in 1838, this badass dude named J.J. Hill came up with a plan to build a railway across the country through some rough wilderness. His haters called it “Hill’s Folly”.
He, unbothered, gave them all the big middle, and pressed on with his plan. The problem was, no one wanted to invest into such a high risk asset. I imagine that if I were alive at that time, and not having the benefit of knowing how railways now coat our country, I would probably have said no to something so high risk as well.
But J.J. shrugged off his critics and offered an entirely new way to invest into his pretty big gamble. That entirely new investment that he came up with is going to give us an incredible play in today’s highly volatile market: The Convertibles.
His approach was so successful that by 1893, he reached Seattle. The Great Northern Railway operated through much of the 20th century. He was able to accomplish all this without receiving any government aid.
And how he financed the construction was something that had not been done before.
The First Convertible Bonds
At the time, capital was not easy to obtain by just issuing shares (equity) or bonds (debt). If J.J. offered a bond (essentially debt, an IOU with interest), it simply would not provide enough of a return to generate investor interest for the risk taken on. Selling equity (ownership shares) in his company was even more difficult due to the extreme perceived risk.
These challenges were the catalysts for J.J. Hill creating an entirely new security, a convertible bond.
The convertible bond was unique in that it was a hybrid security that includes components of both debt and equity. Being able to invest in a bond backed by assets – in this case, the railway – and having the added benefit to profit from rising equity prices due to the convertible aspect of the security made J.J. Hill’s convertible bonds attractive to both institutional capital and other investors.
When I say the word “bond”, my mind automatically goes to the word “boredom”. When my Dad shows me his portfolio (he’s 78, and therefore more conservative), it’s loaded with bonds and it almost puts me to sleep looking at all the low return, boring bonds that he owns. Many bonds are currently paying out 3-5% interest returns and many even lower.
But that’s the spice! A convertible isn’t your ordinary bond. This new form of security was so successful that it was adopted widely in the railroad industry to finance the national infrastructure build-out.
This investment vehicle is still in use today. But convertible bonds are no longer exclusive to the railway industry. Some best-in-class technology and biotechnology companies are now offering convertible bonds that will deliver us steady income, virtually no downside, and attractive upside potential with the conversion option.
Many great technology companies are being unfairly punished by the market-wide volatility. Nothing has changed with the underlying companies, except for their stock prices getting hammered. Growth will return to the markets as it always does, but until we begin to see healthier market conditions, it makes sense to look for more conservative strategies.
We’ll be using convertible bonds to secure a steady stream of income with essentially no downside risk. And because these bonds can be converted into shares of the issuing company, we have the potential for capital gains when growth stocks rebound.
Once I lost half of my money in the tech market when I was 22, I became a very cautious investor. I started putting my money into things like self-storage, single family rentals, mortgage backed notes (become the bank), and stock options, which all generated steady cash flow and protected my hard earned capital. I wish I knew about this back then, it would have given me one more weapon in my toolbelt to very passively build my wealth.
Convertible bonds have always been attractive investments for more conservative investors, but at certain times, like what we are experiencing now, they can be attractive to even those investors who are looking for higher overall returns while at the same time reducing risk. But first, let’s take a high-level look at the convertible debt market to better understand our “tech income” strategy.
Most convertible bonds pay a regular coupon (like a dividend payment) and, in that way, act like a fixed income investment. And some convertible bonds are zero coupon bonds, which are typically purchased at a discount to the face value of the bond and pay no coupon (zero interest payments).
Either way, when held to maturity, investors can earn a healthy yield and receive the full face value of the bond back. Fantastic!
Extremely Low Risk With A Large Upside
The reason convertible bonds are so interesting for high-growth companies is that they can earn a nearly guaranteed yield on their investment. The only way we don’t get our money back, and our yield, is if a company goes bankrupt.
Of course, that only happens with very low-quality companies which I would never recommend. I think when you see the strength of the financial picture of these companies, you’ll come to the same conclusion: They are not going bankrupt anytime soon.
Aside from the safety of high-quality convertible bonds, the upside opportunity for investors in convertible bonds is the chance to participate in significant equity appreciation.
For instance, this morning I looked at a convertible issuance for the semiconductor company, AMD. These bonds were issued in 2016 with a yield of 2.125%. Now that isn’t a large return, is it?
However, the return came with essentially no risk for a high-quality growth company like AMD. There was/is no way AMD was going to go bankrupt. And investors got paid to wait for AMD’s shares to rise.
Well, they didn’t have to wait long. If the investors had purchased these bonds and held on to them through today, they would have made 10x their money!
It is possible to see incredible capital gains with virtually no downside risk. That’s an attractive prospect right now. This is the “Heads, I win. Tails, I don’t lose” strategy in motion.
Assuming a strong economy and steady appreciation in the share price of the underlying stock, convertible bonds can be turned into equity at a specified ratio prior to the bond maturing.
This is very important so I don’t want you to gloss over this part: It’s this conversion feature that provides convertible bonds the upside potential of a high-growth stock.
And here’s the best part:
Even if the underlying stock never reaches its conversion price, investors will simply hold the bond to maturity, collecting a yield along the way, and then receive the par value (face value) of the bond. This is typically $1,000 per bond on the date that the convertible bond matures.
It’s a fantastic security to invest in during times of economic turmoil like we are experiencing now.
Our strategy right now is to take a more conservative approach to investing. Growth stocks simply aren’t being appreciated by the market right now, and capital has been on the sidelines waiting for improvement in both economic and monetary policy from the Fed.
Investing in convertible bonds from high-quality, high-growth technology companies gives us the best of both worlds. It provides almost no downside risk, assuming we hold to maturity. Plus, it guarantees that we’ll earn an attractive yield while we wait.
With convertible bonds, the upside potential comes with the bond – the ability to convert the bond to equity when the underlying share price rises above the convertible bond conversion price.
Even while healthy markets rule, they can be a great asset class for those investors whose goal is to take a more conservative investing approach.
If you’d like to take a deeper dive into this ultra-low risk asset with huge upside, I’ve added in a training module to my Indestructible Wealth Builder online learning course. I simply cannot give away these three companies on this blog because this is an evergreen podcast, meaning that if someone listens to this 6 months from now, these picks will likely be outdated and there are new picks that make more sense. But for only $97, you can get 32 video lessons and a lifetime access to any new updates that I add into the course, like this one. The course is designed to give you a solid base of safe assets that will kick off multiple streams of income and bulletproof your investments for the rest of your life.
You’ll not regret investing in convertible bonds. You get low risk, good returns, steady growth, and stability all at once - what more can you ask for as an investor! This asset class is my more preferred hand when it comes to minimizing investment downsides. They get you 7% guaranteed with a 10x upside. You can get started too, you just need to be ready to embark on a long, fruitful, patient journey.