Geopolitical Tensions - How We Are Positioning Portfolios

We are living through a pivotal time in history, marked by geopolitical tensions from the Russia/Ukraine War to China and other threats to worldwide stability alongside the evils of higher inflation and higher interest rates on a global scale.

I am emphasizing owning debt securities that have collateral backing them and a lower “value at risk”, or simply said the possibility of losing less money in a worst-case scenario of bankruptcy.  Corporate Loans have shown a recovery of roughly 70% of invested capital whereas stocks in bankruptcy tend to lose all their value as was the case for ENRON where hundreds of employees and retired investors sought a safe dividend and consistent company performance but lost all their invested money.  Corporate Bonds have shown a general recovery of 40-50% meaning they would only lose 50% of their value in a bankruptcy versus the stock “getting nothing and liking it” per the humorous movie, Caddy Shack.

Most investors today have never seen or invested in a grueling bear market and hence are shocked at the losses accrued year to date.  The risk of owning stocks is once again showing the possibility of 100% value at risk where nothing is received in a bankruptcy and potentially all your money is lost.   

I started investing in my teens during the horrific 1970’s bear market when the markets went down for several years.  As a professional, I was fortunate to work at Drexel Burnham as a bankruptcy analyst and later as a Managing Director at Canyon Capital which required rigorous research before capital was committed to an investment while also having a heightened concern for downside risk.  I believe these experiences are serving me well during these difficult and turbulent times.

The management teams of public companies are mandated to work for the benefit of stockholders to generate profit and growth. This all changes if a bankruptcy occurs as the management team would be obligated to work purely for the recovery of the debt holders.   This is one of the main reasons why debt is deemed safer and more stable than stocks and why it is my preferred vehicle to generate income for our investors.