Income Factory: An investor’s guide to a consistent lifetime return. 2020. Steven Bavaria. McGraw-Hill Education.
Professional investors can find unique, well-distinguished ideas among the many outputs from many contributors Looking for alpha, A crowd-sourced content service for the financial markets. One standout among many contributors is Steven Bavaria, whose long-term return message (ideally, more than 20 years) is entirely produced by dividends, interest, distribution and re-employment of their revest and income from the compound.
Inside Income factory, He strongly demonstrates how it is possible to build assets in a style detached from the more conventional methods of balancing growth and income based on the declared objectives and risk tolerance of the investor. His vision is deeply fundamental, a strong foundation of credit and risk analysis backed by decades of experience in banking and lending. Income factory Shows that double-digit returns do not need to be derived from growth or growth and income but can be earned from income and its reinvestment.
Portfolio managers for individuals and institutional portfolio managers will want to look behind this approach. Bavaria proves this in a number of ways throughout the book using a mix of different return estimates and investments. For starters, he explains why the “income factory” earnings flow increases rapidly when stocks are flat or decreases when they are rising. The Income Factory approach provides a higher sense of security in volatile markets because it discourages taking defensive measures or taking defensive measures that can be costly in the long run. Moreover, this approach requires companies to simply operate and continue to operate without increasing value.
The author considers the book to be basically three books. Book One, Chapters 1 to 5, describes the overall philosophy and strategy of the income factory approach. Book Two, Chapters 6 to 9, provides building blocks for the construction of an Income Factory with Income Factory Lights, a combination of traditional thematic investments. Building blocks are represented by a selection of top quality close-end funds that the author has observed and used over time. Finally, Book Three, Chapters 10 to 14, discusses in depth the risks and rewards of various equity and fixed income sectors, especially the highest yields that can increase potential income.
As an impatient investor I started reading Income factory Chapter 10, “Classification of Risks and Rewards”, as soon as I finished the introduction and Chapter 1, “How to use this book.” The author immediately opened my eyes to a much broader definition of fixed income and to a surprising contrast between bond risk and stock risk than I was acquainted with.
First, in the case of options available for fixed income investing, the author covers the outstanding bonds, master and preferred stocks, leveraged loans, master limited partnerships (MLPs), business development agencies, collateral loan obligations (CLOs), and closed-end funds. Uses alternative strategies to offset future stock appreciation for high and stable current cash earnings. Instead of individual securities, Bavaria relies on top performers among closed-end funds that invest in conventional and more complex asset classes. He describes the dynamics and credit risk of each asset department (which outweighs the interest rate risk in the current environment). The investor’s understanding of the risks associated with these assets and how they can affect potential income generation.
Second, I have taken an interest in Bavarian equity risk segmentation, which cleverly explains the price action of stocks following the outbreak of the Covid-1 pandemic epidemic. He noted that equity owners, in addition to taking the entrepreneurial risk and rewards of owning a company, take the company’s credit risk in the same way as the firm’s credit holders. A stockholder must realize the price increase and achieve a dividend yield that the income factory can only promise to pay through cash disbursements and reinvestments. Another thought: Many equity investors do not consider buying high-yield bonds (those rated BB + or below) because of their higher risk. The author says that this category covers more than half of all companies, so most stocks labeled “midcap” and “small cap” are actually non-investment grades.
Considering the abundance of well-supported and fully presented ideas Income factory, What could be wrong or not work? The first thing that comes to my mind is the distribution cut which will reduce the rate of cash distribution, re-employment and compounding. Yet this will not happen at once in all asset classes and securities, one hopes! Following the outbreak of the Covid-1 outbreak, we have actually seen cuts in distribution across a number of securities. Which the author has actively recommended And did Appropriate investment allocations were transferred under current conditions (see Steven Bavaria’s “Income Factory Update: Titanic Hits Iceberg, Don’t Drown,”) Looking for alpha, 30 March 2020). To get out of a recession and an epidemic (both indefinite lengths), an investor can choose to “de-risk” an investment portfolio and go into investing with a better chance of survival if not prosperous, although low distribution yields yields.
Another thought that might go wrong is investing in income “enhancers” (such as CLOs, MLPs, or equity covered calls) without fully understanding how it works. The Income Factory is not a “get in, get out, pay” approach. This represents a truly long-term (20-year or more) investment approach.
Finally, I am concerned that interest rates may be permanently lower, which will reduce the expected rate of income factory approach. The U.S. 10-year government bond rate has risen from 1.919% at the end of 2019 to 0.711% at the end of May 2020, up from 2.416% a year earlier. If this trend continues, it will obviously limit the interest rates that income factory investors will consider.
The Income Factory approach requires a lot of discipline, but it is so well explained and mathematically interesting that many investors will want to test it, if not accept it.
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All posts are the author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed must not reflect the views of the CFA Institute or the author’s employer.