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'Cold Hard Cash,' Paper Losses, And Sleeping Better At Night

May 02, 2022 5:19 PM ETBBDC, DIA, ECC, EIC, EXG, IAF, KYN, ONEQ, OXLC, PSLDX, SPE, SPY, XFLT189 Comments


  • Whatever stocks or funds we hold in our portfolios, most investors are hurting at times like this.
  • But at least high yield investors can collect 9 and 10% cash distributions while they wait for markets to improve.
  • That means if they are retired they don't have to touch their principal or sell at losses in order to generate current income.
  • And if they are still at an accumulative stage and reinvesting that "river of cash," they can watch their income grow faster than ever as they compound at bargain prices and yields.
  • All of which helps us "stay the course" and avoid doing something "defensive" that history shows we would almost invariably regret later when markets finally improve.
  • Looking for more investing ideas like this one? Get them exclusively at Inside the Income Factory. Learn More »
Young woman relaxing in bed

Typical Income Factory® Investor

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An Investor's Best Sleeping Pill: "Cold Hard Cash"

It's hard not to be anxious as we review the state of the world - geopolitically, economically, financially - and, especially, watch the daily gyration in the prices of our investments.


I launched Inside the Income Factory because many of my 12,500+ followers and readers of The Income Factory® (McGraw-Hill, 2020) asked for more interactive dialogue. Here's what members say: 

  • "Learned the hard way how exceptional Steven Bavaria and the Income Factory is"
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Steve Bavaria

This article was written by

Steven Bavaria profile picture
Steven Bavaria publishes a boutique marketplace service - Inside the Income Factory - here on Seeking Alpha, which helps members implement the strategy outlined in his book "The Income Factory: An Investor’s Guide to Consistent Lifetime Returns" (McGraw Hill, 2020).

Bavaria introduced the Income Factory® philosophy in his Seeking Alpha articles over the past 12 years, drawing on his fifty years experience in credit, investing, journalism and international banking. His earlier book "Too Greedy for Adam Smith: CEO Pay and the Demise of Capitalism" exposes the excesses in the CEO pay arena. Both books are available on Amazon. 

Bavaria began his career at the Bank of Boston, handling international credit workouts that included managing a fleet of ships, chasing a Vatican-owned bank in Switzerland, and leading the turnaround of troubled branches in Australia and Panama.
Then he did a stint as a journalist, writing about the financial markets for Investment Dealers Digest (IDD). There he wrote some of the first articles about novel securities, like CLOs, that have now become mainstream, and covered the early evolution of corporate loans to a public, tradable asset class. 
Later he worked at Standard & Poor's, where he introduced credit ratings to the leveraged loan market, helping to open the loan asset class to pensions, mutual funds and specialized investment vehicles like CLOs.

Bavaria graduated from Georgetown University and New England School of Law. He lives in Ponte Vedra, Florida.


Analyst’s Disclosure: I/we have a beneficial long position in the shares of BBDC,ECC, EIC, OXLC, XFLT, KYN, IAF, PSLDX, SPE, EXG either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

My articles published on Inside the Income Factory or elsewhere on Seeking Alpha, including comments, chat room and other messages, represent my own opinion based on personal knowledge and experience. I am not an investment “expert,” counselor or professional advisor, and while my articles may reflect substantially the strategies I employ in my own investing, there is no assurance that these strategies will be successful, either for me personally or for my readers. In other words, while I do my best, there is no warranty or guarantee that the ideas expressed are correct or accurate, and I urge all readers to take my opinions for what they are – “opinions” – and to do your own due diligence on, and check out personally, every investment idea, stock or fund that I may present, so you can make your own informed decisions.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (189)

29 Jun. 2022
Steve, agree on all your points. Having big success with this strategy. However, my current concern with HY is the "new" element of interest rate risk hitting my portfolio. I say "new" because although this has always been a risk, the impact on my HY portfolio is new, and it's substantial. What are your thoughts on how this recovers in credit based CEFs, if ever?
turbotom profile picture
I believe selling is a good thing. rising tide lifts all and sinking same. get out and wait for a reversal .
Steven Bavaria profile picture
If you sell at the right time it undoubtedly is. But history has shown over and over that trying to time the market is a losing strategy for most investors. So if you plan to do it, you better be confident that you have the timing figured out just right.
DKB2 profile picture
When hamburger goes on sale, do I hear:
I am not buying it and will clean out my freezer to sell in hopes that hamburger will rise in price???

That makes no sense to me. These are the times to acquire more burger.

Happy Eating....
@turbotom My guess is that we might be in the trough of the CEF cycle. If I am correct, it could be imprudent to sell unless absolutely necessary. With the clear optics of hindsight, the time to sell would be last December/Early January.

Now if you want to sell now for tax loss harvesting and buy back in 31 days or use the money to buy similar similar stuff now, that might make sense.
Psldx opinions now at lows
But interest rates rising?
Jdavis4982 profile picture
@dnj life in paradise Pimco is best of breed. I like the leverage they use with bonds/ equities. Rising interest rates won't help PSLDX but I believe management will adjust the portfolio. The leverage in equities will help us the correction ends and equities rise. Not sure where bottom is but feel we will be there by end of year if not already. PSLDX is pretty beat up here at -30% YTD but to me a buy in my opinion if I was to get started I would buy 25% this month, 25% next month, 25% the following month, and in August buy my last 25% and let it ride. I got in at $9 - an underwater but happy to be here. In 10 years I plan on pulling 1-2% a quarter in dividends to support my lifestyle and let the river of cash grow. Right now I am re-invest all PSLDX. just my two cents. I am sure others have opinions on this Mutual Fund from PIMCO.
Steven Bavaria profile picture
I tend to agree with you.

Many of us "discovered" PSLDX last year when a couple popular and highly respected authors here on SA wrote articles pointing out - quite correctly - how successful PSLDX and its "return stacking" or "StocksPlus" strategy had been for the previous decade or so. What the PSLDX fund is, as I understand it, is basically an indexed equity fund that is leveraged to include a bond portfolio as well. Given that indexed equity (a la John Bogle et al) has been a great performer for many years for those patient enough to hold on to it through thick and thin, and Pimco's consistent demonstrated expertise at making money in the bond and fixed income markets, its "StocksPlus" strategy looks like a great idea to get the best of both worlds in a single fund.

Unfortunately, the current market which has punished both stocks and bonds at the same time, has proven to be a real double whammy for PSLDX. But I think both the strategy and the manager are good bets for the long term, so I am hanging in there as well. Fortunately most of my portfolio is invested in a high yielding Income Factory® strategy, so I am enjoying a constantly growing (through reinvestment and compounding at current bargain prices), 10% yielding cash income stream while I wait for my paper losses to turn around. Which, if history is any indicator, they will.
@dnj life in paradise

Once rates level off $PSLDX should level off as well. Once rates start to go down PSLDX should skyrocket (in theory). I bought too early but am happy to DRIP at low prices for now.
Damn, the "river of cash" plan will be tested big time in this market environment. TB I'm nearly fully invested already, otherwise I would be buying shares at attractive prices, like ARCC at $19.19!! That's a 9.3% yield on this steady eddy, trading at a rare discount to BV. FOF at 9.3%, wow tasty. Glad I also own FSK too after today's stellar earnings report and another dividend hike.
Philipsonh profile picture
@wwn2001 Correct. The current market is a major test and you have to stay in it long enough to catch the turn, which could be quite a while. Personally I think the Nov elections will be a turning point if it does not happen earlier' ie: Russia quits fighting in Ukraine. The 'wizards' on tv are already saying it is time to start buying, but the downturn keeps going on. and the Administration is doing all they can to destroy our society. ( oil, the Southern border, inflation, violence in major cities, etc ).
Ptstanford profile picture
@Philipsonh ...and the Administration is doing all they can to destroy our society. ( oil, the Southern border, inflation, violence in major cities, etc )."

You couldn't mean the Joe Biden Administration!? After all, he got more votes than Obama and is what Americans wanted.

I do agree with you, though... it is terrible that Americans' worst enemies reside in Wash DC.

I also agree that November will be an utter repudiation of all the craziness that has gone on the last few years.

I so hope we have a bottom much sooner, though.

This is a true "hunker down" environment.

"violence in major cities"

The Federal government runs city police departments now?
ManWithoutName profile picture
I'm always reminded that in days like these, with markets having multiple days of losses, one of the differences between growth investors and high yield investors is that growth investors are looking for the price to sell their investments while high yield investors are looking for the price to buy more of their investments. I'm a buyer in panic driven markets like today and know that if I were holding high growth stocks, i'd be concerned.
Manzanita Research profile picture
It is nice to have steady income too offset the pain of unrealized losses but I am starting to think it is smarter to be in cash then to be fully invested through a bear market, in the name of dividend yield If one is truly ready to treat their principal like annuity that will never be touched again than I could see truth in only caring about dividends being stable, but even though I could live with a high yield and not need to touch my principal ever again I can't bring myself to accept anything less than a positive total return over 3,5 and 10 year periods. If I am not confident the total return will be positive over these time frames I think I should stay in cash. Some people call this timing the market and perhaps they are right but being invested is also timing the market even if you are getting cold hard cash. One might think buy and hold always wins in the end but even the best stock can be flat for a decade. Dividends can be cut or eliminated. Leverage can blow up and destroy funds permanently. I don't think I can sleep well with paper losses unless I see a long track record showing a CEF, ETF or stock has overcome drawdowns and went on to new highs consistently. There are CEFs that have done this like $USA but these seem to be uncommon.
mrmedusa profile picture
@Manzanita Research With rates around today, and inflation rates where they are, staying in cash is going backward. If that makes you feel better, that's fine. There are "what if" risks all over, and it's silly to try to guard against every pitfall. I doubt there is very much that meets your requirement.
@Manzanita Research You are. absolutely correct. To optimize your return, you would be best to sell everything at the market top and go to cash. Then sit for a while until the market bottoms out. Then buy back in at rock bottom prices.

Best wishes. Please let me know how that works for you.
Manzanita Research profile picture
@mrmedusa I think the old adage sell in May and go away will prove true this year. There are also short term treasury funds like $SHY yielding 2.5% with minimal volatility one can use. No it's not going to beat inflation but sometimes equity preservation is more important than equity returns. Then again these may be the best prices we'll see this decade and if I don't buy now I am cutting my potential returns in half. My point is a paper loss is still a loss but the best way to avoid that and maintain your cost of living is not set in stone.
@Steven Bavaria

Good article appreciate your thoughts.

RC (Ready Capital) has performed well for me. Any thoughts?
Steven Bavaria profile picture
@6824615 I am not familiar, but a quick peak at it looks pretty impressive. 11% dividend yield, 59% institutional ownership. You might consider ARI as well.
@Steven Bavaria And according to Yahoo trading at a big time 50% premium to BV. Yikes. An 11% dividend yells "warning, warning" as well.
Steven Bavaria profile picture
@wwn2001 Re RC, what you say is very interesting. At the same time, Yahoo labels it "undervalued" and shows mostly "buy" ratings for it. Obviously further due diligence is necessary before anyone gets too interested. But based on a quick two-minute frisk, it looks worth investigating further.
mysonchino profile picture
People misunderstand total return in both directions. For example, too many "investors" think they actually make 21% or whatever distribution the cost/dividend ratio is on the Cornerstone funds. They also think they lost money on OXLC because the price has declined over time . Total return, which is the cirrect measure of how much was made or lost isn't part of their equation.

People will believe what they want to believe and I have had incredible conversations with many who will not accept facts.

Cash flow buys the beer. You don't cut off a piece of you house and sell it because you have more room than you need. Should think of stocks or other investments the same way.
Philipsonh profile picture
So far, today is an excellent day to test this article.
alphaseek2018 profile picture
The cash seems to be taken away from your own capital. It depletes over time. Check out the graphs over a longer time period. CEFs are like an annuity.
Ptstanford profile picture
@alphaseek2018 Which CEF are you talking about?
Steven Bavaria profile picture

Some are like annuities, many are not.

It all depends on whether a CEF's total return exceeds its distribution over time. That's why it's important for investors to do their homework and be specific. I've written extensively about it. Readers interested in the topic may wish to check this out: seekingalpha.com/...
mrmedusa profile picture
@Steven Bavaria Hmm- returning your own capital. So if I own blue chip (low yield) stocks and funds, and I plan on selling some to provide income in retirement, that's good, but if a fund does the same thing, that's bad?
My dividend income portfolio is only down 1.8% YTD compared to the S&P's 10%ish drop. And I continue to collect my rivers of cash. A big win on NRZ too.
scarp1952 profile picture
Steven, it would seem that BWG would be a present opportunity for the Income Factory now with a significant discount and high yield. Over 90% of the holdings are B or better. The fund was formed post GR but seems to do well. Thanks
Steven Bavaria profile picture
You better take a closer look at BWG. It has hardly made any money for 10 years (annualized total return about 1 or 2%). Yet pays out over 11%.

Classic case of a closed-end fund that HAS turned itself into an annuity. Gives other CEFs a bad name and encourages the sort of over-generalizations we see in the comment up above.

Giving you back your own money while eroding your capital and charging over 20% in expenses to do so. I wouldn't touch with a 10-foot pole.
scarp1952 profile picture
@Steven Bavaria Since writing I’ve been doing DD and see what you mean. Also a good bit of that ROC IS destructive. I was intrigued not just by the present yield but possibly being a fit for a taxable portfolio. I intend to Continue the search and with the corrections happening this week I may just find a muni that fits. Most of my income portfolio was initially invested in 2009 back when discounts were available and they have worked well. I now have distributions I’m looking to deploy. Thanks for the feedback
Veritas1010 profile picture
@Steven Bavaria,

Excellent article and advise. Many of us tow the line with the Misses (read the commentary within), but part of that “good life” is because in the market we swing the big bat and that’s our call with no one looking over our shoulder. Your never going to win without some risk. That’s life, just get results.

Thank you very much for sharing your some of your recco’s with me and others!
craftbrewinfo profile picture
@Steven Bavaria this article is full of nuggets of wisdom, but this one especially stood out :
"We are paid to take risk. At least that's the theory. So if I can make the same rate of return taking less risk than clearly I'd prefer to do that.
That's what substituting credit risk for equity risk is all about, especially if we can figure out how to make the same return with less risk"

I had to read that a few times and let it resonate .. I have been spooked by Credit risk ever since the financial collapse of the early 2000's all those spooky CLO's, and other credit swaps.. However I get what you are saying here when you put it in the context of overall defaults ( which are much much lower than the non-defaults) Makes total sense. I need to open my mind to these kinds of investments because to me they are still deemed "risky", but I really like the way you explained this with the background of your experience in banking. Just another excellent article Steven. THANK YOU
Steven Bavaria profile picture
Thanks for your comment and support.

Just to clarify, there were no "spooky CLO's" involved in the 2008/2009 collapse. CLOs are highly transparent vehicles filled with senior secured floating rate loans to major corporations, all rated as to default risk as well as loss/recovery in the event of default. CLOs came through the crash with flying colors.

Many people, unfortunately, confuse them with the CDOs (collateralized debt obligations"), carelessly and often fraudulently underwritten vehicles that contained sub-prime retail home mortgages and home equity loans. When these blew up, they left a tangled trail of poor and incomplete paperwork, non-existent borrowers or borrowers who had lied or had their brokers lie about their actual earnings or lack thereof, etc. Those were the securities that blew up when the property meltdown began, bringing down Lehman and other banks and investment houses and precipitating the broader crisis.

Not CLOs.
Philipsonh profile picture
@Steven Bavaria
and all the derivatives and insurance on insurance and other games. The biggest investment loss I ever incurred was on a Lehman bros bond that was rated I>G> 2 weeks before the company went bankrupt. I
lived and learned. I never trust ratings agencies or paid analysts.
Slade_01 profile picture
@Steven Bavaria I am constantly amazed how people confuse the very secure CLOs with all the garbage that blew up in 2008, mostly CDOs just because the abbreviations are only one letter different. ;)

Nice article, I own a number of your recommendations and am very happy with the high yield and comfortable with the risk profiles.
Jdavis4982 profile picture
I like the income factory and the service Steve provides. While the market is down the cold hard cash keeps hitting my account month in and month out. I have been able to allocate the dividends as they come in to what suits me after I do my due diligence. The river of cold hard cash is growing every month. For this I am thankful. Yes my portfolio is down just like everyone else. But each month my dividends have risen. Thanks for a insightful article and providing great service to your readers. Looking forward to the cold hard cash to keep growing.
Often see OXLC show up as a buy option. Thought it was a Senior debt fund. Maybe its time to pull the trigger.
Manzanita Research profile picture
@Max 2.0 I own $ECC and $XFLT but something weird is going on with $OXLC. Strong downtrend so I watch it for now.
@Manzanita Research Ok, thanks for the info. I did just look at OXLC and certainly price performance over time is subpar. I have an issue psychologically with investing into something that loses value over time despite the cash flow it generates.
7865671 profile picture
@Manzanita Research I've been acquiring small amounts of OXLC on the way down, but I'm stumped by the lack of support below $7. I've read information that indicates the coverage is good (with another div raise likely later this year) and that interest rate increases aren't going to be a problem. So I wonder why is this acting like a falling knife?
MtBudmoreView profile picture
I've dabbled in funds for years but nothing decisively large. As the markets got what I felt were too frothy I've concentrated more to your suggestions. I'm very happy with that decision. Economics requires a swing higher at some point in the future but I'm going to let compounding returns do the work. The Steven Bavaria program is money.
This crazy market is a good test of your high income strategy...which I have moved toward the last few years. While this year's market price drops have gutted the value of my portfolio, my dividend stream is at a record high. This keeps me from panic selling since I don't "need" to sell anything. One investment that gives me concern, however, is PSLDX. I have stopped reinvestment of the dividends to lessen my losses.
Steven Bavaria profile picture
@RetiredinIndy I agree about PSLDX, which is the only open end mutual fund I own, and I bought it on the strength of its great record and PIMCO's overall smarts as a money manager. It is one of the few investments I have that doesn't really fit the Income Factory profile, but I put it in the list just to be transparent and complete. I'm crossing my fingers and assuming the market will turn and/or PIMCO will adjust its strategy to one that makes money.
darehabber profile picture
The value in this article….simply put:
Encouraging the readers to
Ed needs bucks profile picture
My wife and I read Steven's excellent book after hearing him on a Seeking Alpha podcast at the end of 2019. We've been members of his service ever since. We retired during the beginning of the pandemic and began transitioning our portfolio to around 60% CEFs in March, April, and May of 2020. Boy has our retirement income shot up!
@Ed needs bucks I also enjoyed Steven's book. I would now be considered "Income Factory Light," since I still invest in some growth funds. But, the Income Factory portion of my portfolio keeps my retirement lifestyle completely unchanged during this crazy market. So far, I'm loving this strategy and my 30 CEFs...many with no or very low leverage.
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