Borrow like the Rich.

Yes most articles you read try to tell us how to invest like the rich, but sometimes it is better to know how to borrow like the rich.   Now is one of those times.  Bill Gross, who has forgotten more about bonds and borrowing, noted such in a posting over the weekend.  He is a billionaire and like Warren Buffet knows that contrarian investing is the way to serious riches. 

Foolish people borrow for consumer goods and run up credit card balances. Only big ticket items should be bought with borrowed money.  Education and homes are a good example in that borrowing to buy them also offers the chance of both purchases being more valuable in time.  Automobiles, due to the large price tag, are also usually purchased with borrowed money, but smart borrowers use short time frames for their loans.  Foolish people also borrow when rates are high, which generally means the economic cycle is most positive, thinking that the good times will continue and of course that does not happen. 

The economic cycle now is producing the lowest rates in generations.  As we posted a couple of postings ago we expect these rates to continue for some years.  Smart seasoned borrowers are taking full advantage of these low rates.  Corporations are issuing bonds and reissuing debt at these low rates to use the proceeds for other purposes.  Warren Buffet has been using the float in his insurance business to buy companies when the financing is cheap.  Home buyers are buying homes and locking in cheap financing for 30 years.  So how can the average person take advantage of these lower then low rates, other than buying a home.  Simple, find a company that can borrow at these low rates, that is doing so, and buy some shares in that company. 

This morning gave us a perfect example of just that happening.  Annaly Mortgage announced they are buying Hatteras Financial.   Both are basically buyers of mortgages guaranteed by the Federal government.   They borrow money on the cheap in the private market and then buy these mortgages which yield a higher rate and make money on the difference.  Simple business in that they are holding government guaranteed mortgages and the only risk is if the borrowing they have to do to buy the mortgages get more expensive it squeezes their profits.  Annaly is obviously comfortable enough with long term cheap money that they are willing to double down on their business by buying out a competitor.  You can get in on this deal by buying what is known as a mortgage reit.  Lots of them out there, but Annaly Mortgage symbol NLY is the largest and best.  A 12% dividend is the payoff. 

Another way to get in on the borrowing is with what are known as leveraged bond funds. They do basically the same thing as Annaly above but buy bonds instead.  This is done in a closed end bond fund where there is a limit to the number of shares issued.  The fund buys bonds, and then borrows money to buy more bonds and makes additional interest on the difference between the cost of borrowing for the bonds and the interest rate on the bonds.  Again the only risk is the concern over interest rates going up cutting into the value and profits from the leveraged bonds owned.  These bond funds have been rocketing up in value lately as more and more people find these deals.  Most of the slow rabbits have been caught here, but there is still some out there to purchase.  We like municipal closed end bond funds here for the safety and tax free interest.   Invesco has some good ones, so do your shopping, and pick.  We own a large position VKI, which has run up, but still yields over 6% tax free. We are up about 8% this year in value since we purchased in January not adding in the 6.6% tax free yield, which is about 8,8% tax adjusted for us.   Bill Gross suggested taking a look at DPG and JPC, both which are solid choices and safe for long term investing. 

One other choice we like is high yielding stocks, that can borrow for their growing business and pass on the profits to their shareholders.  We posted last time about one such selection in New Media Investments Group.   They pay a 9% dividend, which we think should grow and the opportunity for capital gains is there as well.  We also own a large position in NEWM.

Having money in a savings account at a bank, or owning low yielding US Treasuries in this environment might give you a sense of safety, but you are earning basically nothing on your money and only helping the bank and the government do well.  So consider some of the alternatives above and begin borrowing and making money like the rich.