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NO MATTER WHAT: You Need to Get Paid

December 21, 2021 By E.J. Smith

By fotosav @ Shutterstock.com

Let’s stay on the subject of making sure you get paid in times of trouble no matter what, just like Tony Soprano. Because any time you invest, you’re using your own money to create interest, dividends, or rent, and preferably all three. I’m not interested in price increases and selling assets. I want you to think like an owner of a multitude of assets.

I remember my dad telling me how, as a teenager, he would collect for his dad’s rental properties. Some of them were in rougher neighborhoods, and his dad would tell him: “You stand to the side of the door when you knock. You never know what’s coming through it.” Lesson learned.

In times like these, not all rents are paid on time. But if you own the building, you own the building, and the rents it produces are yours by law. The same is true with bonds. You own the bond and have a legal right to the income. As a bondholder, that places you above stockholders in the capital structure. Remember, in times of trouble, it’s the return of assets, not the return on assets, that matters most.

Action Line: Read this from Michael Milken, who knows about capital structure. He wrote this at the end of the financial crisis “Why Capital Structure Matters: Companies that repurchased stock two years ago are in a world of hurt,” for The Wall Street Journal on April 21, 2009. Let me help you stay on track by signing up for my free monthly Survive & Thrive letter, but only if you’re serious.

The current recession started in real estate, just as in 1974. Back then, many real-estate investment trusts lost as much as 90% of their value in less than a year because they were too highly leveraged and too dependent on commercial paper at a time when interest rates were doubling. This time around it was a combination of excessive leverage in real-estate-related financial instruments, a serious lowering of underwriting standards, and ratings that bore little relationship to reality. The experience of both periods highlights two fallacies that seem to recur in 20-year cycles: that any loan to real estate is a good loan, and that property values always rise. Fact: Over the past 120 years, home prices have declined about 40% of the time.

History isn’t a sine wave of endlessly repeated patterns. It’s more like a helix that brings similar events around in a different orbit. But what we see today does echo the 1970s, as companies use the capital markets to push out debt maturities and pay off loans. That gives them breathing room and provides hope that history will repeat itself in a strong economic recovery.

It doesn’t matter whether a company is big or small. Capital structure matters. It always has and always will.

Mr. Milken is chairman of the Milken Institute.

Originally posted on Your Survival Guy. 

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E.J. Smith
E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris.

Please get in touch with E.J. at ejsmith@youngresearch.com
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