Today we discuss how investing beginners invest in extremely risky investments that are called high yield. High yield is just another name for junk.
Beginners Chasing Yields - Danger
Charlie Munger: Invert And Use “Disconfirming Evidence”
Charlie Munger is considered to be one of the best investors and thinkers alive today. His thoughts and statements on investment research, investment psychology, and general rational behavior are often incredibly insightful. Anyone can learn something from this billionaire investor and philosopher. Q2 2020 hedge fund letters, conferences and more If you’re looking for value Read More
Good day fellow investors. A comment that they really wanted to do a detailed answer is Project Brian gave a great comment. Do you feel that low interest rates have forced people who are risk averse that would normally not invest in the stock market to invest in the stock market. Do you think that this will have consequences when the stock market goes down. I feel like many people have been forced into a risky game and that they will be angry when there is a downturn. So I really think people have been forced to chase yields. I have had so many friends people that know me relatives ask me Oh I went to my bank. The yield was zero point twenty five percent. And they said I should invest in funds. And then I go I go crazy because yes the banks invest in funds because they're is big profits for them with fees huge fees from the bank not from the fund. The bank charges the fees. So that's something crazy for me. And then the risk is not for those people they should stick to savings or. I always told them invest in real estate. If you have enough money buy something give it to someone manages it and forget about it and be happy with the free for 5 percent. When I was telling that to people the real estate prices have jumped 50 100 percent since I told them that. But that's different in France have also done well but not all funds and not in the diversification. They the bank offered them. So that's crazy.
Further also what the banks are selling are high yield funds. And that's something even this yields chasing environment. This is the European High Yield Index Fund yield. It is at three point sixty seven and it has increased significantly over the last in this year was about below free. Now what does this high yield mean. This does not mean you have will get the high yield. It means you have you own a junk bond junk. Do you know what that junk means. So this is what banks are selling to people they are selling. Oh look you have here high yield which is great thing to sell something that offers three point six percent in Europe and a lot of poor people that don't know about finances invest in such schemes such vehicles and that's something crazy because for the high yield for that junk or free percent returns they risk to lose 50 percent of what they own. And that's crazy. Better stick to the saving return. Let me show you what junk is so high yield bonds investment grade and high yield high yield bonds are also referred as non investment grade or junk bonds. This is from Fitch Fidelity which means that pertains to bonds rated b a one and lower. Let's look here at Moody's ratings so you have investment grade from A to be a free and then below investment grade junk junk junk junk. What does this junk means. Here are more long term definitions. So if you go down below a B A so substantial credit risk high credit risk see very high credit risk very near default like a default and see in the.
So those very high credit risks are yielding free percent and these vehicles are being sold to the people. Crazy. What does this high risk mean. It means that any shock to the economic environment is likely to have the stock downgraded the bond downgrade the company going in the fourth or the country. There are plenty of countries with 3 percent treasuries. Ten year yields that are junk. Countries that will go into default when the next recession camps and that's something crazy and it's not ok that people who don't understand this are being lured by banks investment bankers to invest in such vehicles. And this really hurts me because I know the pain that will come afterwards when all those savings are lost. So unfortunately the investment world works like this. I'll do my best to continue and to educate people about this and that's why I made the special videos about the chasing yields problem. Always think about the risks understand the risks and don't invest in something that's called the junk. If you want to be sure about preserving your capital and not losing it. Thank you for watching. Please share this with people that are chasing yields so that we help them in the long term. I'll see the next video.