Bonanza Of Bargains For Income Investors? | Steven Bavaria

**SPEAKER_1** (0:00)
It's time to refresh your yard during Spring Backyard Days at The Home Depot. Get low prices guaranteed on propane grills starting at $179, like the Next Grille 3-Burner Gas Grill, or get $50 off the Select Weber Spirit Grill and bring big flavor to your backyard. Then set the scene with Hampton Bay String Lights that bring it all together. Shop Spring Backyard Days for seven days at The Home Depot. Now through May 6th. Exclusion supplies to homedepot.com/pricematch for details.

**Adam Taggart** (0:30)
Just to get to the punchline, Steven, it sounds like you believe that high quality publicly traded BDC funds are undervalued right now.

**Steven Bavaria** (0:44)
Yeah, for the most part, especially if you see the individual ones that have big discounts I think are definitely undervalued. Although I think besides those, if you were building an income factory and income portfolio, I mean, there are a lot of good opportunities in other assets.

**Adam Taggart** (1:02)
Okay, so that's my next question here.
Welcome to Thoughtful Money. I'm Thoughtful Money Founder and your host, Adam Taggart. We're very fortunate today. We are going to be joined by Steven Bavaria. Those of you who have seen my previous interviews with him know him as the creator of the Income Factory framework. So, Steven is a big proponent of income investing. He's got a very particular style in which he builds income generating portfolios. And essentially, his mission is to help investors obtain equity-like returns with bond-like safety, constructing a lower risk portfolio of income generating assets. And Steven, it's been a little while since we've had you on, so just wanted to bring you back on in general. But we have had a lot of viewers asking for you of late over the past couple of months, given everything that's been going on in the private credit space. You have had a cohort or a sleeve of your portfolio invested in assets like BDCs, business development companies, that are oftentimes private credit vehicles. And I think people have been wondering and worried that, wow, given the private credit concerns that we've been reading about for the past couple of months, they've seen the prices of a lot of these private credit issuers.
Or private credit funds get pretty hammered. And I think people have had concern that, wow, does that mean that there's a, is this having an injurious effect on Steven's approach and his portfolios? So anyways, wanted to get you back on to talk about any and all of that. So thank you so much for joining us. And before we get specifically to private credit, I guess, just talk about the state of the markets right now for income investing. Are things going along pretty well the way they always have? Are there opportunities bringing up? Are there some challenges out there? What's it like right now for your income factory approach?

**Steven Bavaria** (3:14)
Hello, Adam, and thank you for that generous introduction and for inviting me back.
It's a challenging market out there, as everybody knows, whether you're doing income factory investing, or equity growth investing, or equity dividend growth investing, whatever you're doing. I think there's no particularly safe approach, given all the geopolitical uncertainty and everything that we're all facing.
It's hard to talk about the income factory and its safety or not, without mentioning what our goal is and what we compare ourselves with. I'm a firm believer in index investing generally.
I don't really believe, and I think people have won Nobel Prizes with writing about this, so it's not unique to me. But it's hard to beat a market, and it's hard to time markets and get it right consistently for an entire investing career. Most people who try to beat the markets actually probably do a little worse, because one, they miss certain days when markets take off. They also end up having to hedge their more aggressive investing with less aggressive investing, safer stuff that pays even less, like long-term bonds that pay them 3%, 4%. So anyway, with all that, having said that, the purpose of our, what we try to do with an income factory is achieve the average equity return of the last 50 or 100 years, basically, of something like 9 or 10 percent, which is what you would get on average had you been an index investor and were there through all the highs and lows of that time, except that I'm too much of a chicken, I found through experience to do that with a index investing, equity index investing, because you make one and a half percent average yields per year, and then you're counting on a capital gain of another seven, eight, nine percent in addition to that on average every year to get to your nine or 10 percent. I found the hard way that it's hard to just sit through negative periods, bear markets and stuff like that. But I discovered in my career as a banker, seeing people, institutions mostly, banks and institutions earning eight, nine, 10 percent on high yield credit, that you could make that a yield, and if you never had any capital gains, but you reinvested that and compounded it, you'd have the same long-term return as an equity index investor. But you might sleep better at night because you're still getting your eight, nine, 10 percent even while you might have paper losses, or you're not getting any increase in value, any capital gain, but you're making the money and reinvesting it and growing your income at that rate. So that's what I've been doing for the last many years and started writing about it on Seeking Alpha and in my book. And this last year or so has been a good test of this because it's been hard. I mean, stocks have actually gone up more than an income factory. A successful income factory would have made over the last few years. The last decade overall has been very terrific for stocks. So if you'd known that in advance, who would have done an income factory? You just would have bought the S&P 500 But we're doing this because we don't know what's going to happen in the future. And if you're going to have a period of years where you're not going to have that kind of return, then I'd rather get my 8, 9, 10% yield and just reinvest it and live with that sleep.