It was October 2008.

As usual, the trading floor was pitch black besides text scrolling across a sea of computer screens. But I wasn’t paying attention to any of it. My eyes were glued to the six monitors in front of me.

I didn’t know it at the time, but I had discovered a timeless investment strategy. In fact, what I learned sustained my hedge-fund career for years. It even led to the design and launch of our proprietary High-Yield Advisor service.

Today, I want to show you what I discovered. And I want to tell you about an opportunity in the markets we haven’t seen since those dark days in 2008.

Take five minutes to read today’s essay. A few years from now, you’ll be glad you did.

Peak Chaos Becomes a Mega Bull Market

October of 2008 was eventful, but nothing compared to the September that came before it.

For me and most reading this, it was the most chaotic September of our investing lives (and I hope it stays that way). The U.S. Treasury was forced to take over Freddie Mac and Fannie Mae. Those two guaranteed 80% of U.S. mortgages. They were so underwater no one could calculate the potential financial hit.

A week later, Lehman Brothers became the largest bankruptcy case in U.S. history. It created $619 billion in losses, and the market believed someone else on Wall Street had to pick up the tab. They were partly right.

The very next day, on September 16, the U.S. government bailed out American International Group to the tune of $85 billion. The stock market did the math, and it never bluffs. If something hadn’t happened soon, the banking system would have collapsed.

The government decided the U.S. taxpayer should hold the bag. They called the historic bailout the Troubled Asset Relief Program (“TARP”). To their credit, the first half of the name made sense.

A New Reality

TARP was passed, and everything changed. It took a while for us traders to realize it, but there was now an “infinite buy order” propping up the market. After the market bottomed out in March 2009, it became undeniable. What worked in the past was history. New strategies were needed, and fast.

That’s exactly what I was working on that day. It was inspired by a mysterious and highly successful trader on the far corner of the trading floor. He was a legend in his own right.

He didn’t trade trendy stocks in the news, exchange-traded funds (“ETFs”), or S&P futures like everyone else. He didn’t rely on technical analysis or momentum indicators, either.

Instead, he found investments no one else had heard of. He built a huge portfolio of unknown preferred stocks, distressed bonds, and other investments I didn’t recognize. This trader wouldn’t reveal much, but he was friendly enough to give me a few clues.

I learned that he focused on thinly traded, poorly understood securities. In order to execute this strategy, I taught myself about liquidity ratios, credit ratings, and how to interpret lengthy legal and financial filings. I learned how to compare different investments using all this information and pick the best one.

Most importantly, I learned how to find all these hidden opportunities. After all, it’s a lot easier to win when there isn’t much competition. Once I really figured it out, I became the most consistent trader at the 250-person hedge fund.

Here’s what I discovered…

Go Beyond Common Stock

To most people, each company has a stock symbol and that’s about it. I’ll admit that early in my career, that was mostly my focus as well.

But to professional traders and Wall Street pros, they look past the common stock and see the preferred stocks, trust preferred securities, bond issues, convertible securities, and bank debt.

And there are a lot more of these than you think.

Source: Quantumonline.com

Take Citigroup (C). That image above is half of the different publicly traded investments associated with it. It’s similar for all the big banks. What most retail investors don’t know is that just about every company in the S&P 500 has many options besides the common stock.

That’s what I discovered in 2008.

While most of the market was obsessing over when the indexes would bottom or if there would be more bankruptcies, I became entrenched in this little-known universe of securities.

What I found was that – with the chaos distracting most of the market – these assets had become deeply discounted. It was like the market was selling dollars for 50 cents, and hardly anybody was picking them up.

I knew I had an edge. And so I started buying the assets hand over fist – Bank of America, Wells Fargo, JPMorgan Chase, and any discounted preferred shares I could get my hands on. In the end, my preferred shares made hundreds of percent returns when the panic finally subsided.

And believe it or not, I see that exact opportunity taking shape today.

The Panic Nobody Sees

It may seem strange to say that there is a “panic” in the markets. After all, the major indexes remain near all-time highs. Artificial intelligence is getting non-stop coverage. And investor sentiment remains jubilant. On the surface, it would seem this is nothing like 2008.

But in this one corner of the market – preferred shares and corporate bonds mostly – it has been a bloodbath. You have interest rates to thank for that.

Remember, when rates rise, the value of these assets – all else equal – will fall. By way of example, long-dated government bonds, as measured by the iShares 20+ Year Treasury Bond Fund (TLT), are still some 40% off the 2021 high.

That sort of downturn might be par for the course in crypto or small-cap stocks. But for arguably the most important financial assets in the world, it’s almost unheard of.

It’s not just government bonds. High-quality bonds across the market have been brought low. I haven’t seen something like this since I first entered this world back in 2008.

By way of example, I just recommended a “baby bond” in the pages of our High-Yield Advisor service. At current prices, it yields 7.3%. Compare that to the 1.3% currently on offer with the S&P 500. And the bond has become so discounted that it carries a 59% upside potential at par value.

Put simply, it’s an incredible yield and has fantastic upside potential. That’s hard to beat. In fact, I wouldn’t blame you if you thought it was too good to be true. It must be a risky junk bond, right?

Not so…

The company issuing it carries a BBB- investment-grade credit rating. The company operates approximately $104 billion worth of energy infrastructure across North and South America, Europe, and the Asia Pacific. And it’s been increasing its dividend at an annual clip of 8% over the past 10 years. In other words, it’s a solid business.

That isn’t to say there aren’t risks. There are, of course. And I spend a good deal of time discussing them in our regular issues.

But I remember that eureka moment I had back in 2008. I remember the feeling of discovering something important, and highly lucrative. I have the exact same feeling today when I survey these high-yielding assets.

And the best part? Hardly anybody sees it.

Subscribers to High-Yield Advisor can expect to hear much more in the months ahead.

Regards,

Stephen Hester
Chief Analyst, Wide Moat Research