Giving Thanks

I have heard it cynically said that one of the quickest and easiest ways to make a lot of money is to borrow it and not pay it back. Regrettably, loaning money, like investing in stocks, entails risk. But unlike a stockholder who enjoys ownership in a company, a bondholder is a lender to a company, and therefore has a higher priority than stockholders for a claim on a company’s assets.

When a company borrows money, it often issues bonds that typically fall within the category of corporate debt. Many factors determine the cost of that debt to the company. The bondholder receives interest and expects to receive the principal they gave the company when the bond matures. Bonds don’t often provide the growth of stocks, but they deliver a relatively safer source of total return and offer the potential for capital preservation.

Another potential benefit of bonds is diversification. Given their dissimilar responses to market events, stocks and bonds have a lower correlation and, therefore, can be complementary. Stocks are the riskier of the two asset classes, and they tend to be more volatile. While bonds usually offer a smaller return, that return may be more stable. Treasury bonds offer a reliably lower correlation to stocks than corporate bonds and have the added benefit of no state and local taxes, no credit risk, no liquidity risk and no default risk relative to corporate debt.

We believe an allocation to bonds (via ETFs and mutual funds) in a diversified portfolio is essential to reducing risk and volatility and preserving capital. We believe these allocations should emphasize U.S. Treasuries, high quality tax-efficient municipal bonds and high-quality corporate bonds—principally investments with a low probability of default.

As a new member of the team, I would like to express my genuine appreciation for the trust you place in Travis, Steve and me, to oversee your hard-earned capital. As a New Englander, as a CPA and as a former corporate bond research analyst, I am guided by the principles of conservatism and pragmatism in my role. To me, this means striving to preserve the capital that you worked so hard to attain, by investing in the highest quality bonds we have available. With historically low interest rates, growing inflationary pressures and a rapidly changing economy, it is our belief that a focus on the preservation of capital and purchasing power is imperative.

Collectively, we continue to strengthen Circa Capital in various ways, including the recent acquisition of a Professional Liability (Errors & Omission Insurance) Policy. Despite it not being required for advisory firms, we deemed this level of protection indispensable, considering what you have entrusted us with. Our belief is that the quality of our operations must be consistent with the quality of the investments and strategies we recommend and use for clients.

It is our sincerest wish that you all get to enjoy time with family and friends over the coming Thanksgiving Holiday. The past twenty months may have been challenging for all of us, but perhaps that will strengthen our appreciation for the most important things in life, and things we may have previously taken for granted.

~ James Callahan, CPA, CFA