Byte #41 – The Easiest Risk Filter: “I Don’t Get It, So I Don’t Buy It”
Dear Reader,
In a market where everyone is chasing yield and private credit headlines dominate, today’s Byte is a reminder of my simplest investing rule:
If I don't clearly understand what I'm buying, how it makes money, and how I can get my money back, I don't invest. No matter how attractive the stock or the yield looks, I just leave it alone.
Over the past few weeks, Blue Owl and its BDCs (Business Development Companies) have been all over the news. There's a lot of drama around structures, mergers, discounts to NAV, liquidity terms, and "semi-liquid" products.
Here's my honest truth: I don't fully understand all the moving parts of BDCs and these complex private-credit products. I understand enough to know this: they are not simple. So, for me, they're a hard pass.
Instead of trying to look smart by owning everything that yields 8–10%, I'd rather look "boring" and stay in things where:
I know exactly what I own.
I know roughly why it goes up or down.
I know how and when I can get my money out.
If I need a 20-minute explainer just to understand the structure, that's already a red flag for my portfolio.
So my takeaway from the whole Blue Owl saga is a reminder of a very old rule:
"Never invest in a business you cannot understand." – Warren Buffett
For me, that now translates to:
If the product deck is full of words like "semi-liquid, interval, side-pocket, complex structure"… I'm out.
If I can't explain to a friend in 2–3 sentences how the thing works and how I get my money back, I'm out.
If I'm only attracted because the yield is higher than a simple ETF or bond, I pause and ask, "What risk am I being paid for that I don't see?"
Now take Ares Capital (ARCC) – another BDC.
It's one of the most respected BDCs out there, often held up as the "gold standard" in the space. It lends money to private companies at high, mostly floating interest rates and currently pays close to a ~10% dividend yield.
On paper, that sounds perfect:
Big, established manager.
Floating-rate loans, so income can rise when rates are high.
Nearly double-digit yield.
And yet, I still haven't put a single dollar into ARCC.
Why? Because the way BDCs react to interest rates still feels too messy for me:
They lend at floating rates, which can be good when rates are rising.
But they also borrow money themselves, and their own funding costs move too and can eat into the spread.
The net result depends on many moving parts – loan floors, hedges, leverage, credit losses, and how fast rates change.
I understand this at a high level, but not in a way that lets me sleep well through big rate swings. The volatility in interest rates, the impact on their net interest margin, and what that means for NAV and future dividends is more than I want to juggle.
So even with a ~10% yield staring at me, I've stayed away. Not because ARCC is "bad" – many smart investors like it – but because I don't fully get the moving pieces, and I respect that gap.
For me: if I don't clearly understand how a company's business model works, how its cyclicality can impact its business, or how the yield will be generated, I'd rather pass than pretend.
If you're reading this and you own something you don't really understand, this might be a good week to pull up your statement, pick one position, and ask yourself:
Do I know what this is?
Do I know how it makes money?
Do I know how I can get my money out?
If the honest answer is "not really," it might be time to go back to basics.
That's it for today! As always, a big thank you for reading, subscribing, and sharing Invest Smart with Pooja.
Cheers,
Pooja
