Who’s up for some reward-free risk? In recent years, investors with a high risk tolerance have gravitated to shares in fast growing but cash-hungry Silicon Valley concerns Netflix, Inc. and Tesla, Inc., with terrific results: The pair has delivered exponential returns over the past five years, as popular products and cultural cachet have trumped financial statements that could be described as less than stellar. The potential for further such reward colors the evident risks.
The bond market, of course, features a different calculus. Instead of the potential for outsize returns available to stockholders, the measure of success for corporate creditors is the return of their capital, along with contractual interest payments. Necessarily limited upside trains the investor mind on what can go wrong. For par value bond investors, risk aversion is the name of the game.