If You Don't Understand Bonds, You Don't Understand Money

If you don't understand bonds, you just don't understand money. And the reason you don't understand bonds is because no one has actually taken the time to explain it to us. Unless you've taken a really high, fancy, technical financial course. That's why most people don't really understand how bonds actually work. But once you do, it unlocks how money works entirely for you. Hey, my name is Sharan Srivatsa, and I've had a chance to build two billion dollar companies and a chance to invest in over 100 plus deals. And today I'm the CEO of Acquisition.com, where I work with my partners, Alex and Layla Hermosi. And I learned a lot about the bond market when I was a banker at Goldman Sachs on Wall Street. Just being there showed me the internal workings of how all of it works. And I want to take all of that experience and break it down for you so that you understand it at a very operational level. On how you could actually use it in your life right now. So let me tell you the big question, which is, what is a bond? And the easiest way to think about it is, just replace bond with debt. Bond is just debt. So anytime someone says, hey, I have this fancy bond, just think about it as fancy debt. A bond is just debt. And the reason it has the wording of a bond is because you make your bond to pay that debt. That's why it's called. A bond. And if you just understand that a bond is debt, everything else becomes extremely simple. Now, you may say, well, if a bond is debt, why are bonds actually important? How can you actually say that if you don't understand bonds, you don't understand money? And that is because having access to capital is so important in the world. Anytime anyone is struggling, it is just about access to capital. In fact, when I wake up in the morning, there's only one number that I actually look at. I don't look at the stock. I don't look at the stock market. I don't look at the headlines. I don't look at the social media feed. I only look at one number, and that is the 10-year treasury or the 10-year bond. If I know what the 10-year treasury and the 10-year bond is doing, it gives me a sense of how the entire economy is working. And as of today, when we're recording this episode, the 10-year treasury, the 10-year bond is yielding 3.9%. Now, if that number is significantly higher, say it's 7% or 8%, you know that we are in risky territory in the market. If that number is significantly lower. If that number is significantly lower, you know that the money is moving much more freely. So, knowing what a bond is, which is being debt, and the second is having it being important, which is like how does it actually work in the marketplace, is good. Now, there are three main reasons why bonds are important. And the first is that you want access to capital. Every business across the world needs access to capital. Now, what does that mean? Businesses, whether they are HVAC companies. Or large banks. All need access to capital to move cash around. In fact, you and I need access to capital. When you show up at a Starbucks and you swipe your credit card, what happens? There's a transaction that happens. And someone is paying for that. You're not paying for it until 30 days later. Someone is paying for that. So, access to capital constantly allows for money to move around the world. And the only way you can do that is if someone is willing to lend money to move around the world. So, number one is access to capital. Number two is banks. Banks are not always the best access to capital. There's a wide variety of businesses, maybe 90 plus percent of businesses, that actually cannot get access to bank financing. Because if you said, if you went to the bank and said, hey, my daughter and I are starting a company to sell unicorn products, they are going to be not very excited to lend you any money to be able to do that. Because you don't have any track record. You don't have actual inventory. You're probably drop shipping from China. You have a website. You think they think it's a hobby for your daughter. And if that business didn't do well, then they can't come after you or your daughter in any way. So, that business is not very bank financing friendly. So, if bank financing is not the right approach for all businesses to have access to capital, you need another set of access to capital. And that is why the bonds are important. Because any company, including you can issue a bond. What is a bond? It's just debt. Any company can issue debt. You can get debt from the SBA for a financing loan. You can get the debt from a bank. You can get the debt from a business partner. You can get a debt from me. And you can say, hey, Sharron, I want you to, I'm thinking about expanding my business and opening five more subway locations. I would love for you to invest in this. And the way I want to invest is maybe, could you give me a million dollars for this return? What am I doing? I'm just, you're giving me a bond. It's just debt. That's why bonds are important because it creates a liquidity and access to capital. When most people don't have access to capital. And the reason why people would rather do a bond or debt as opposed to get ownership in your business is because owner getting ownership in someone's business gets really messy. That's the next question I want to answer for you, which is what is the difference between bonds and stocks? Right? So I'll use an easy example. So you understand, let's say you were going to buy a house. If you bought a house, generally, there's two pieces to buying a house. Number one, you put some money down and second, you get the rest of it as a loan or a mortgage from the bank. Well, the loan or a mortgage from the bank is that essentially a bond, right? And the rest of the money that is left over the down payment that you put down is your equity, right? So equity is the stock and everything else is the bond. And for most people, the equity is just the ownership in the asset. You can have a hundred. A hundred percent ownership. You have a hundred percent ownership in your house. If I bought a house today, I have a hundred percent ownership in my house. No one else owns it. It's just that after I pay off my debt, after I pay off the mortgage, then I have a hundred percent. That's all that means. So the bank could give me a mortgage, which is just a bond, which is just debt. But I still have a hundred percent ownership in my house. The ownership is the equity. The ownership is the stock. So you have a hundred percent ownership of stock in your house. Now take this. Same exact thing to a company. Let's say you run a private company. Say it's a e-commerce business and you're doing $5 million a year and you own that business a hundred percent. Well, you have a hundred percent of stock in your business. But maybe you went to the SBA and you got a million dollar loan. Well, that is a bond. That is just debt. But you still own a hundred percent of the equity or the stock in your business. Now, if you take it to an even bigger level, think about Microsoft or Google or Amazon. Well, they are some of the biggest bond issuers in the marketplace. You can still own a share of stock of Amazon or Google or Disney or Tesla. Owning that piece of stock, you are part owner in the company after all the obligations of the company are paid. After. So a stock is a right to ownership in a business. A bond is just the debt in the business to allow the business to operate. But the bond has to get paid off first. So the debt has to get paid off first before you get your equity overall. So you may say, all right, Charan, you're talking about these bonds. I don't, no one talks about bonds day to day. I, does it even matter in my life? Like what kind of bonds are they? Do I even need to know any of these? Well, you should know what they are so that when you hear the words, it actually triggers the right thing for you. Uh, there's four kind of broad types of bonds that you need to know about. And if you just hear it one time, you'll know exactly what I, what I mean by that. The first one are government bonds or what, what? In the U S we call treasury bonds. That is the U S treasury actually issues bonds to the world and anybody, including you and I can go buy a U S treasury. It's a treasury bond. Um, the largest holder of treasury bonds right now is actually China. China believes that the U S the debt, the debt that the U S is offering is so secure that they want their cash in U S bonds. Now there are some geopolitical reasons why China wants to own a lot of this. And we could go into that, but anyone can own U S treasury bonds and that bond has to be backed by something. Now, this is a key part that you need to understand. A bond needs to have some kind of collateral, just like debt needs to have some kind of collateral. When you get a, when you have a house and you have a mortgage, you have debt. The collateral is your house, right? But when the U S treasury says that they're going to issue a bond, what is the collateral? The collateral is your house. The collateral is the, is the good faith interest in the United States. That's why they say the U S cannot default because once it defaults, it, it, you know, has this cascading impact of all the pain that can happen. So the first type of bond that you'll hear often is a, is a government bond or a treasury bond. Uh, the government government bond or treasury bond is actually considered to be the safest investment in the world right now. So if you live in America and you buy a U S treasury, that is the safest. The safest investment in the world right now, it's to the point where they actually call it their risk-free rate. Think about that. So if you hear about something called the risk-free rate, that means that if you invest in the treasury bond, you need that the world is saying you take almost no risk by investing in this and you get a certain rate of return. So the first type of bond is a government bond or a treasury bond. The second type of bond is a municipal bond, and this only, uh, matters for, uh, if you live in the United States. And other countries have something like this, but a municipal bond is where the municipality or like a state or local municipality issues the bond. Now, uh, It's very important to know the distinction of this because it has enormous benefits if you know how a municipal bond works. So let's say the state of California, crazy state, you pay 13% extra in taxes. You still get 72 degree weather to live here, but you pay a lot in taxes. But the state of California may say, hey, we want to build a new highway system. And for that, we're going to issue this highway bond. And what that means is when the state of California issues that bond, a couple of things are true. The first is it's backed by the state of California. And the second is most states, when they issue a municipal bond, they actually give you tax advantages. They're like a state of California. You're a California resident. California is willing to do this. You as a resident of the state of California are willing to invest in this bond. Therefore, we're going to give you a break from California state taxes for the interest associated with that bond. It's actually a really good thing. But the key part is. A municipal municipal bond is has there are two kinds of bonds when it comes to the first is called a general obligation bond, which means that a municipality will almost never default on their bond. Because what they can do is they have the right to unilaterally raise taxes to pay back your bond. To pay back your debt. So if I invested a hundred thousand dollars in the California highway system bond and it was a general obligation bond. That means. That it is almost as close to the risk free rate as possible, meaning the state of California, if it could not pay the bond in some way, because of his economics could unilaterally raise taxes and then pay me back that bond. The second type of bond is called a revenue bond and a revenue bond is generally used for key projects. And let me tell you what I mean by that. Let's say the state of California is building a bridge and they'll say this is a revenue bond and they'll build the raises money and they build a bridge and the entire the way they actually pay the bond. Back is from the revenue of that bridge, which is why you see tollways. When you see a toll, the reason for that is not because the state of California wants to charge your toll. That's because generally speaking, that toll is connected to the revenue that that project creates to pay back the bond, to pay back the debt holders associated with that project. That's why whenever I see opportunities to, to invest in municipal municipal bonds, I always want to see, do I want this to be a general obligation? Bond or a revenue bond? Me personally, I like the general obligations a lot more because I know that they'll never default on it because you can unilaterally raise taxes to actually pay that bond back. The third most interesting type of bonds are, uh, corporate bonds. This is the least known vehicle out there. So if there's one single vehicle that you need to know when it comes to managing your financial future, and that is understanding how. A corporate bond works, meaning a company like Google or Amazon or Tesla or Yahoo will essentially say they're going to go out to the market and issue some debt, issue a bond where you can invest in that business and you're loaning that business money. And they are going to use the profits of their business to pay back your debt. And it's crazy because they're going to pay back your debt before they pay back, uh, any of their, you know, any of their stockholders in any way. And the reason this is important, because. Most of these big companies are going to do capital expand expansion projects. They're going to actually need money for operations and they don't have any other way to go get money from the public markets because just, they're not always going to get the size of money that they need for bank financing. So I currently own several corporate bonds and the easiest way to invest in corporate bonds is you should just get a corporate bond ETF. Uh, you can actually Google exactly what they are, but a corporate bond ETF is a good one because it allows you to get a corporate bond ETF. You can actually Google exactly what they are, but a corporate bond ETF is a good one because it allows you to get a corporate bond ETF. bonds where companies from around the world, both public and private, can actually issue some debt to have investors that are, you know, you and me and companies, et cetera, that can actually get access to the bond. The last one, though, is actually called private credit. This is my favorite of all of the bond types. Private credit is just a form of debt, which means that private companies like you or I are now have the ability to issue a bond, issue debt to companies. There are times when, you know, you, you are not, you can't go to the bank to get debt to do a certain project. And you say, man, I'm just going to, they call it pass the hat around or syndicate the debt to other private investors. And that is called private credit. That allows you to get a, a wider pool of investors to actually get access to capital that you would not get otherwise. The key part in all of this is if the bond market stops for even one day, the entire world will shut down because when the world needs money to run on itself, the bond markets are the ones that create the capital and the liquidity that is needed for the entire world to run, which means that credit cards will stop working. Um, trucks cannot move because they don't have access to capital to actually buy goods and services. No one can actually buy inventory to, to, to stock these stores and restaurants. The fact that the entire world is based on one number, which is roughly the 10 year treasury or the 10 year risk-free rate is amazing to me. And that is the one thing that is not taught to anybody. So the next time you're curious about why your credit card interest rate went up or why your student loan balance went up or why, um, you suddenly, you see mortgage rates come down. You'll start to realize that you're not going to be able to move forward. You're going to start to realize that it's not got to do with the essential health of the economy or because there's a war in Iran or because, uh, you know, open AI released some new AI it's because everything is tied to access to capital and access to capital is entirely based on understanding what a bond is. So hopefully as you listen to this, you will realize and keep your eyes, eyes and ears open to what a bond is. And you will know that if you don't understand bonds, you will never understand money.