Carry

Carry is the return an investor earns from simply holding, or “carrying,” an asset over time, assuming the asset's price doesn't change. Think of it like this: imagine you buy a small apartment to rent out. The rent you collect is your income. Your mortgage payments, property taxes, and maintenance fees are your costs. If your rental income is higher than your costs, you have a positive carry—you're literally getting paid to own the property. Conversely, if your costs exceed the rent, you have a negative carry, and the property is costing you money each month. In the investment world, this same principle applies to everything from currencies and bonds to commodities. The core strategy is to profit from the difference between what an asset earns (its yield) and what it costs to finance or hold it. The big catch, however, is the assumption of a stable price. As any investor knows, prices rarely stay still, and that's where the risk lies.

At its heart, carry is a simple calculation: Income - Cost of Holding = Carry. Understanding the two possible outcomes is key to grasping the strategy.

• Positive Carry: This is the desired state where the income generated by an asset is greater than the cost of holding it. It means you are earning a net profit just for owning the asset. For example, if you buy a high-quality corporate bond that has a yield of 5% and you finance the purchase with a loan that costs you 2% in interest, your positive carry is 3% per year. You are being paid to wait.
• Negative Carry: This occurs when the cost of holding an asset exceeds the income it generates. In this scenario, you are losing money over time, even if the asset's price remains flat. An example would be buying a non-dividend-paying stock on margin (with borrowed money). You receive no income from the stock, but you must pay interest on the loan. Here, you are betting entirely on the stock's price appreciation to turn a profit, and the negative carry is a headwind you must overcome.

Carry strategies are prevalent across different asset classes. Here are a few common examples:

• Currencies (Forex): This is the home of the famous Carry Trade. A trader borrows money in a currency with a low central bank interest rate (like the Japanese Yen or Swiss Franc for many years) and invests it in a currency with a high interest rate (like the Australian or New Zealand Dollar). The trader's profit is the interest rate differential, as long as the exchange rate between the two currencies remains stable or moves in their favor.
• Bonds: An investor might engage in a carry trade by buying a long-term government bond yielding, say, 4%, and funding the purchase with a short-term loan at 1.5%. The 2.5% spread is the investor's positive carry. The risk is that the short-term borrowing rate could rise, or the long-term bond's price could fall.
• Commodities: In commodity markets, carry relates to storage costs and futures prices. For example, if the market is in backwardation (where the future delivery price is lower than the current spot price), a trader could face a negative carry when hedging a physical position. Conversely, a market in contango can sometimes offer positive carry opportunities, though these are more complex and typically the domain of professional traders.

For a value investor, carry is a tool, not a holy grail. The focus is always on buying a great business at a fair price, but a positive carry can make a good investment even better.

A prudent value investor looks for assets trading below their intrinsic value. If such an asset also provides a positive carry—for example, a solid, undervalued company paying a reliable dividend—it's a significant bonus. This dividend acts as a form of carry, providing you with a cash return while you wait for the broader market to recognize the company's true worth. It’s a “get paid to wait” strategy that provides a tangible return and a margin of safety, completely separate from the potential for capital gains. The carry becomes a component of your total return, not the sole reason for making the investment.

Strategies that pursue carry for its own sake are often closer to speculation than investment and are riddled with risk.

• The Lure of Leverage: Because carry spreads are often thin (e.g., a 1% or 2% interest rate difference), traders frequently use enormous leverage to magnify their returns. While this can amplify gains, it also amplifies losses. A small, unfavorable move in an exchange rate or interest rate can be catastrophic, wiping out an entire investment in the blink of an eye.
• Ignoring Price Risk: The fundamental flaw in pure carry strategies is that they depend on price stability. In the real world, asset prices are volatile. A sudden, sharp drop in the price of the high-yielding asset can erase years of accumulated carry profits in a matter of days or even hours. This is precisely what happened to many currency carry trades during the 2008 financial crisis.
• The Crowd Effect: Popular carry trades become crowded. When everyone is on the same side of the boat, it creates a fragile and dangerous situation. The moment sentiment sours, the rush for the exits is stampede-like, causing prices to collapse as everyone tries to sell at once.

A value investor appreciates carry but doesn't chase it. The primary analysis must always be on the quality and price of the underlying asset, not just the income it can generate through financial maneuvering.