Assume I believe in risk-adjusted return on capital. That is, I don’t buy a bond yielding 12% instead of one yielding 6% without first considering that the yield difference is affected by the likelihood of Principal return being lower. (But I will buy the 12% bond if I believe the risk premium is too high relative to the 6% bond.)
In short, I fit the second—not the more accurate “traditional” or the current even-more-bollixed “risk management” definition—of the Prudent Investor.
I can watch my neighbor buy more and more expensive gadgetry, while knowing that s/he makes no more than I do, has some old debts, and doesn’t not have dynastic wealth (i.e., the possibility of inheritance or some other deus ex machina) to save himmer. And I notice that hisser buying is growing greater over time.
My neighbor decides to borrow money from people to support hisser ever-more-extravagant lifestyle. S/he offers rates slightly higher than the rate at which I can borrow. (That is, I can borrow money, take the interest payments from himmer, and pocket the difference—if the Principal is paid back on schedule.)
Do I loan the money to—effectively, buy bonds from—my neighbor?
My instinctive answer is “No,” but I am a Prudent Investor. So perhaps I give my neighbor some money—monies I can afford, not something I need to borrow—as a token.
Under no condition do I become—by a margin of more than 2:1—the largest creditor of my neighbor’s lifestyle. Not, at least, if I want to maintain my reputation as a conservative (“prudent”) investor.