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Subject:  Re: Building Bond Portfolios Date:  11/10/2002  11:38 AM
Author:  imcharliehm Number:  5170 of 35272


Do you remember the lyrics from the Simon and Garfunkel song, "The Boxer"? ...a man hears what he wants to hear and disregards the rest. I'd accuse you of doing exactly that with my posts (as I likely do with yours and other's). As the Buddhist proverb goes: "A way of seeing is also a way of not seeing". I don't think we share a similar focus at all and will only end up talking past each other. But let me make an attempt to clarify my post.

That 40%/30%/20%/10% allocation ratio that you are finding fault with --as you should-- was just a demo, nothing more, merely a way of setting up an example, about which I was careful to point out that the numbers were variables that could be varied to construct different profiles and different portfolios. Portfolios can be built bottom-up, one bond at a time, or they can be built top-down, using allocation schemes such as I was playing with. But the point remains that I was playing, as I almost always am --with words, with ideas-- but playing, because that's what message boards are for - to play.

As to that historical default rate for single A's, the number I reported isn't something I believe or not. It's merely a number I found in the professional literature a while back, copied the table summarizing the results of their study, and used it as a guideline. Your mistake is that you believe history is deterministic (i.e., "Past is prologue"). You'll trust those kinds of numbers and build a focused portfolio from them. I'll take a trader's approach and assume that my worst draw-down is yet to come and try to respond to what I'm seeing right in front of me, not what I'm remembering I saw, not what I think I'm seeing, or what others say I should be seeing, but what the market itself is saying, right now. I don't care if the historical default rate for single A's over the last one hundred years has been a steady 0.14%. The only that that matters is which single A's I own, and if I don't own them in sufficient quantities to capture the statistical trends --probably more issuers than the average investor can own, though I'd have to hit the stats books to work out the exact number-- then attempting to apply results derived from statistically valid samples to my admittedly statistically invalid sample is exactly the kind of academic horsesh*t that the MPT boys use to get themselves into trouble with (and so consistently so that they are reliable contrarian indicators). Investing isn't a science, and it isn't even engineering. It's merely an art form with all the vagary, chaos, serendipity, surprises, mistakes that adhere to any art form. Retail investors get themselves into a huge amounts of trouble in trying to apply to their retail-sized portfolios the guide lines that were created for institutionally-sized ones. The concepts don't scale. That's another of your mistakes: using big-money ideas for small-money portfolios.

A related point: There is no way in hell that it can be argued responsibly that markets are random, but they are definitely very, very complex and very, very difficult to predict beyond a couple of minutes. Therefore, the agnostic approach of scrupulous diversification becomes the safest approach for the "average investor", which is a category into which I'll put myself most of the time, unless I've put in the time and effort to learn enough about a technique or asset class to set myself apart, as I would argue I've done in the case of junk bonds. That's a place where I know what I'm doing. I've served my apprenticeship, and I'll take on anybody, including the "big boys" whom you hold in awe and reverence, some of whom I've even had the privilege to meet and to swap ideas with, discovering to our mutual delights, --because we both love the game for its own sake-- that we were pursuing similiar paths, selecting the same securites.

Lastly, I deliberately used the colloquialism "screw around" with reference to your involvement with tobacco bonds, because I think your approach is financially irresponsible and morally bankrupt.

Have a nice day, Charlie
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