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URL:  http://boards.fool.com/dan-thank-you-for-taking-my-post-and-then-going-28496867.aspx

Subject:  Re: Yesterday’s Damage? None to Bonds Date:  5/7/2010  1:31 PM
Author:  charliebonds Number:  30777 of 35397

Dan,

Thank you for taking my post and then going deeper with it by looking at a variety of bond-index proxies, not just the single broad one I used.

Now let's look beneath the hood a bit. The sub-classes with the least credit-risk did best, as would be expected. Those most exposed to credit-risk did the worst, as would be expected. But this is where being a buyer of individual bonds, rather than an indexer, might pay off. Though JNK has tanked hugely, my own holdings, a substantial portion of which are less than investment-grade, were barely affected. My day-over-day change for my E*Trade account, all of which are bonds, was a mere $8 on a $65,600 account, all of whose 54 holding (but two) were acquired between Feb 6, 2009 and April 28 of this year. Of those holdings (listed below by issuer), all but one are corporates, and most are "Industrials", (which is a group I strongly prefer for having real, underlying assets) rather than "Financials", and some are "Foreign" (giving me a bit of diversification that way).

I haven't done a break-down by credit-risk tranche, but I'm guessing that for this account (one of three in which I do active buying) the split between invest-grade an spec-grade is roughly 40:60. I know for sure in my IRA that this year's buying has been far different, and the ratio of invest-grade to spec-grade is roughly 75:25, because I was pursuing a different strategy, and of that invest-grade tranche, everyone of them is triple-AAA.

As to your point that some expected and minor price fluctuations might create buying opportunities for bond buyers, I seriously doubt it. As I wrote to a friend yesterday,

Bond prices are being hammered, but in two directions. The "safe" stuff is getting even more over-bought. (A week ago, the long bond tagged 5%. Now it's sub-4.7%.)

The financials, OTOH, are getting dumped. E.g., two days ago, Zion's yield-curve was headed toward 6.7% (down from last winter's 12%). Today, same issues are over 7%.

Goldman's bonds inched over 7% at the long end. BP's longest maturity went to 4.3 (from a previous 4.2). Transocean's issues remain unmoved (so far).

"Sell before May and go away" would have been excellent advice. I'm doing not much looking and no buying. Let the dust settle, and then I'll reassess where we're at. So writing book reviews keeps me out of trouble.


I could be wrong about prices and timing, of course. I frequently am, and I've been saying since last July that bonds were over-bought. But since then, I've added 76 new positions, 45 this year alone. But the shopping hasn't been easy, and it's now getting all but impossible. The "good stuff" really is overly-priced, and the junk isn't cheap enough. But that's the bond market, and you deal with it as it is, not as you'd like it to be.

Thanks again, Dan, for taking my post at face value and then building on it. Maybe some good discussions can happen in this forum after-all.

Charlie

"He that cannot abide a bad market deserves not a good one."
----------------

Am Rail
AMD
Anheuser
AOL
Arcelomittal
BAC
Banponce
Belo
CAF
Caterpillar
Columbia
Conoco
Cooper
E*Trade
Edison
Ford
FPL
GE Cap
Geico
Goodyear
Gulfmark
JA Solar
Kansas
Masco
Mead
Mueller
Navios
Norse
Oregon State
Pilgrims
Principal
Seagate
Sears
SLM
Smithfield
Sprint
Suntech
Terex
Trinity
Ultrapetrol
United Rentals
Zions

As Graham points out in his book, The Intelligent Investor, if a seemingly-risky asset can be bought at a substantial discount to its intrinsic value, then a margin of safety is created that removes a great deal of the seeming risk, just as when a seemingly-safe asset is bought at price far above its intrinsic value, great risk to the investor is created.

Value investing, folks. Value investing. Buy what should be bought, when it should be bought, at the price it should be bought, and in the amount it should be bought. That's the game. That's how you make money in bonds (or any other asset class). You buy smart, so you avoid a lot of trouble for yourself down the road, like now, when markets are blowing up, again.
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