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URL:  http://boards.fool.com/folgore-i-know-nothing-about-tenneco-packaging-as-28753145.aspx

Subject:  Re: Last high yield bond bargain? Date:  9/9/2010  9:16 PM
Author:  charliebonds Number:  31469 of 35357

Folgore,

I know nothing about Tenneco Packaging as a company, and there’s plenty of people who post in this forum who are way better industry analysts than me. So my comments on possibly buying Tenneco’s bonds will have to be of a general nature. By way of doing that, let me take violent exception to your lament that you didn’t purchase more of Pru. Rear-view investing doesn’t deserve a second thought. In early 2009, there could be no assurance that prices wouldn’t continue to plunge and that the whole economy wouldn’t go down. And it would have self-destructed if the Fed/Treasury “Plunge Protection” team hadn’t stepped in and hadn’t begun buying behind the scenes in early March.

Yes, in early 2009, we were seeing what seemed to be bargains, and anyone who considers himself or herself a value investor should have been doing some buying. No matter the uncertainties, some buying had to be done. If a person wants to claim that he or she is an investor, he/she has to “walk the walk”, which meant doing a judicious amount of buying, but not so much that ruin would ensue if one’s timing were wrong. Thus, any position initiated had to be small, or else one was just gambling. Yes, in retrospect, all of us would have done well if we had “backed up the truck”. But that is a sure recipe for disaster over the long haul. Betting bigger than is prudent will pay-off far fewer times than sizing positions prudently. Given the uncertainties at the time, the purchase of a single bond was justified, and, depending on one’s account size, maybe 5 to 10. But nothing bigger, as it is easy to show from game theory.

In other words, using realistic date in which the absence of evidence isn’t evidence of absence, how many times over 100,00 market cycles would over-buying the dips have been the best strategy?

That’s hard to compute, right? So let’s take a simpler example. You’ve got $1, and I’ve got $100, and let’s flip for pennies. If your bet size is a penny, you are likely to walk away neither a significant winner, nor a significant loser, even if we play all day. But if you increase your bet size to two bits, I’ll take all of your money within minutes. “Markets”, as Keynes shrewdly observed, “can stay irrational longer than you can stay solvent.” Therefore, if one intends to be an market survivor, rather than just a “here today, gone tomorrow” gambler, bets have to be smaller than would have been retrospectively optimal over a short time-frame like one lifetime, or two, or ten. But betting properly will ensure survival even if the game is run over another 10,000 life-times. So, yeah, you made good money on Pru, this time, and this time you would have made better money if you had bet bigger. But are you really willing to risk blowing up your account by reaching for that extra bit of return? Isn’t it better to identify where the danger zone is and then back off a notch or two?

Where misinterpretation and misapplication occurs is in identifying “risk” solely with default-risk. Thus, the supposedly “risk-adverse” avoid credit-risk, which is obvious and easy to identify, but they downplay the destructive effects of inflation-risk. So, yes, some Pru should have been bought, as well as some Alcoa, some Budweiser, some Cat, some Delta Gas, some E*Trade, some Ford, some GE, etc., right down the alphabet and right across all sectors and industries. Because that was the macro-bet being made. “If the economy does recover, I want to be positioned to benefit from it.” And it didn’t make a bit of difference whether the bet was done from the stock-side, or the bond side, or both. The bet had to be made, and it had to be properly sized. In other words, it had to be done in a disciplined manner that would tolerate failure.

That’s what most investors don’t understand. The goal of investing isn’t to build a plan that has no faults. The goal is to build a plan that can tolerate one’s inevitable mistakes, misjudgments, and a fair share of bad luck, the future being the unknowable thing it is and markets being the capricious, vindictive things they are.

As for Tenneco, be very careful to distinguish between "agency-assigned credit-rating" and "market-implied credit-rating". My bet is that Tenneco isn’t investment-grade. It’s a junk bond, and it has to be managed as such right from the getgo.

Charlie
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