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Subject:  Why I Buy Bonds Date:  12/4/2012  2:52 PM
Author:  trader2012 Number:  34544 of 35623

The following post is as good a reason as any as to why I buy bonds.

Yes, on an absolute-returns basis, stocks --on average-- can be expected to offer greater reward, because they carry far, far, far, far greater risks. And even when you do a genuine, heads-to-heads, apples-to-apples comparison --such as buying both the debt and the common of the same issuer, and then enter and exit on the same dates-- stocks will offer larger money, because bonds are puts, and that insurance function has to be paid for. Anecdotally, I’ve found that the absolute-returns advantage (the “spread”, if you will) of owing the common versus the debt of the same issuer was about 3.5x. But, also, that was during conditions of rising stock prices. These days, with a broad-market correction --if not a crash-- quite immanent, the spread has probably lessened. So I decided to run the numbers.

Back during what is mistaken called “The Great Recession”, but which was merely a cyclical correction, asset prices fell almost across the board. No one could have known that prices wouldn’t fall further, and they should have been let fall further instead of the Treasury’s Plunge Protection Team stepping in and the Fed/Treasury cartel bailing out their Wall Street buddies. But falling prices were creating what a value-investor might have considered to be Ben Graham’s “a sufficient discount to intrinsic-value to create a margin of safety”, and he or she should have done some buying. Not a lot, but some, or else they couldn’t in good conscience have called themselves a ‘value-investor’.

In those conditions, and in that frame of mind, I got my butt back into the value game in early 2009, and I began buying. Not big, but widely, and one of the positions I put on was E*Trade’s 7-7/8’s of ’15 at 48 (all-in). Yesterday, the bond was called at par, meaning, I made decent money. But would I have done better if I had bought the common instead? The Motley Fool’s stock touts would reflexively say “Yes”, that stocks are what those who want to appreciate their capital should be buying. But if you want to appreciate capital, you buy ‘risk’, and it don’t make no difference where that risk is found, as long as, (1) you can price it properly and, (2) buy it advantageously.

E*Trade’s common pays no dividend. So setting up a head-to-heads, apples-to-apples comparison between the gains/losses to be made by owning the common versus the debt is very straight-forward. I put on my bond position on April 21, 20