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Investment Analysis Clubs / Macro Economic Trends and Risks
|Subject: Re: Municipal bonds: A train wreck waiting to ha||Date: 12/7/2012 7:57 PM|
|Author: yodaorange||Number: 410779 of 471919|
I would think someone buying individual bonds, especially those requiring an initial investment of $10,000. +, would have some degree of savvy and an intelligent investing approach if they are managing their own money. These individuals should be aware of call dates on bonds.
Crackd, unfortunately some folks that buy individual bonds clearly do NOT understand what they are buying. A while back, I had a long meeting with the head of bond trading for a nationally recognized firm that caters to individual investors. We talked about the range of individual investors. He confirmed my suspicion that some investors only understand and look at “current yield.” They take the annual dividend and divide it by purchase price. These folks do NOT understand “calls” or “sinks.” Many of them also do NOT understand or appreciate credit quality.
For example, immediately after Stockton, California declared bankruptcy, the market was flooded with Stockton bonds for sale around 100 cents on the dollar, as if nothing was wrong. The bond head told me that individual buyers were coming out of the woodwork, eager to get these great deals! I do NOT know what percentage of individual bond buyers fit into this category. Clearly folks like this would be better served to buy bond funds. Some bond dealers are ready, willing and able to sell bonds to unsuspecting buyers at inflated prices. The worst case I have seen recently was a dealer paying a seller ~$35,000 for $50,000 face value bonds. The same day, the dealer was able to sell them for ~$50,000 for a quick $15,000 profit. This is NOT the norm, but the “vig” for bonds is much larger and much more variable than for equities.
Imuafool did a great job documenting EMMA and MSRB. Those folks have done a TREMENDOUS job making muni bond data widely available. In general you can get the prospectus, current financial reports and trading history for any muni bond. IF and it is a BIG IF, an individual investor takes the time, he will learn a lot and make a more informed decision.
Related to this, there are broadly three different kinds of brokerages that offer individual bonds for sale.
1) Anything goes, caveat emptor, let the buyer buy anything, no matter how irrational the decision is.
2) Customer can “order” anything, but a human checks to see if the order is totally irrational before “releasing” the order. For example, if the customer is attempting to buy a bond where the muni has already defaulted, the brokerage will notify the customer BEFORE proceeding. The customer must acknowledge this either in writing or a recorded phone call by saying something like I understand bond XYZ CUSIP 12345678 has defaulted, please ignore this and release my order to buy XX pieces.
3) The brokerage attempts to BLOCK “low quality” bonds from being offered. They usually do this based on Moodys/SP Ratings. Once again, this is NOT a perfect model, but it does prevent some of the worst offenses. The tradeoff is that it prevents sophisticated investors from even seeing any of the low quality offerings.
All of these issues are manageable by individual investors. It is not Rocket Science. It just takes a lot of time and diligence. That said, there is one other major advantage that professional bond buyers have over individual investors: a “Bloomberg Terminal.” The Bloomberg Terminal is the gold standard for all information on all bonds. As good as EMMA is for muni bonds, Bloomberg is better. The challenge is that a Bloomberg Terminal is about $20k per year. Not many individual investors can/will spend that kind of money for bond research.
As to a person deriving 100% of their income from bonds, and having their income decrease by 62%, not sure how you couple this with most Americans having difficulty raising $1,000. In short order. I would think if someone is counting on their investments in muni bonds to produce their retirement income, those investments had better be way north of $200,000.
Crackd, I know quite a few investors that have a large majority of their assets in individual bonds. Matter of fact, there is a nationally known financial advisor team, Stan and Hildy Richelson, which advocates ~100% should be in individual bonds and 0% in equities. You can see their website at:
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