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Subject:  Re: MBIA Bonds? Date:  12/20/2012  11:15 AM
Author:  globalist2013 Number:  34562 of 35397

you think there is any upside to get in now?

altstrat91,

I'll echo what Howard said about MBIA's prospects. I really have no idea if MBIA will survive in the long run. But I’m guessing the odds are on their side now.

Where he and I do differ is in how we manage our risks. I wouldn't let a questionable situation --which MBIA certainly is-- become 2% of AUM without doing a whole lot more digging into their financials than I'm willing to do. In other words, I never bet big, and I define 'big' as a 2% exposure, never mind the fact that 'exposure' becomes 'risk' only when recovery becomes zero. Let me illustrate those concepts with a story I've told before.

Years ago, I was reading a value shop's quarterly report to shareholders, and they mentioned buying ShopKo's stock. What they found attractive -- and seemed to reduce their risks-- was that ShopKo typically onwed the land on which their stores were cited. Per GAAP rules, that asset was carried at 'book value', not 'present market value'. Hence, it was probably undervalued. Hence, were a Chapter 11 filing to occur, creditors --aka, unsecured bondholders-- might have a bigger margin of safety than a typical guesstimate about workouts. In other words, my thinking was this. "If I'm getting into the bonds at 60, but a workout could be 40, then my upside/downside ratio could be a favorable 2:1". Obviously, likelihood becomes part of the calculation, not just magnitude. But I saw in the situation enough of an edge and bought nearly everyone of their bonds I could get a hold of, which was two odds lots and a chunk of a third offering, creating --maybe-- a 5% exposure relative to my AUM at the time.

This is the kind of indefensible risks I used to take on. The reason I don't do so these days is that I've got 3x the money to work with. Taking on risky positions is a Catch-22 situation. If you don't accept enough risk, you can't grow your account. If you accept too much risk, you'll trash it. But where --exactly-- is the balance point between 'enough' and 'too much'? In retrospect, the balance point is obvious. But looking forward, that point is rarely obvious, which is why rules of thumb about position-size are necessary. Retrospectively, those rules might prove to have been too conservative. "But better a missed opportunity than a realized loss." In the case of MBIA, I had put on my initial position years ago. Later, as the fundamentals of the situation changed, I added. Then, when given a chance to exit early with profits, I cut my exposure by selling some and tendering others, leaving me just a single to let ride. In this case, that’s what made sense to me to do. How I’d handle other situations would be different.

To return to your original question. I have no idea whether your trying to get into MBIA at this late date would be a good idea or not. But it is a question that your own research could answer for you. Also, that same research could be directed toward fresher opportunities. I put on two new positions yesterday, and I bid for a third today. So it’s not as if things to buy cannot be found in the bond market even at this late date in the cycle. They aren’t easy, obvious, risk-free, or advantageously-priced. But they are there in sufficient abundance for them that want to go looking and who have a process already in place by which the risks of those situations can be estimated. In other words, the low-hanging fruit has been long gone for over three years now. I.e., by summer of 2009, the easy opportunities were gone. But since that time, I put over $500k to work in bonds, most of them singles, and I'm still finding things to buy.

Whether MBIA is an opportunity depends on doing the needed research, which is a point most investors fail to understand. Markets don't give investors profits. Profits are earned by being more willing to accept risk than your counter-party and by being more capable of managing those risk properly. Said another way, the sheer, dumb luck of being "in the right place and the right time" plays a huge role in investing success. But it takes more skill than most investors will ever acquire to put themselves into that "right place at the right time". This is why the DALBAR 20-year studies of investor behavior and results can document that the "average" investor (equity or fixed-income) NEVER achieves a real rate of return after taxes and inflation. The "average investor" will never pull more money out of markets than they bring to them. They are the prey species, not the predators. They are the mice and rabbits that feed the hawks and owls.

Charlie
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