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Subject:  Re: Inmet Date:  2/22/2013  3:28 PM
Author:  globalist2013 Number:  34799 of 36305


The bond game --and it is just a game, as is stock investing or Black Jack-- can be done in one of two ways. Either you’re making bets on the level/direction of interest-rates, or you’re making bets on the level /direction of an issuer’s credit-worthiness. For all practical purposes, gambling on interest-rates is tough game to play well for being no less demanding than currency trading. But gambling on credit-worthiness can be an investing game. In fact, it can be a very clear instance of classic, Ben Graham-style, value investing in which you are attempting to buy assets at a sufficient discount to their estimated intrinsic-value as to create a margin of safety for yourself.

By and large, fixed-income value-investing is easy to do, and it requires no more skill than basic familiarity with financial statements and a bit of probability theory, like, “if I buy this piece of trash, what’s the likelihood and magnitude of my downsides (always to be considered first) versus my upsides?” If you can’t price the risks, prudence demands that you back away. If the price isn’t favorable, prudence demands you back away. If the risk/reward profile seems tolerable, such that it would offer you a positive-expectancy on average and over the long haul, you execute, and then you do it again, and again, and again. Scan-vet-execute. That’s a very clear paradigm.

Where most would-be fixed income investors screw up is that they fail to think about what they are doing. Specifically, they fail to answer for themselves this question. “How much more will my dollars buy me when they are returned (via coupon payments, or cap-gains, or the simple return of my principal) as compared with my present-day purchasing power?” If the answer is that a person will be worse off in terms of the goods or services he/she could buy, then why do the trade? Why not look for a better opportunity to put that money to work? The answer to that question is three-fold. Most people have no idea how to find better opportunities, nor do they want to learn how to find them, nor are they willing to do the work of finding them.

Gosh, isn’t that a surprise? In fast-food America, people want fast, easy investing success, which TMF does nothing to discourage with its endless promo pieces and “advisory services”. But the next time you pay a journeyman craftsman the union-scale wages she/he will charge you (be that craftsperson a doctor, a lawyer, an electrician, a plumber, or your friendly auto mechanic), also ask him or her this question.

“Say, tell me. I’d like to make some quick, easy money in medicine, or law, or pipe-fitting next week. Can you tell me the name of a good book to read over the weekend?”

If that same question were asked of an obviously successful investor, the answer might go like this. “Nah, forget the books. Just do this. First, think about how you intend to price and manage your risks, and then go find an investing game that seems fun and that you could do within the constraints of your time and capital.”

Obviously, what isn’t being mentioned is that the would-be investor had better come up with a theory of how inflation and taxes will impact their investment returns, if they ever do achieve any gains, which is highly doubtful, as the Dalbar 20-year studies of investor results so clearly document.

My advice to you with regard to trying to break into the bond game at this point in the credit and interest-rate cycle?

You’d be wasting your time. Stick with the game you’re already got going for yourself at which you’re already making decent enough money. Right now, bond risks are horrendous, and their pricing is adverse. There’s easier money to be made elsewhere. But after the economy cashes again? Ah, then is the time to go bond shopping, because there’ll be bargains aplenty. Is it a certainty that the economy will crash again? Yes it is. And here’s a good enough reason why.

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