The Motley Fool Discussion Boards
Investing/Strategies / Bonds & Fixed Income Investments
|Subject: An Annualized Return of 3,608%||Date: 3/14/2013 3:06 PM|
|Author: globalist2013||Number: 34830 of 35400|
Most people think bond-investing is dull, boring, and low-paying. For the most part, they’d be correct. Bonds really are the “Plain Jane’s” of the investment world compared to the sex appeal of stocks. But bonds can offer returns that are fully competitive with those from other asset-classes when the same sorts of risks are accepted. That’s what those who tout the supposed superiority of stocks so conveniently forget. Stocks can offer a lot of return for the simple fact that they can be very risky.
I’d love to do an apples-to apples comparison of buying the stock of Network Equipment Technologies versus buying the bond. But NET was taken over, and the common is no longer traded. Http://www.bizjournals.com/sanfrancisco/blog/2012/06/network... However, I did buy the bond while NET was still trading. Shortly after the acquisition was completed, the creditors were paid off, and I logged a very fat profit. When I bought the bond, I had no idea that the company would be taken over. I just knew on an evaluation basis the bond was cheap. So I put on a position in a size I deemed appropriate to the situation.
On 06/04/12, I bought Network Equipment Technologies’ 7.25’s of ’14 at 38. On 09/27/12, the bond was called at par. Do the math. The holding-period is 0.27 years. Therefore, on a per bond basis, $19.81 in coupons was received, and $620 in cap-gains. Therefore, the annualized gain works out to be 3,608% when this formula is used: Annualized Gain = (Par + Coupons)/Entry-price ^ (1/Holding-period) -1
Few stock investors will ever make that kind of money on even the best of their positions, as will even fewer bond investors. But those kinds of gains are possible to them that use a Ben Graham-style value approach to guide their buying. No matter the asset-class in which you are are doing your buying, if the buying is done at a sufficient discount to intrinsic-value to create a margin of safety, you're going to make decent money, and sometimes, you're going to make extraordinary money, which is fun. A gain of 3,608% isn't too shabby, and even the absolute numbers for the trade are decent enough.
|Copyright 1996-2014 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us|