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Author: charliebonds Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35383  
Subject: A Friend Writes Date: 12/30/2011 4:24 PM
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A friend writes: What is so easy for you is pretty opaque to most of us. I fantasize about taking a dart and throwing it to pinpoint a stock that will simply go up and up forever!

I replied: I can give you the true, three-word explanation for my investing success: "Sheer, dumb luck". Seriously, that's 90% of the explanation. In the fall of '99, I didn't like what was happening in the stock market and thought it would end badly. So I focused my money and efforts on bonds. In betting terms, I walked into the casino and bet everything on red. Out of sheer, dumb luck, the bet paid off. What I did wasn't anything any investor couldn't have done just by buying a single index fund that focused on bonds, such as Vanguard's VUSTX or VBLTX. My 10-year, average return of 8.10% is no better, no worse, than theirs (8.18% and 7.93%, resp., as of 11/30/11). But no investor in his or her right mind would have made that bet. They would have spread their money among many asset-classes, a few of which did better, but most of which did far worse.

But let's say they did make that bet, that they bet everything on a single bond fund. Where would they be today? They'd be better off financially than 98% of their peers. But they wouldn't be better off in terms of their investing skills. All they did is make one lucky guess about asset-allocation. Can they repeat that performance going forward? My bet is that they can't, and that I can't, either. But I am willing to bet that bonds aren't going to be the place to be going forward, that over the next decade, bond investors are going to get killed, as will stock investors. But traders (any asset-class) might actually be able to do well in the choppy, flat-to-down markets that are likely to prevail. So that's the bet I'm making for 2012 and beyond. I'm going to stop buying bonds and find something to trade.

From my daughter I'm getting the same kind of resistance and stalling I get from everyone else to whom I try to preach the gospel of active investing. Her choice. Their choice. It's not my problem that they will never be able to retire, not that I've been able to do so, either, not when I'm putting in 20 hours/week managing my money, and, lately, it's been 12 and 16 hour days as I gear up for my 2012 campaign.

If you want to use darts to pick your stocks, do so. Actually, it's a very sound method *provided* you know when to get out. More than one study has been done using random entries paired with aggressive risk-management and proven to be profitable. Or as the trader's joke goes:

Ques: You and a monkey are going to set up a trading business. One of you will do all the buying, one all the selling. Which job do you want?
Ans: Always assume a monkey did your buying, and that the far more important job is risk-management.

-------------------

Lastly, to All.

I want to thank you for your indulgence (or not) of what I've posted over the nearly ten years it's been since the time I first wandered into this forum (under a different handle) and challenged what someone was saying about bond-investing, because it reflected his lack of experience and understanding about how bond-investing must be done if a real-rate of return after taxes and inflation is to be obtained. The past several years have proven me right. The trade-off that has to be made with every bond-buying decision is whether to accept default-risk or purchasing-power risk. Those are the two sides of the equation. You can't avoid both risks at the same time. Most bond investors can't quantify either one for themselves. But they fear the former more than the latter. So they buy accordingly, and they haven't done very well in recent years.

My bet is most bond-investors will continue to under-perform unless they change their game. What worked in the '90s didn't work in the '00s. What worked in the '00s won't work in the 'teens. Out of sheer dumb luck, I had the wind of falling interest-rates at my back for nearly ten years, as well as little competition for what I was buying. But now, with yield-hungry boomers crowding into an increasingly over-crowded market, and with central bankers printing money and continuing to suppress interest-rates out of self-interest in their own survival, it's gotten tough to find bonds that are cheap enough to offer a margin of safety *and* a real-rate of return. So I've ceased my buying, and in 2012 and beyond, I'll be rotating my efforts into a new investment theme, about which I won't be posting. So this really is a "good-bye" to you, an audience whom I valued as any writer does, because it was your unspoken questions I was trying to answer on the theory that, if I could explain it to someone else, I could explain it myself. The time for explaining is over. Ben Graham's classic intro to value-investing really does have most of the answers any investor needs. The rest is just small details that the specific markets you pursue will teach you if you just pay attention to what they are saying.

It was a good ten-year run for me, but 'charliebonds' is no more.

Trade well.
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