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If you bought someone’s 7-1/4’s a couple months ago in the high 30’s (as I did) and then recently got called at par, what would your achieved Yield-to-Maturity be? How about 522.5%? That’s not too shabby, right? In fact, with that return, I achieved a personal best. I’ve made as much as 100% on bond positions before. Not commonly, but it’s not so rare as to be surprising. But a return of 522.5% really is remarkable, and it prompts me to ask this question:

Am I good, or am I good? BZZZRP! WRONG QUESTION!!!! The proper questions are these:

Do I have a good PROCESS by which I find those kinds of returns? And could any investor do the same?

“Yes” and “Yes”. To whom does Warren buffet owe his success? As he freely admits, he owes it all to Ben Graham, whose investment classes he took at Columbia. As I freely admit, I owe my investment success to Ben Graham as well and to his classic intro to value-investing, The Intelligent Investor.

Sometime, when you get tired of the probably miserable returns you are achieving, you should make an effort to read his book. It doesn’t contain everything you will need to craft a money-making process for yourself. But his book offers the most important part, the conceptual framework within which you will operate. (The rest is just tiny, tactical details that the markets themselves (stock, or bond, or whatever) will teach if you really want to learn the investing game.)

Most won’t make the effort to read the book, and fewer will attempt to apply Ben Graham’s insights to markets. Instead, they’ll look for shortcuts where there aren’t any. 'Investing’ (which doesn’t differ from ‘gambling’, except in its spelling) is the business of making bets about unpredictable, future events. But there are better and worse ways to be making those bets. That’s what Graham’s book is really all about, how to make good bets in the securities casinos. Graham's betting schemes have paid off for Buffet. They have paid off for me as well (who happens to be beating Buffet’s returns over the past ten years).

They could pay off for you, too, though I’d bet against it, because most would-be investors refuse to think about investing probabilistically. They want sure returns when such things can never exist. So why not admit from the getgo that you're just gambling with your "investment" money, but then make sure you're the smartest gambler you can be and someone who, year after year, pulls more money out of the securities casinos than you bring to them, enough, in fact, that you can support yourself several times over?

Winner or loser? The choice is yours.

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party like its 2009 Charlie! In honor of this thread I had to pause a moment and weep. These types of trades and opportunities were so abundant a few years ago but now its like finding water in the desert >> in 2009 fond memories of unisys, yrcw, pier 1, mgm grand, e-trade, sirius satellite, sunamerica all trading in the single digits to 20 cents on the dollar range and then shortly later trading/calling at par. i could go on but i digress. now adays it seems whenever a corp like atpg takes that downward spiral into the <$30 handle range its the point of no return. although i must say i was a little impressed with patriot coal's bounce from intially $30 handle on BK news, now trading in the 1/2 par range.

wonder how long this current drought is going to last. i am already looking at individual corp floating rates as possibly the next trade.
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... wonder how long this current drought is going to last. i am already looking at individual corp floating rates as possibly the next trade.


Financial disaster is coming our way due to Bernanke's corrupting of the capital markets. (Like, what else is new, right? that a central banker would choose to depreciate his currency rather than end the good times for investors. Easy Al did it, and Helicopter Ben is following the same playbook.)

I'm absolutely sure what my next move will be, which is to get massively short just about anything. Nor am I worried about timing. The markets will ring a bell. They always do for them that haven't filled their ears with wax or blinded themselves so much they can't read a chart. But what I am having a hard time with is the exact set of rules by which I'm willing to trade.

I started on the project almost a year ago, but I haven't made much process for my keep being sucked back into buying bonds. (90 some new positions YTD.) I can either trade, or I can invest. But unless I go algo, I can't do both, for there being only so much time each day that I'm willing to devote to markets. But bonds have been so good to me that I'm reluctant to scale back my efforts to understand that market. Everyday, I see something new. Everyday, I find a new problem to explore. The puzzles are endless, even as profits have become harder to find. But in time, and likely before disaster strikes, I'll put something together, so that whatever I lose on the bond-side is more than offset by a new gig.

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i concur with your observations in terms of where the markets are heading. its not a matter of if but when. i can personally relate to what you are saying. my purchasing has dramatically slowed down the last couple months. YTD in my cash based portfolio i added 48 new corps but in my leveraged portfolio i added a little under 300 new corps. for me personally the debt side has been the way to go. i made the switch in mid of 2007 but at that point was mainly trading agencies.

bonds just have a different flow of transparency and process. yes we could talk about and point out the flaws of being a small fish in the proverbial big pond but there are still edges to be had for those willing to do the work day in and day out. in the last 15 years i have tried many different other trading methodologies and vehicles ranging from currencies, options, equities when scalping was still viable pre-decimilization but when all was said and done the results varied and to some extent there is a bit of randomness involved as well.

in a previous thread i asked a question to you in light of the fact that you revealed your YTD buy list in terms of are you actively managing positions or are you sticking with a process in the sense that you are buying across a broad range spectrum in order to achieve a specific annualized ROR or possibly something in the middle.

for me personally in my cash based portfolio we are very alike. i take positions because they have to be taken and let it play out. but in my leverage based portfolio that is well over the four digits mark i actively manage positions based on specific set of criterium.

in terms of shorting and taking a more hands on approach vs. a managed fund, one particular vehicle that really interests me are zero coupon strips. there is no interest to pay out. all you have to do is potentially take a borrowed position; looking into any applicable carrying costs. but this could be something to scale into over time.

one thing that has recently helped me in terms of reading all of your threads is this. in the past i have been hell bent on maintaining zero or break even on principal capital while maximizing income stream, very similar to howard's approach in terms of he sees his bonds as a provider of an annuity like income stream.

so if i picked a lemon position that tanked below a specific mental stop point, i would cut it loose and conversely sell a different position(s) in the green to void that said loss. but the reality is i was sacrificing income stream to do this and it really works itself out in the wash at the end of the year. any potential lemons which ultimately lead to a realized loss of principal can merely be "taken off" the back end out of your annual income stream thus reflected in the final annualized ROR or Yield for a given year.

if i get my hands on any decent floating rate corp notes i will pass along the cusips.

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You're playing a far more sophisticated game than me. I'm just the smallest of small fish, someone who managed to swim his way into the backwaters that bonds really are for them that can't "trade 'em in size". (Were I to be granted another another turn of the wheel, I'd choose be a market-marker in bonds. Now, that would be fun.)

Yeah, zeros might be a good way to go if one isn't responsible the implied-interest. But futures on the long-bond are a more direct route. In the past, I've traded that contract successfully with total indifference to market-side. Long or short, it didn't make me no difference. But that kind of trading is a high-effort, high-stress gig for which I'm good for about 45 minutes before I get tired, sloppy, and into trouble, though even just a couple ticks makes a day's wages.

But I'm looking for bigger, easier money. I ran a couple of no-brainer, multi-day, test trades in the Spring on which I made about a gazillion percent annualized. But then I got sucked right back into bonds, which have been my first love going on a dozen years now. In lots and lots of very principled ways, there is zero-difference between 'investing' and 'trading' (and between 'investing' and 'gambling', or 'investing' and 'speculating'). But in the real world of actually putting those trades on (whether they are called and/or thought of as 'investments' or 'trades"), there really are nearly insurmountable differences in how one has to organize one's day (mind, thoughts, emotions, money, and actions) so that one doesn't screw up the gig one is pursuing. Maybe some people can both 'trade' and 'invest'. I can't. For me, it's gotta be one or the other. I can't do both at the same time. And since the lazy, kick-back gig that bonds are has provided me with twice my living, I haven't had much need to look elsewhere.

That's going to change, of course, due to Bernanke. In fact, it already has. The only ones who can still pull decent money out of the current bond-market are the experienced hands. The newbies, the flood of fresh, dumb money now buying the top, are just going to have their heads handed to them, and Dalbar will be able to report of them next year in their annual study that their fate has been the same as for the last 20 years. The average fixed-income investor will under-perform their benchmarks by 85%. (That's not "the benchmark minus 85 basis points". Their returns will be no better, on average, than 15% of whatever the benchmark achieved.)

Pure intellectual interest can't be spent at the grocery store. So Bernanke is forcing me out of the bond-market as well. I'd like to stay, and I've been delaying my departure as much as possible. But I've gotta make the switchover from 'bond-investor' to 'risk-trader' if I want to keep growing my account.

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in a previous thread, I asked a question to you in light of the fact that you revealed your YTD buy list in terms of are you actively managing positions, or are you sticking with a process in the sense that you are buying across a broad range spectrum in order to achieve a specific annualized ROR or possibly something in the middle?


Actually, I'm doing none of those things. When I say that "Ben Graham provides my playbook", I mean just that. I'm a 'fixed-income value-investor' (at least for now). I do exactly what he says a value-investor does "...buys at a discount to intrinsic-value in order to create a margin of safety". No more, no less. What gets bought doesn't matter. It could be Agencies, Treasuries, Munis, Corporates, Sovereigns, or even CDs. But the estimated price-to-value ratio matters hugely. I make no attempt to "ladder" maturities (for being the stupid, expensive tactic that it is), but I do try not to get over-weight any issuers or industries as a way of helping to manage my risks. I never do not grind through an issuer's SEC filings. I never do not look at T&S, etc., etc.

In short, I run through a check-list of things, as does every good investor or trader, no matter what they are making bets on, that in no way has any secrets, because there are none to be found. Anything worthwhile any investor or trader wants to know about markets is all there in the classic literature that no one but those who are serious about their game take the time to read, much less think about in any meaningful way. Instead, most depend on the trash written by sh*t-for-brains, financially-dyslexic idiots like John Bogle, William Bernstein, Jeremy Siegel, Burton Malkiel, etc., not a one of whom knows anything worth knowing about 'investing', much less 'trading'.

What's at issue here is the 'paradigm' (in Kuhn's sense of term. See his The Structure of Scientific Revolutions) one chooses to work within. In bull markets, anything works, and everyone pats themselves on the back, thinking they are investing geniuses. But when the investing/trading gets tough, those who didn't have a sound plan wash out. What is the estimated, cumulative loss to the net-worth of retail investors (which, in 401k America, is nearly everyone) from the 2007-2009 correction? $12 Trillion or something similar. That money didn't disappear. It went from weak hands to strong hands, with 'strong' being those who rejected the fable of "Modern Portfolio Theory" in favor of what they themselves, through their actual experience of markets, discovered was useful.

It takes no more brains than that required to play a simple game of cards, like Euchre, to become an effective investor. What it does take, which almost no investor attempts to do, is to tie the two together in any meaningful way. In classic closed-systems (where strategies based on simple probability are useful), it's easy to determine if a game has a positive expectancy and to exploit that expectancy to the max. In the quasi-open, quasi-closed systems of markets, where the deck of cards in the shoe can vary randomly in number and composition according to the whims of the gremlins at the card factory, classic statistics goes out the window, as Taleb has proved in his technical papers. Nonetheless, risks have to be managed, which means that left-hand tails have to be chopped. Not one in a freaking hundred bond-investors has any idea of what their risks are, nor how to manage them, and, as the Dalbar studies persistently document, those investors on average achieve a mere 15% of their relevant benchmark.

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