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Author: howardgt One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35351  
Subject: Re: Revising Howard’s Scanning Rule Date: 2/28/2012 11:45 PM
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Charlie,

Thanks for taking the time to tabulate and present your data. I see this thread has now morphed into 3 threads that talk mostly about buying bonds above par. I will stick to our original discussion about default rates and investment returns in the various junk price brackets. Below I list my data which shows why I’ve come to my conclusion. I’m not trying to convince anyone, I’m just describing what works for me. As you can see my <50 bracket shows a 37% default rate (on a small sample). The 50-59 bracket shows the highest total return and the >90 bracket shows the lowest return. I’m a numbers guy, so this is why I said what I said, and do what I do.

Price Trans Issues Defaults TotRet% Defaulted Issue

< 50 15 7 2 8.7% Newpage, Norske (large loss)
50-59 11 9 1 74.8% US Concrete(small loss)
60-69 21 19 1 25.1% Dynegy (small profit)
70-79 30 25 1 28.8 Dynegy (small loss)
80-89 18 16 0 20.7
90-100 8 7 0 1.0

Totals 103* 76** 4*** 25.8****

* includes all transactions (open, closed and defaulted) except bonds bought AFTER default (Tribune, Abitibi)
** 7 issues were bought in split price brackets, so totals don’t balance with sum
*** Dynegy was bought in 2 price brackets
**** total return over 3 years of gradual accumulation

I think the main reason we tend to differ in our buying approach is that bonds are your primary investment class, so you need to cover as many areas as possible in order to reinvest your free cash flow (in Lynch analogy, you need more rocks to turn over).

For me, bonds are a sideline to my equity investing, so I focus on what works best. I’m just trying to add a bit of diversification and increase my income by leveraging my equity knowledge. It also gives me a market to shop before and after the stock market is open. On earnings announcement days, this can be very beneficial. So I’m quite happy to limit my focus to a part of the bond market that performs best and compliments my other investments.

I agree with you that “everyone needs to trade their own game” (or something like that)

Howard
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