No. of Recommendations: 2

Thanks for your numbers. But I’m not sure we are comparing apples to apples and I’m not sure we can because we may be tracking different data. Here is how I do it:

First of all, I have three buckets:

1) performing bonds (market value & paying interest)
2) defaulted positions (market value only)
3) closed positions (called, matured or sold)

As long as my closed positions (3) covers my defaulted positions (2), then I’m happy (and they have so far).

That leaves my performing portfolio (1) which I’m basically holding for income.
In this bucket I’ve made something like 84 transactions in 34 months averaging about 2.5 per month.
I track this bucket in three ways:

Current market price (MTM): 79.0 per bond Earning CY=9.8%. YTM=12.4%
Buying cost price: 70.5 per bond Earning CY=11.0%. YTM=13.9%
Adjusted-cost (cost reduced by interest): 57.5 per bond Earning CY=13.5% YTM=17.0%

Now the above numbers are a bit inflated because I’m holding 3 issues (TXU, DEXO, VRS) that will probably default at some point down the line and a few others that may default if and when the economy slows. But I feel my adjusted-cost price gives me a sufficient cushion and a good chance at making my 10% per year target if the economy continues to muddle along. All bets are off if we encounter a full-blown recession. But that is not all bad, because 2009 prices may be back.

But you know, if I could find investment grade bonds with a YTM of 8.3% (like you), I would probably be better off... But for now, I’m having too much fun filling my spreadsheet with junk.

I’ve tried to learn from my mistakes over the past 3 years. These days I stay away from bonds selling for less than 50. I think the market knows what’s probably in store for these issues. I try to favor B and BB ratings over CCC. I find the extra yield is not worth the extra risk. It’s been an enjoyable learning experience and so far I’ve been able to make a few bucks at it. But I also know my results so far mean very little until I’ve been through a complete cycle (recession to recession). I feel I'm winning the game but it's too early to declare victory.

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