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Author: imdajunkman Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35400  
Subject: Re: Bond Brokers & Bond Desks Date: 7/20/2006 4:50 PM
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DeltaOne81,

My respect for you is reciprocal. You do good, careful work. If what I said doesn't make sense to you, then it likely doesn't make sense to me, either, or anyone else. Not a problem.

A better restatement might be: Is this particular bond riskier than that particular stock? Answering that question depends on defining "risk". But I'm going to do the cowardly thing of not going there and simply report my own experience. I'm a crap stock investor, but I'm a decent bond investor. In my own life, for my own purposes, bonds provide me with rewards that aren't inferior to what the rearview-looking theorists say I could achieve for myself in stocks, which is why I made the appeal to mutual funds. Call the broad stock market “normal risk”. Back off one notch and call that ”conservative”. Compare conservative to multi-spectrum and what do you see? Equivalent risks and equivalent returns. A 100% bond portfolio is unusual. blearynet asked about it. I attempted a reply. If I misspoke, my apologies.

There is a serous issue here, buried very deep in myths and assumptions, that “bonds are safer than stocks”, and people steer themselves (or get steered) toward one or another on the basis of a whole bunch of factors, some of which serve the interests of financial middlemen (the brokers, advisors, planners, academics, etc.) more than real-life Joe's trying to move a few dollars of savings forward in time for when they do need its undiminished purchasing power. Conventional wisdom suggests that if you want 7% returns, you do bonds, if you want 10% returns, you do stocks. If you want 21% or 34%, or 55%, you're truly delusional, or, if you do achieve them, you're the equivalent of a lucky coin-flipper.

You've heard the standard arguments from Loki and the MPT crowd: theorists like Markovitz, and popularizers like Bernstien and Malkiel. My reply is that the flaws of CAPM are well known. The attempted fixes are plentiful and futile. The theory is garbage for is its assumption that returns are normal. Cut that assumption loose, and what do you end up with? Uncharted territory as to how to build portfolios, but still the need to make financial decisions in the here and now under conditions of uncertainty about things that can't be known. If theory doesn't match with practice, well, then, theory needs to be revised.

The basic situation is this: I'm going to do what I'm going to do, and I'm going to try to understand it. There's going to be contradictions in both actions and explanations. Such is the human condition. Do I trust my own experiences in these matters, or the beliefs of others? Were I running other people's money, I could hand you a tidy prospectus (even if it were based on fictions). My money is my own. So I forge ahead as best I can. It's not that I'm unwilling to discuss this matter, but, in a large part I don't even understand it. I have no “complete theory of investing”. I'm working toward it as fast as I can, because I'd like to se what it would look like, and because it would be a useful tool. So my choices are two: I can either worry about the bush fires of small details and fight them, or I can assume that the forests were meant to burn on 20-30 year cycles and go for the larger picture. I'm not arguing that details don't matter. The whole is, in some sense, merely the sum of its details. Did you ever read “The Bridges of Madison County” or see the movie? There's a scene in which she is talking about her life and sums it up as getting so immersed in the details of daily living that life isn't examined. It is simply “lived”.

Who's my hero? Why did he go to the woods? To lead “an examined life”, right? This forum, and years and years of letters (in the old days, e-mails in present times), journal entries, reflections, walks, experiments, are, for me, a financial Walden Pond of the mind with its seasons and its storms, its flora and fauna, and morning spent hoeing beans, afternoons floating on its surface, chasing loons.

Are stocks riskier than bonds? What's a stock? What's a bond? What's risk? Barron's "Dictionary of Finace an Investment Terms" provides seemingly clear descriptions of all of them and five thousand other things. But start thiunking about any one of them in a methodical way and pretty soon you see just how clear they aren't and how mostly useless they are to real investors faced with real markets. Humbly, from the back row, I'll raise my hand and say, "Please, sir. Would you explain that one more time? I still don't understand. That hasn't been my experience."

Charlie
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