Ford’s 6.350’s of ’14 were called this past Wednesday, offering buyers an improvement on their Yield to Maturity, but now creating a problem of what to do with the cash. As you will recall, 2007 was a tough year for bond investing. Very little was available that offered a decent yield, and the bulk of them were the banksters that subsequently went under in 2008. But among the debris were some industrial issues of debt that merited taking a chance on, one of which was Ford. My entry into their 6.35’s of ’14 was 08/01/08 at 53.550 (all-in) for a projected YTM of 20.5% which was probably appropriate for where they had been notched down to. Lots more of their debt was available at similar prices and yields, but I chose a nearby issue, so as to front-run other creditors should they eventually be forced to file. With the call, my YTM bumps up to 33.8% which is part of the reason I make the money I do in bonds, compared to the pitiful returns of the CD crowd whose obsession with “safety of principal” is actually a very reckless strategy, because it squanders purchasing-power, whose preservation and enhancement is the real game being played. In other words, I buy CDs when they are attractively priced. I buy invest-grade debt (agencies, corporates, munis, treasuries, foreign sovereigns, etc.) when that is attractively priced. I buy spec-grade debt (aka, “junk”) when that is attractive priced. In other words, in marked contrast to the crowd that focuses solely on principal-protected instruments, I buy across the yield-curve and up and down the credit-spectrum, and I achieve returns that are roughly 3x theirs, but with far less relative risk. But to each, his own (I suppose).
Charlie,What are the top 3 or 4 books or other periodicals/literature you would recommend one read regarding bond investing? This could be for someone with novice or intermediate knowledge.
I know you've recommended the Strategic Bond Investor in the past, by Crescenzi. I found much of that book worthwhile. I've also checked out Marilyn Cohen's work per your recommendation. I'm curious as to what you think is the "best" work out there.
What are the top 3 or 4 books or other periodicals/literature you would recommend one read regarding bond investing? This could be for someone with novice or intermediate knowledge. LONGREITS, The bond literature can be divided into two groups, that targeted toward beginners and that intended for professionals. There are almost no intermediate handbooks. Of the beginners books, one is mostly as good as another. I like the way Wright introduces the topic, but others prefers Tau's book, or Cohen's or whomever's, and I wouldn't disagree. Begin wherever it makes sense to do so. They're all going to cover the basic vocab and concepts. The lit meant for bond professionals can be interesting to dip into, but it tends to be overly-mathematicized and mostly applicable to larger portfolios than the average retail investor will be managing.Of the few intermediate books there are, my bet is that by the time a bond-investor is ready to read them, they won't need them, for already having worked out a philosophy and method of doing bond-investing. So reading the intermediates is fun to do but not really helpful in any practical sense, because implementing their implied strategies would require more capital than the average bond investor can bring to bear on the problem. Therefore, the task of learning bond-investing is the task of defining for oneself what is meant by "investing" and how it differs (or doesn't) from ""trading", "speculating" and "gambling". All four are value-neutral terms for clusters of activities that can be analytically distinguished from each other, but, at heart, are no different than each other. All make bets about an unknowable future. Once that intellectual (and emotional) break-through is made, and once the moral nonsense is set aside that "I'm an investor (not one of them other naughty persons)", then the real work can begin of identifying and managing risk in all its forms, and some good people to read are Taleb and Mandelbrot who never even mention bonds, but who do understand risk-management. The rest is just details that anyone whom the market gods meant to play the bond-game will work out for her or himself. In other words, "There are no roads but by walking." Charlie
Thanks, Charlie. A few months ago I also read Wright's Getting Started in Bonds, which I found to be okay but fairly elementary. I view bonds the same as I do equities, bottoms up, and feel it would make some sense to focus on BB-B, or just below investment grade. I continue to be committed to equities, particularly many at today's prices, but find bonds interesting. Also, I'm sure there are opportunities there, if only because the market seems to be little understood and dominated by institutions.I think I will try the Strategic Bond Investor by Crecenzi next.Thanks again.
LONGREITS,I don't mean to be facetious, but to call Wight's book "elementary" is a more a characterization of the reader than of what she's actually saying. By that I mean this. Yeah, a lot of the book is basic info (yadda, yadda, yadda) that can be found anywhere. But, sometime, go back and re-read her book looking for the investment strategist behind what she is saying. She's no dummie, and she was well-schooled by her mentors. Hidden in plain sight, there's a lot a shrewd, experienced advice that's quietly revealed in a sentence or two here and there that makes that book worth picking up again from time to time to go over over "the basics" which really aren't so basic after all. Maybe it's a Zen thing, and maybe it's just me. But I get a lot more out of her book than I do the other basic intros. In other words, as I read her book, I find myself nodding my head in agreement with her as to how she's laying out the material or, even better, being nudged to reconsider something I had assumed was otherwise, whereas when I read something like the Richelson's book, I find myself screaming at them for their repeated stupidity.In other words, as simple as Wright's book seems, I can always get one more insight out of it, whereas I won't ever pick up again the sort of trash put out by Bogle, Wm Bernstein, Malkiel, or any of the MPT cult. That stuff is a true quagmire and tar baby that sucks you in and drags your down without offering anything of benefit. If you want to read Crezensi, read him. He's not bad. But the far more productive thing is to take a long walk, and or long bike ride, and to really think about pieces and parts of bond-investing and then start building the tools and techniques needed to implement your investment plan. The "bottom line"is this. Nothing works all of the time, and nearly anything works some of the time. Meanwhile, the only constant is constant change. So you're constantly having to review and rethink your foundational assumptions, and that constantly changing you is the only constant in the investing world. You are your ship, your rudder, your map, your compass, and your horizon, and all need maintenance. That maintenance (and development) is going to come more from your "thinking time" than your "reading time", and more from your screen time dealing with actual prices than from arguing with the fools that inhabit discussion forums. Charlie
Thanks. I will go back and re-read parts of the book. I don't claim to know much about bonds, other than the necessary but not pivitol basic definitions and concepts. Your success dictates you do know something. I've actually never bought a bond, ever, but have continuously invested in equities for about 6 years and on an ad hoc basis the five years prior to that. I do think the fixed income market is seemingly a fascinating place. One thing that I've found helpful in understanding the "top down" big picture is the free pamphlet (a book, really, over 100 pages) put out by the Fed continuously since the early 20th century, Federal Reserve: Purposes and Functions.http://www.federalreserve.gov/pf/pf.htm
I also think my characterization of her book as "elementary" was somewhat misplaced and a misnomer. The concepts in the book are very, very important. No doubt. I've just read them before in several other places in a piecemeal fashion (in that Federal Reserve pamphlet, in studying for the Series 65, in other books discussing fixed income, in economics classes), that I guess a lot of it wasn't new. It's not unimportant, though, and that wasn't what I meant to articulate. On the contrary.
Charlie said...."...whereas when I read something like the Richelson's book, I find myself screaming at them for their repeated stupidity."Presumably that would be Hildy and Stan Richelson's, "The Unbeatable Path To Secure Investment Growth". If so, that was the first bond specific book I ever bought (2007). I found the book completely non-insightful. I put the book down, never looked at it again, and never studied bonds again until early to mid 2008 when I started noticing extremely attractive YTM's and decided it was definitely time to "dip my toe in the bond waters".Thankfully I was lucky enough to start buying my first individual bonds when the picking was quite easy (but scaring). I remember by mid September 2008 when Lehman fell, I was scared each time I made a buy but luckily I kept buying. Up until that time, I did not have the dicipline to size my individual investments small relative to the size of my overall portfolio. Fear during 2008 and 2009 made me start sizing positions appropriately. I remember thinking something like..."surely not all of these companies can go bankrupt".
Presumably that would be Hildy and Stan Richelson's, "The Unbeatable Path To Secure Investment Growth". Prophet43,Yeah, that's the book, and I doubt I was being unfair. I would characterize the pair of them as "Johnnie Come Lately" and the book as "Dangerous to Wealth Building", because their approach has to be qualified by too many exceptions in order to make it viable. In other words, in very short order, it becomes apparent to a reader that they don't know what they are doing and that any success they might have achieved has been due to sheer, dumb luck. They don't attempt to manage risk, because they are oblivious that it even exists. Whereas, as skimpy as her book is about a lot of the details, Wright isn't going to get her readers into trouble, nor is Cohen, who, if anything, is even more adamant about avoiding trouble. But Cohen is more of a muni-specialist --her first love-- and she's far more well-heeled in the types of portfolios she builds. Wright, I think, strikes a good balance between starting small but being reasonably aggressive about accepting the risks that should be accepted in order to build one's account. But, in the end, each person has to use the resources that make sense to her or him. A book that would find a place on my list of "The Essential Five" would be Justin Mamis', The Nature of Risk. I love the book and have recommended it many times. But not a person who took me up has liked it. "He keeps saying the same thing over and over" is the consistent complaint. "But it isn't the same thing", I would protest, "or if it is, the lesson needs repeating just because it is so important. How do you find the courage to act on imperfect information which, actually, is as good as it is going to get unless you're willing to suffer price-risk in exchange for information-risk?" But I think the bottom line is this. You don't learning bond investing by reading about it. You learn it by doing it, one decision and one position at a time, and the learning never stops. Charlie
Charlie said....."But I think the bottom line is this. You don't learn bond investing by reading about it. You learn it by doing it, one decision and one position at a time, and the learning never stops."I agree with you...but...reading is ALSO absolutely a fundamental requirement for mere mortals like myself. To be quite honest, I'm not smart enough or insightful enough to ferret out many of the key elements of successful investing on my own. The more I read, the more epiphanies I have. However, as you suggest, reading the work of others doesn't get the job done on its own. The individual investor needs to follow up by putting his learnings to work for himself the best way he knows how....and of course the techniques learned from books are refined and perfected by learning from his own successes and failures.About the only thing I think I'm good at is picking and choosing from the best practices of others and assembling them into composite techniques that work well for me.Reading to learn and develop successful investment techniques is easily more effective now than ever because of the internet. We now have the luxury of reading books that provide insight (in most cases) and discussing those techniques, successes, and failures with active practioners like yourself more or less real time. I've learned a great deal from your generous sharing as well as Jack's and a few others on this and other message board.Honestly, I'm still amazed how openly you share the structure of your portfolio, your successes, your failures, and honest critiques of your own performance. In general, I'm a very confident person but I'm NOT confident enough to put myself "out there" like you do.
"We now have the luxury of reading books that provide insight (in most cases) and discussing those techniques, successes, and failures with active practioners like yourself more or less real time. I've learned a great deal from your generous sharing as well as Jack's and a few others on this and other message board.Honestly, I'm still amazed how openly you share the structure of your portfolio, your successes, your failures, and honest critiques of your own performance."Ditto. I, too, greatly appreciate it. Thank you.
Honestly, I'm still amazed how openly you share the structure of your portfolio, your successes, your failures, and honest critiques of your own performance. In general, I'm a very confident person but I'm NOT confident enough to put myself "out there" like you do. Prophet43, Don't be too quick to thank me for something I'm not doing. I never mention the truly proprietary stuff I've developed. (I'll hint at it, but I never lay it out.) Nor do I ever publicly provide actionable tips in real time. If I mention a bond, it's because I've already bought as much as I want. Offline is another matter. I've got a couple of friends with whom I'll swap ideas the instant I see there might be an opportunity, because I know -and they know when they do the same for me-- that we can vet any tip thrown our way and proceed, or back away, on the merits of the idea itself, not its source.As for "self-critique", another word for it might be "trading journal" and there's no trading coach who won't say, "Show me someone who isn't keeping a trading journal, and I'll show you someone who isn't going to make it." Schwager in his Market Wizard books makes it abundantly clear that, to a man or a woman, every successful investor/trader is absolutely ruthless about critiquing his/her own performance for the obvious reason that you can lie to yourself, but not to markets, so why even try? Also, don't beat yourself up over the mistakes you make. Admit them, learn from them, and move on. Read someone like Linda Bradford Raschke, who is a goddess among traders, recognized for being "The Real Thing", or even a scrappy popularist like Toni Tuner. Both are completely forthright about their mistakes, just as they can honestly take full credit for their wins when they do happen. In her book, Greenlaw makes the same point. She is absolutely ruthless about evaluating her strengths and weaknesses and then busts her butt trying to fix whatever needs fixing. Why? Not so she can put more fish in the boat, but because she wants to be the best for its own sake. So, yeah, the money from bond investing is going to happen, or it isn't, just fish are going to get caught, or they aren't. But that's not how one scores oneself. "Did I see (or do) what I should have seen at (or done) at the time? Did I play the hand as it should have been played, knowing only would could have been known at that time?" As for thanking someone who really does deserve thanks for the outreach he does, thank Jack. There is no one on any board who makes a better or greater effort to help others, and most of the people to whom he replies have no idea how good his advice really was. Charlie
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