Like BAC, GE is calling in its bonds. This is the fourth GE position I’ll lose because they want to re-fi while interest-rates are still low. This was my trade. I bought GE’s 6.1’s of ’30 on 03/04/09 at 66.195, for an originally projected YTM of 9.9%. The call is 02/15/13 at 100, which will result in an achieved YTM of 18.5%. So, yeah, I’ll make a few bucks, but I’ll have the problem of putting that money back to work again. Of interest, when these kinds of things happen, is wondering whether buying the debt, rather than the common, really was the better value play. Obviously, I can’t know what the price for GE’s common will be on 02/15/13. But let’s project current trends and guess it’s going to tag $22.50 (or 10% up from its current $22.29, given that equity traders/investors have gone into panic buying mode on whatever news is driving prices higher). On 03/04/09, GE’s stock closed at $6.69, or a div-adjusted $5.95. From 03/04/00 to 02/15/13 is 3.954 years. The price for GE on 02/15/09 will be div-adjusted, so the gains fraction becomes 22.50/5.95, right? and the CAGR becomes 40.0%, compared to a CAGR of 18.% for the bond, or an advantage of roughly 2.2x for buying the common versus the debt. Why do stocks pay better than bonds? For the simple reason that stocks are riskier than bonds. Said another way, why are bonds less risky than stocks? Because they come with an embedded put, and that put has to be paid for. Bonds offer the promise of maturity. Stocks lack that promise. Is it worth paying for the put? I think so. That’s why I don’t do stocks. I don’t like the ‘naked vulnerability’, nor its size, that owning stocks requires. Think back to the 2008-2009 correction. By how much was the average stock account down in 2008? About 40%. By how much was the average bond account down? About half of that. The rule of thumb for gains and losses is this. The two are symmetrical. If you want big gains, you have to be willing to accept big drawdowns. If you want to avoid big drawdowns, you have to be willing to live with smaller gains. Yes, over the past 30 years, bonds have beaten stocks on an absolute returns basis (as a couple of studies have documented). But 30 years is a very, very short time-frame. Over holding-periods of several thousand years, it can be expected that stocks --as an asset-class-- will outperform bonds due to their respective structural characteristics. So, if you’re planning on living nearly forever, stocks are what you should bet on. Otherwise, if you’re in dealing with normal lifetimes and normal investing horizons, you should bet on what is doing well for the present moment in your own lifetime, and bonds haven’t been a bad place to be over the past dozen years. They offered smaller money than stocks. But they also did so with far less worry, which is why I got out of stocks entirely in the Fall of ’99. That's was the best market call and move I ever made, because it enable me to nearly triple my money. I really, really doubt I would have done as well if I had stuck with stocks. What will the next decade or two bring? Who knows? But I'd rather be going into the uncertainties those years will bring with the huge stash of cash that betting on bonds gave me rather than be scrambling to make up losses, as so many equity investors are still doing. OTOH, if I were just starting out now and had only tiny money to work with, I would bypass bonds entirely in favor of other asset-classes. So timing does matter, and those who got into the bond game when they did have 'luck' to thank far more than 'skill'. As plenty of studies have suggested, simply being in the right place, at the right time, will explain about 80% of your returns. Charlie
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