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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 35367  
Subject: Re: Revising Howard’s Scanning Rule Date: 2/28/2012 2:29 AM
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I’d suggest that the cutoff-price could be bumped up to 60 as an easy way to avoid bonds that probably offer more grief than reward.

Charlie,

That’s probably true, but from my experience, I’ve found that bonds in the 50’s have offered me some of my best risk/reward results. I’ve bought many bonds (with attractive CY’s) in the 50’s that have struggled, but so far managed to keep paying their coupons. I especially like high-coupon bonds selling in this price range. An example of what I’m talking about is Realogy 12-3/8’s of ’15. I bought this issue for 56.5 and my interest-adjusted cost is now down to 27.6. The bond is currently marked at 90 and still paying the high coupon. Overall, I’ve had very good results buying bonds in the 50’s and I’ve had very poor results from my purchases below 50.

I’ve come to the conclusion that market-price is a very good indicator of a bonds chances of default...Better than agency ratings or YTM. In fact, in my junk world, I interpret “Price-Ratings” something like this :)

< 50 likely to default
50-59 hanging on by their finger nails
60-69 high risk of default
70-79 probably will survive
80-89 conservative junk
90-99 blue-chip junk

As far as a high-price limit is concerned, I do NOT buy above par. I stick with this rule only because it makes my buying decisions easier. It means I don’t have to check and worry about call-dates and whether YTM numbers are accurate. I'm sure to miss some good buys, but I’m always trying to simplify my scanning procedure with as few parameters as possible.

The rules above were derived from my personal experiences and results in order to refine my scanning and buying process. They do not apply to everyone. I probably should consider them more guidelines than rules, but it’s easier to scan using strict rules.

Howard
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