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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 35351  
Subject: Re: Bond Brokers & Bond Desks Date: 7/20/2006 11:34 AM
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Just curious... are you saying that you don't invest in stocks at all?

blearynet,

No stocks. None at all.

Well, that's not entirely true, as things never are. I own 68 shares of TRMP that came to me as part of a Chapter 11 workout. The deal was either a combination of cash/new debt/equity for old debt, or cash for old debt, or new debt for old debt, and I chose cash. But E*Trade screwed up with the paperwork, as they did for several hundred accounts on that re-org, and I ended up with the default choice. So, I own some Trump stock. I also own some E*Trade stock, 127 shares that came to me when I did a conversion of three of my E*Trade bonds. I could have taken cash. But the stock was soaring. By converting, I picked up another $100 per bond. I should have immediately flipped. But the stock was very strong, and I decided to let the tiny position ride.

Also, just recently, some warrants have come my way from JL French's re-org, 68 of them that are being priced by E*Trade as worthless. Stocks come my way as part of Chapter 11 workouts. But I get rid of them. Retrospectively, that's not always a good decision. I threw away a small fortune by not hanging on to my KMart stock that I received for my K-Mart bonds. But I'm a bond guy, so I don't mess with stocks. All in, my non-bond holdings are less than 1% of assets under management. But my average, annual returns exceed the average, historical returns for stocks, because I run a multi-spectrum bond portfolio. However, I'm rethinking my entire portfolio, and I'll be moving a portion into equities shortly, not individual stocks, which I do not like and at which I am not a good investor, but to indexes managed as position trades. Given the increasing volatility of markets, I need to be able to respond rapidly and appropriately to changing conditions with a portion of my assets.

The huge advantage bonds have over stocks is that bonds mature and come earlier in the credit line. It's possible, though not always prudent or profitable in specific cases, to be a Buy-and-Hold investor with bonds that way it would scare me silly to do so for stocks. I've been made whole more than once from a Chapter 11 workout, while the equity guys got zilch. Generally, I take a take a haircut from re-orgs. But that's just a cost of doing business. My wins exceed my losses. I'm profitable.

Why can that be so?

Because reward is proportional to risk, all other things being equal. If a bond investor takes on the same risks that a stock investor does, then he earns the same rewards. People mistaken think that bonds are the “safer” vehicle. They aren't. Some bonds are truly safe. Some are toxic trash that are comparable to penny stocks. By running a diversified portfolio, with positions held across the maturity range and down the credit spectrum, I can capture, on average, returns equivalent to a conservatively managed stock portfolio.

But don't take my word for it. Look at mutual funds. Compare the returns of a well-run spectrum bond fund against those of a conservatively-managed stock fund. You'll see the same Alpha's, STDev's, Sharp Ratio's, etc. For the most part, the underlying companies in both portfolios won't be the same. Or, maybe, they will be. A good strategy for a bond investor is the buy the debt of the same companies that the value guys are buying the stocks of. Marty Whitman makes a good living buying either, or both, as the situation warrants. But the thinking behind the two approaches is very overlapping: both are attempts to capture value, and both need to manage risk. I'm doing it almost exclusively from the debt side. Others are doing it almost exclusively from the equity side. And some people take a “balanced” approach, and do a bit of both.

Charlie
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