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Author: trader2012 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35262  
Subject: Shopping Value, Not Price Date: 2/28/2012 1:25 PM
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Recommendations: 3
Obviously, anyone can define the bond game as they choose and play it according to their own rules. For some, such as Howard, that means focusing exclusively on junk. For others, that means never considering it. For still others, that means buying “across the yield-curve and across the credit-spectrum”. Under discussion in another thread is what, in the current market, seems to be a prudent, lower price-point, below which grief is more likely than reward. Whether that is 50 or 60 is what is being discussed, with Howard arguing for 50 and me saying 60 (in the current market).

Obviously, in past markets, a buyer could have (and should have) gone a lot lower, because that is where the deeply-discounted stuff was to be found that offered Graham’s “margin of safety”. Those discounts have disappeared. But that doesn’t mean that value has disappeared as prices have risen. It simply means that value is now harder to find, and it isn’t as attractively priced. Therefore, I’d argue, one has to “pay up” if money is to be put to work, which a true-blue, deep-value investor would not do. He/she would “sit it out” until the bargains appear again. That’s a viable tactic, but not one I use. I prefer to “average in”. When discounts are deep is also when the buying is scary, but I force myself to do some. When discounts are narrow is also when the buying is scary, but I force myself to do some. Therefore, I’m constantly buying, for never really knowing whether prices will get worse or better. On average and over the long haul, the tactic serves me well. So I stick with it and shop frequently, trying to put ten percent of my capital to work each year. (But I make no attempt to ladder maturities for not having scheduled obligations to meet, as might a pension fund).

In the table below, I’ve tried to summarize at what price-points I did my buying during which periods. The earlier years have few entries, because the stuff has matured, been called, was sold opportunistically, or defaulted. Also, the earlier years are when zeros were still readily available. But I’ve excluded them. In the current market, something in the neighborhood of 140-160 is the highest price. I’ve never paid that much, as the table below shows. But I wouldn’t hesitate to do so if the bond offered value. I don’t shop price. I shop value. E.g., in early 2009 when prices were at their lows, I was still buying at a premium to par when it made sense to do so.

Again, as I said earlier, that’s my rules, and they don’t have to be anyone else’s. Each has to play the game as it makes sense to them. But I would argue that focusing on price, instead of value, is the wrong way to think about bond investing, and if you’re a fan of Buffet’s, his recent excuses to shareholders underscores the point that it’s not the mere return of nominal principal that he focuses on, but the return of purchasing-power after taxes and inflation. That’s why the avoidance of paying a premium to par doesn’t make sense. What matters in the bond-game (and the investing game generally) is what you can spend at the grocery store or gas pump. Whether that cash comes from cap-gains or ord-inc makes no difference. They both spend the same once taxes are paid and inflation is discounted.

In the table below, what would be Column A is the price brackets. Columns B through Column whatever are chunks of 20-25 bonds, sorted from highest price to lowest and roughly matched up to the price brackets, where each price-point is a position I currently own (of one to twenty-five bonds). With a lot more tweaking, and with the insertion of benchmark interest-rates for each time-period, I could show that, as time went by, prices were high, then they fell, and now they are high again. How much higher they will go, and when they will roll over, is anyone's guess. Meanwhile, buying has to be done as best one can. As you can see, my buying ranges from a high of 111.8 to a low of 30 something (and in the past, I've bought both higher and lower).

Value. The investing game is about value, not price. (Price is a trading game.)
-------------------------------------

01-06 2007 2008 1-5/09 6-12/09 2010 1-5/11 6-8/11 9-12/11 YTD


110.0 110.8 111.8 108.5 111.3
111.4 107.6 109.5
109.6

107.5 107.9 107.0



105.5 104.4 105.3 105.8 105.5 105.5 104.2
103.0 104.9 103.0 104.3


102.5 103.4 102.0 103.0 102.8 101.6 103.6
102.5 101.5 101.0
102.5 101.1 100.7
100.2 100.3


100 100.0 99.9 99.1 102.0 99.9 101.0 99.8 101.3
98.2 97.3 101.8 98.3 100.8 98.3 100.2
97.2 101.5 97.7 99.7 98.0 100.0
101.5 99.0 97.6 98.8
101.3
101.3
101.0
98.5
98.0

95 96.9 95.3 96.6 96.6 94.3 96.6 96.1 97.0 97.5
96.8 95.2 94.2 95.0 96.4
95.1 94.4 94.0 94.4 94.8
94.3 93.1 92.9 92.6
93.8 92.6
92.5

90 87.8 91.4 92.7 88.1 91.1 92.3 89.1 90.5 91.8 92.4
87.7 91.1 92.5 90.7 90.9 88.9 89.7 91.4 92.2
90.8 90.6 90.7 89.6 89.8
90.0 89.2 90.2 88.0 88.1 88.6
88.1 87.8 88.5
87.3 88.0
88.0

85 85.1 86.9 85.8 86.8 87.4 84.8 87.7 87.0 86.0
83.3 85.5 85.8 85.5 83.1 85.7 86.0
84.5 85.5 85.3 85.8

80 81.2 82.5 81.1 81.5 80.6 80.7 82.5 80.5 79.5
82.1 77.0 79.7 79.1 80.0 78.1 80.1 79.5
80.8 78.8 77.6 78.7 76.2
77.6 78.1
77.5 75.5
77.3
75.5

70 74.5 69.2 74.6 70.5 68.5 73.1 74.5 73.0 73.7
68.7 73.9 72.5 68.1 73.0
68.5 73.1 70.3
72.0 67.0
71.0 66.4
70.1
66.3
66.2
66.1

60 58.4 64.4 64.1 62.0 65.0 61.5
61.0 60.7 60.5 55.5
60.6 58.0
57.3 57.3
56.0


50 55.0 53.1
48.0
45.0

40 44.6

30 30.8
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