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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 35357  
Subject: Stocks Down, Bonds Up Date: 11/9/2012 11:29 AM
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One could make the argument that “price isn’t value” and say that the past several days of price declines in the equities markets don’t matter, that nothing has changed fundamentally with the companies whose shares have fallen in price. But ‘value’ can’t be spent at the grocery store, only ‘price’. So ‘price’ does matter. In fact, it is the ultimate determinate of ‘value’.

Just as stock prices --typically-- have backed off in the last several days, bond prices have done the opposite. Typically, they’ve gone up. So, again, have the fundamentals of underlying companies changed in any material way, or are the price changes just market ‘noise’? If they are merely noise, why do stock investors feel angst and bond investors feel vindication? Probably because investing is just as much an emotional undertaking as it a quasi-rational one. Having entered the securities casinos and placed a bet, most gamblers --err, ‘investors’-- would rather win than lose. The mere thrill of placing the bet isn’t enough. They also want, not just a return of their money, but a return on their money.

How often are stock prices: ‘Up’, ‘Down’, or ‘Flat’? Because they were so in the past, will they be so in the future? And what of bond prices? Generally speaking, when stock prices are down, bond prices are up. This is the reason that most securities gamblers --err, ‘investors’ -- own a bit of both asset-classes, plus some dibbles and dabbles of other things, in an effort to smooth out their equity curve. Rather than doing really well in bull-market conditions, but very poorly when the bears go prowling, most investors would prefer to lag hot markets by a bit in exchange for not getting dragged down as badly when prices decline. They want “Goldilocks” returns.

But one could make a slightly different choice. One could choose to under-perform stocks even when stocks are doing merely ‘average’ in exchange for out-performing them when stocks are doing poorly. In other words, rather than owning both stocks and bonds, one could choose to own only bonds, and I’m happy to report that bet continues to pay off quite nicely. Due to the past two day’s declines in the equities markets, my equity-curve hit another, YTD high. Today’s recovery-rally will erase that benchmark. But it won’t invalidate the underlying strategy, which is to favor downside-protection over upside-gains. In other words, long ago, I answered for myself the following question and made my bets accordingly:

“Do you want to eat well, or sleep well?”
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