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Author: gurdison Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 50  
Subject: Re: Forbe's article Date: 10/20/2003 6:36 PM
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The article was fairly generic. With preferreds, there are an awful lot of nuances. Not knowing or not understanding them can be very costly. I hope your new board works out. However, there is already a fair amount of discussion on the subject on other boards, especially the REIT board. My favorite source for information on the subject is Quantom online. They are a free site, but have asked regular users to make a donation to defray their costs. They can be found at:

http://quantumonline.com/stklist.htm


One thing that the article ignored is that we are well past the sweet spot for buying preferred shares. One of the many pieces of homework that one must do before buying is to calculate the YTFC (Yield to first call). If you are paying anything over 25.00 you are paying a premium. Some of the issues listed in the article were going for 27.00. If you are buying a preferred with an 8% face rate, you would be receiving 2.00 per year in income. Paying 27.00 effectively means you are forefiting one years worth of income to make your purchase. In this case, your yield would be much lower when you factor in the call at 25.00.

Another critical point is that all buyers should clearly understand the inverse relationship between price and interest rates. When rates move up, the prices on the preferreds will move down, even with the most solid of issues. It would not be surprising to see the shares selling for 27.00 to sell for 22-23 somewhere down the road. The pricing on shares of less than stellar issuers will fall even more. Don't become a yield hog, as being one can result in some rude awakenings. These are not CD's. They definately go through their cycles.

Those that bought in the sweet spot before this year were able to increase their yield AND get themselves some CG's too. Your purchase of an 8% face rate @23.00 becomes an 8.7% yield, plus you would have 2.00 of CG's when it is called, more if you sell at a premium. Also remember that most calls are at the companies option. In todays environment, if a 9% issue reaches its call date and they can issue new shares at 7%, they will.

Yet another important consideration is that trading volumes on most preferreds are razor thin (5k or less per day). If you are forced to sell, your selling price can be driven down a lot more than it would if be if it was very liquid. Most shares of most preferred issues are never traded at all. They are bought at par, held strictly for the income and not touched until they are called. I heartily recommend that people take the time to educate themselves on the subject before plunging in.


BRG
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