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Author: globalist2013 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35362  
Subject: The Bond Game Date: 2/7/2013 1:39 PM
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I told myself that I was going to cease posting at TMF, that I was wasting my time trying to help people from hurting themselves due to their ignorance of how to identify and manage their investing/trading risks. But I was always writing only for myself and, nearly always, I was the only one who benefited. That hasn’t changed, and I still despise what TMF has morphed into, a fee-sucking affinity scam that preys on the (willfully) ignorant.

The only difference between ‘investing’ and ‘gambling’ is the obnoxious moral righteousness nearly always attached to the former. In both cases, bets are being made about an unknowable future. If the game offers a positive-expectancy, and *if* the bettor can capture a reasonable portion of it, then he/she makes money. Otherwise, they’re just “paying to play”, which describes the so-called “average” investor, as is well-documented by Dalbar’s longitudinal studies of investor results. The average investor (stock, bond, or whatever) pays to play, because they fail to pull more money out of markets on an after-taxes, after-inflation basis than they bring to them. In the total financial ecology, that is exactly how things need to be. The mice and rabbits of the investing/trading world feed the hawks, eagles, and wolves. So, a person must choose whether to be predator or prey.

The bond game is simplicity itself. If you can buy bell peppers or broccoli responsibly, you can buy individual bonds responsibly. The game is no different, and its essence is this. “What might I receive in discounted dollars for what I am paying for in present-day dollars, and what is the likelihood of that projected exchange actually occurring?” In other words, “Am I being paid enough to accept the risks?” That’s how any betting game is won. You attempt to estimate odds/payoffs and to position yourself advantageously. Good gamblers --good investors-- take only the high probability bets, and they pass on the rest (or fade them).

I would not disagree with altstrat that the current bond-game has gotten tough. But I would also suggest that it is still playable by them that have a viable, risk-pricing process already in place. Minimally, what might be some of the chief components of such a process?

(0) You’ve gotta know how to identify, and then price and manage risk, no matter the form it takes, or where it is found.
(1) You’ve gotta know how to interpret financial statements.
(2) You’ve gotta know how to interpret stock and bond price-charts.
(3) You’ve gotta know how to run bond scans and be willing to shop daily.
(4) You’ve gotta know how bond trades happen and to find the best places to execute.
(5) You’ve gotta know how to size positions and to manage time-premiums, tenders, calls, etc.
(6) You’ve gotta know to estimate the impact that taxes and inflation will have on your yields.
(7) But most importantly of all, you’ve gotta know how to manage your own persistent human ignorance and stupidity, so that you’re putting your capital to work in a consistent, disciplined, high-probability manner and that you aren’t merely making Fear-driven, Greed-driven, herd-driven, sure-to-lose-money bets.

In other words, you gotta know how not to become a financial sucker. You've got to have learned what shopping in a grocery store would have taught you if only you were paying attention. Stocks or bonds, bell peppers or broccoli, it don't make no difference. Risk is risk, wherever it is found. The underlying does not matter. The process is always the same. "What's the price?" "What will I receive in return?" "Do I take this trade, or do I back away?" And then you ask and answer the same question over and over again, in a consistent, disciplined manner, week after week, year after year, good markets and bad.

And what is good, Phaedrus,
And what is not good---
Need we ask anyone to tell us these things?


(from Prisig's classic study of rationality, as good an intro to bond investing as to motorcycle maintenance, where the real cycle you're working on, the real investment you're working on, is yourself.)

Charlie
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