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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 35367  
Subject: Thinking about the "Bond FAQ" Date: 11/22/2006 7:59 PM
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Years ago, tired of answering repetitive questions about bond basics, I urged the creation of a "Bond FAQ" along the lines of faq's that are widely available in other fields, such as for programming languages or artificial neural nets. At the time, no one else wanted to share the work, so I backed away from the project and let it die. Recently, Lokicious did yeoman's work and posted a comprehensive version, and volunteers have assisted with its editing and expansion. My participation was solicited, but I backed away, arguing that (1) any basic fact about bonds or fixed-income investing should be looked up in one of the many, very adequate introductory books there are or at any of several, very excellent web sites, e.g., Investopedia, Wikipedia, and (2) the things that beginners really need to know --and which typically can't be found in reference sources-- are especially the things that cannot understood by reading a FAQ. Instead, a "proper" answer to such a question depends on the getting the questioner to understand the assumptions that underlie his question, which is a process that quickly gets deeper into investment theory than a beginner has either the interest or the ability to deal with. His question can be answered, but the answer is a heavily-evidenced, closely-reasoned monograph, not the quick paragraph or two he thinks will be sufficient. Furthermore, the proposed answer is provisional, because no one can ever offer a complete theory of investing/investments. Instead, they can offer bits and pieces that might be useful, but which --most definitely-- are provisional, because the future --which is the true "subject matter" of investing-- is unknowable.

Let me give a tiny example of what I mean, by quoting a snippet from the bond FAQ:

The upshot is that it is very difficult to predict what will happen to interest rates, even if we can identify specific factors that contribute to supply and demand (such as foreign governments buying Treasury Bonds and mortgage securities, flight from stocks to bonds during panics, looming end of the Social Security surplus, government deficits, demand for mortgages, etc.). [emphasis added]

The smart-aleckly answer, but the "correct" one, is that it not merely very difficult to predict interest rates, but it is impossible to do so, because it is impossible to predict anything and to achieve more than random success from such predictions. (That's the primary epistemological fact: the future is unknowable.) Most definitely, the inability of humans to make useful predictions hinges on a very strict definition of "predict", which is a word (or process) that can be contrasted with "forecasting", which merely makes probabilistic statements about future events, rather than absolute ones. That distinction might seem like quibbling, but the consequences are profound, because the distinction between predicting and forecasting becomes a means of judging what can reasonably be known and how the consequences of being wrong have to be managed within an investment conext.

Let's do a tiny bit of editing.

"The upshot is that it is very difficult to forecast what will happen to interest rates, even if we can identify the specific factors that contribute to supply and demand."

Now, my question is this: How many assumptions are being made in that seemingly simple statement? How many of them are testable? How many of them are wrong or irrelevant? At the very least, an assumption is being made that it is only supply/demand factors that drive interest-rate changes (instead of, additionally, policy changes and other factors as well), and an assumption is being made that forecasting interest rates should not be attempted and, besides, it is argued --but not by me-- that no one can do it successfully. My take on the matter is this:

#1 Useful interest-rate forecasts are within the abilities of ordinary investors. If a person wants to do the needed work, he can obtain the benefits that a good-enough forecast will provide.

#2 OTOH, it is never necessary to forecast interest rates. (They can be lagged, rather than led.) If a person wants to avoid forecasting, then the use of trend-following methods will provide timely-enough information about the present direction of interest rates to make good-enough investment decisions.

#3 Forecast interest rates if you want to, or don't forecast them. The choice is yours, and each choice will have consequences as to how other things in your investment plan can (or can't) be done.

Those claims depend on this further assumption: the would-be investor is willing and able to write an investment plan and then to follow it. But this is something few investors do for themselves. Instead, they accept the “conventional wisdoms” about investing, and then they work within its framework, thinking they are making fully-informed decisions. But a person who asks a question such as "Can interest rates be predicted, and how would I do it?" is really asking a more basic question: "How will I know if your answer can (or should) be trusted?" The answer, obviously, is that unless the questioner has already figured out the answer to his own question, he won't know the merits of anyone else's answer. So, ultimately, the questioner has to write his own bond faq.

Of what use, then, are investment faq's? Not their content, which must vary because each investor is unique, but possibly their broad approach, which is a reflection of the quality of their writer's thinking. That's why faq's should be read, to see how others deal with solving problems that might be similar to ones a person has to solve for himself. Often, if the approach is clear-cut, it can be leveraged. Either a wholesale knock-off can be done, or the approach can be modestly changed and then adapted to new purposes. If the approach isn't clear-cut or is obviously flawed, often enough what is of value can be salvaged, which saves having to reinvent the whole approach. Instead, just parts of it have to be fixed and can then be re-applied to old projects or to new ones. So faq's should be written, which raises this question: what is the purpose of the present bond faq? How is it --in its present form-- a better source of information about bonds and FI investing than what can be found elsewhere? Everytime I try to read it –-and here I'm only speaking for myself-- I find it to be either misleading or useless for two sorts of failures: its acceptance of assumptions that can be falsified and its failure to ground itself in the realities of actual investing. My conclusion is that the document is too broken to be fixable.

I make that criticism not to disparage the efforts of those who have created the bond faq or contributed to it, but to better understand what my own relationship to it should be. I am an experienced bond investor, but I do not know even a fraction of what I should know, the bulk of which is already readily available in an abundance of reference sources. Instead of a bond FAQ --or perhaps in addition to it-- should there be an annotated bibliography? Again, I would demur. Finding an answer to a basic question about bonds is no different than trying to locate answers to basic questions in any field. It is a matter of basic reference skills and basic reading-comprehension skills. But what is done with the information so gathered is another matter. That requires "critical thinking" skills and, especially, some experience in the subject field. So faq's are a Catch-22 situation. The faq's of others are most useful --and can best be evaluated-- by those who can write their own. And faq's, by their nature, tend to be so compactly written that newbies are overwhelmed by them, which is why I would direct all beginners to the already published literature, which tends to take a discursive, multi-media approach to introducing the basic terms and concepts of the field. Those resources need to be a beginner's first stop. Then, having mastered that material, a person might be ready to deal with faq's such as this forum's members might produce with their inevitable and arguable, embedded assumptions.

Charlie
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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18879 of 35367
Subject: Re: Thinking about the "Bond FAQ" Date: 11/23/2006 9:41 AM
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Charlie,

If you want to do an annoted bibliography as your contribution to the FAQs, that would be a welcome addition. I will reiterate that what we have attempted to do, by providing as complete a picture as possible of various options within what can loosely be called bonds/fixed-income, is very different than anything available in bond books or, as far as I can tell, other web sites providing education on the topic (I find specific sub-topics covered by bonds-on-line and some others very helpful, and we have tried to link those).

It has been hard enough to bring the FAQs to press because we have chosen a huge topic. though I think appropriately so. We are also, as a group, self-critical, which has meant trying to correct mistakes, keep up with changes, and figure stuff out (such as bond funds losing value "mysteriously") before submitting the FAQs to TMF. (If we could just put the draft up, ourselves, then easily edit, without an extra, presumably easy, step, we would have done so long ago.) We have also been waiting for some people to complete tasks they have promised to do or take ownership.

It is always possible to quibble with any statement, but that gets very tiresome and becomes extremely unhelpful in trying to accomplish the basic task. You obviously have no interest in there being FAQs, because you weren't the primary author, so you prefer to take pot-shots, instead of having taken on suggesting editorial changes or fixing mistakes or taking responsibility for topics for which you have the best expertise, notably junk bonds and bond trading, which are poorly covered in the FAQs.

My intent, since 2Old seems to have gone AWOL, is to take what she has done with editing, give it another run through to fix some of her typos and look for changes (such as updated links to the Treasury site), and for the stuff 2Old didn't edit, just go with the inferior draft, so we can have these before the New Year.

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Author: vickifool Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18880 of 35367
Subject: Re: Thinking about the "Bond FAQ" Date: 11/23/2006 10:20 AM
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My intent, since 2Old seems to have gone AWOL, is to take what she has done with editing, give it another run through to fix some of her typos and look for changes (such as updated links to the Treasury site), and for the stuff 2Old didn't edit, just go with the inferior draft, so we can have these before the New Year.


Hooray, hooray, hooray!!

(If we could just put the draft up, ourselves, then easily edit, without an extra, presumably easy, step, we would have done so long ago.) We have also been waiting for some people to complete tasks they have promised to do or take ownership.

Did I promise to to something?

Vickifool of the intermitent memory

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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: 18881 of 35367
Subject: Re: Thinking about the "Bond FAQ" Date: 11/23/2006 10:49 AM
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Loki,

Thank you for clarifying the purpose of the Bond FAQ as “providing as complete a picture as possible of various options within what can loosely be called bonds/fixed-income.” That's a commendable goal.

It is the latter part of your statement that I disagree with, that the FAQ “…is very different than anything available in bond books or, as far as far as I can tell, other web sites providing education on the topic (I find specific sub-topics covered by bonds-on-line and some others very helpful, and we have tried to link those).”

You don't find the existing literature (or web sources) on bonds/FI investing to be useful or comprehensive. I do find the existing resources to be a very adequate introduction to those topics. (NB: not the final word, which has never and can never be written, but certainly a good-enough intro.) So that is where I think beginners should be directed, toward materials and resources that are already available, and I'll accept your challenge to produce, not a bibliography, but a step-by-step, annotated reading list that a beginner has to master if they are to survive and prosper in this game. It will be a list that probably no one will agree with, but it will clearly lay out where I'm coming from and where I'm headed.

I'm still on the road. So give me a couple of days, and then I'll post a first draft once I'm back home.

Charlie


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Author: jmcjls Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18883 of 35367
Subject: Re: Thinking about the "Bond FAQ" Date: 11/23/2006 3:59 PM
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Recently, Lokicious did yeoman's work and posted a comprehensive version, and volunteers have assisted with its editing and expansion.

Yes he, and others, did work hard. You chose not to participate, move on. Obviously you don't need a FAQ.

My participation was solicited, but I backed away, arguing that (1) any basic fact about bonds or fixed-income investing should be looked up in one of the many, very adequate introductory books there are or at any of several, very excellent web sites, e.g., Investopedia, Wikipedia, and (2) the things that beginners really need to know --and which typically can't be found in reference sources-- are especially the things that cannot understood by reading a FAQ. Instead, a "proper" answer to such a question depends on the getting the questioner to understand the assumptions that underlie his question, which is a process that quickly gets deeper into investment theory than a beginner has either the interest or the ability to deal with.

Few people expect a FAQ to be exhaustive -- I don't expect a beginning bond book to be exhaustive either. In fact most of the FAQs I've seen on TMF include a reading list for more info.

I make that criticism not to disparage the efforts of those who have created the bond faq or contributed to it, but to better understand what my own relationship to it should be.

Again, you don't need a FAQ. You're not a beginning bond investor. Move on.

jmc

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Author: jmcjls Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18884 of 35367
Subject: Re: Thinking about the "Bond FAQ" Date: 11/23/2006 4:04 PM
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So that is where I think beginners should be directed, toward materials and resources that are already available, and I'll accept your challenge to produce, not a bibliography, but a step-by-step, annotated reading list that a beginner has to master if they are to survive and prosper in this game.

Wow. A beginner must become a master before beginning. Tall order. Keeping bond investing in the club, eh?

jmc

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Author: halco Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18887 of 35367
Subject: Re: Thinking about the "Bond FAQ" Date: 11/24/2006 7:28 AM
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If you're going to do a definitive "Bond FAQ" please be sure to include some of the criteria recently discussed in the "Offical Bond" thread on the Great Movies board:

When United Artists and MGM enumerate 19 Bond films, they are talking about the 19 official Bonds made by the producers who initiated the series and developed the phenomenon that came to be envied and imitated by every studio in the world.

The other films that have the character James Bond in them aren't really part of the continuing series because they don't feature
-

Oh wait, you meant - I thought...

Never mind.

Harold

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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: 18888 of 35367
Subject: Re: Thinking about the "Bond FAQ" Date: 11/24/2006 10:31 AM
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Again, you don't need a FAQ. You're not a beginning bond investor. Move on. jmc

Sir,

Unwittingly, you make a valid point. Loki's bond FAQ --due to its errors of fact and theory-- is an intellectual tar-baby better avoided by more knowledgeable readers.

So, let me ask you this, since you are obviously so well qualified to judge the needs of others: Should the bond FAQ --in its present form-- carry the equivalent of a Surgeon General's warning?

CAUTION: Some of the information presented in this FAQ is well-known to be incorrect and might have adverse consequences on its readers' financial health.

Charlie



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Author: DeltaOne81 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18889 of 35367
Subject: Re: Thinking about the "Bond FAQ" Date: 11/24/2006 12:37 PM
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CAUTION: Some of the information presented in this FAQ is well-known to be incorrect and might have adverse consequences on its readers' financial health.

Is it really incorrect, or is it just simplified/incomplete? There's a substantial difference.

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Author: DeltaOne81 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18890 of 35367
Subject: Re: Thinking about the "Bond FAQ" Date: 11/24/2006 12:40 PM
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Let me just complete my thought...

Your comment that started the thread seems to be a nitpick, or even semantics. At best, in some ways, its delving much deeper into the topic than a FAQ is supposed to do. It doesn't seem to me to be in any way incorrect. Its merely a beginning level summary.

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Author: TMFGalagan Big gold star, 5000 posts CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18891 of 35367
Subject: Re: Thinking about the "Bond FAQ" Date: 11/24/2006 1:44 PM
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Unwittingly, you make a valid point. Loki's bond FAQ --due to its errors of fact and theory-- is an intellectual tar-baby better avoided by more knowledgeable readers.

Charlie,

There've been ample opportunities over the past year or so for you and everyone to point out errors of fact. It's seems a little late in the game to object on such a global basis. As for theory, the hallmark of a good FAQ is to provide multiple viewpoints where they exist so that beginners don't get confused by internal board disputes. I applaud Loki for inviting you to provide yours rather than taking offense at your comments. I don't think I'd be as charitable had I done the work that he and many others on the board did to produce the draft FAQ.

You might have noticed that parts of the FAQ do point to outside resources for explanations of some basic concepts. That said, it's valuable for TMF members to have a one-stop place to access available information, especially on basic concepts that are necessary to get much from the board.

Personally, I think your viewpoints are interesting and informative, but I also temper them with the viewpoints of others. It's unfortunate that some of your comments seem calculated to be deliberately insulting to others whom I also respect here.

dan

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18892 of 35367
Subject: Re: Thinking about the "Bond FAQ" Date: 11/24/2006 5:09 PM
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It has been made very explicit from the beginning that anyone interested in bond trading or even picking bonds below high investment grade needs to know a lot more than what can be provided by these or any other introduction.

What is different and important about these FAQs, and this board, for which Paul deserves the credit, is that we attempt to explore all the options for those interested first and foremost in getting the best yield they can for limited risks to principal. There are plenty of places and books that try to explain bond trading and picking.

I regret we do not have a Part V to the FAQs that does deal with bond picking and trading, since at the very least it would be nice to have easy access, in some organized fashion, the Charlie's personal explorations into bond picking, which would be highly educational even for those with more advanced knowledge. I'm sorry we don't even have the bond picking primer Jack started before his sudden departure (I hope his membership just ran out or he got bored with us, not something bad in his life happening).

I fear there are some factual errors that are yet to be corrected. I'll see if I notice anything on my read through—we have corrected many on previous edits. Conceptually, I'm pretty comfortable. Talking about interest rates in terms of being difficult to predict is, I think, a good way of saying they aren't some mystical process, but there are many factors that go into supply and demand for debt securities of various maturities and risk, so even if we identify these factors (which we try to do, to some extent), choices that depend on evaluation of future interest rates will always be an educated guess. Helping people make educated guesses, instead of, for example, assuming when they hear about "interest rates" on the news, meaning what the Fed is up to, that's the be all and end all, is a good starting point. If someone wants to play the day to day, week to week, momentum trading game with bonds, they need to look somewhere else. I know I have a much better understanding of interest rates than I did a few years ago, which allows me to make informed decisions between a 20 year corporate, 5-year CD, and 6-month Treasury, which does not mean my informed decision will be proven correct in hindsight.

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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: 18893 of 35367
Subject: Re: Thinking about the "Bond FAQ" Date: 11/24/2006 7:24 PM
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Loki,

Because people new to a field tend to ask the same questions, for people knowledgeable in that field to create a FAQ can be a way of thanking those whose help was extended when they themselves were beginners. Also, creating FAQ's can be a good way of summarizing what a person thinks he knows as a way of identifying what more needs to be learned.

Where I am at odds with the current bond FAQ is in the global assumptions it makes about investing, which means that I am working from different viewpoint than you. (Big surprise, right?) But those global differences determine how each of us deals with details, some of which are simply factually wrong, as consulting the published literature --or appealing to actual experience-- will suggest. Other differences are merely contradictory for their being paradigm-specific. If we don't share a paradigm –and we obviously don't—then, of course, we will argue over details.

I have always argued that there is no single, right way to do any of this stuff, which is a claim that Schwager's work reinforces. (Look him up. He's worth reading.) There are plenty of documented examples of investors/traders doing the exact opposite of each other, with both of them being profitable. In other words, all other things being equal, almost any idea –and even its opposite-- can be made to work if the idea suits the personality of its user. So, in that sense, there can be no “right or wrong” about any of this stuff. But there can certainly be better or worse, which is where we part company.

For reasons that are unique to your personality, and for reasons that are unique to my personality, each of us attempts to manage risk differently. Those global differences determine local specifics, particularly how each of us attempts to explain investing to beginners. That's where the argument is. I think you are doing beginners a disservice. You, apparently, think the same of me. It's not an argument we are going to be able to resolve, nor am I interested in planting a flag on an opposite hill for the purpose of gathering followers. Any investor can do anything he or she wants to. I don't really care. But what I do protest is offering easily falsified “conventional wisdoms” to beginners or a palette of “choices” with the implicit assumption that they are somehow all equal.

How I do bond investing is not how you do bond investing, and I would hope that no one does it as either of us does, that, instead, they find their own path. That's a point I think the bond FAQ should stress: the need for discovery, the need to have experience inform theory. That isn't your approach. So we are arguing pedagogy, as well as philosophy. The investing stuff is merely providing concrete examples of our differences.

Charlie


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Author: jmcjls Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18894 of 35367
Subject: Re: Thinking about the "Bond FAQ" Date: 11/24/2006 8:11 PM
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So, let me ask you this, since you are obviously so well qualified to judge the needs of others: Should the bond FAQ --in its present form-- carry the equivalent of a Surgeon General's warning?

The purposes of FAQs at TMF are, in general, twofold: 1.) To inform newcomers on the board's purpose. 2.) To provide introductory information on a particular type of investing.

That's it. No secret knowledge.

jmc, a woman (thank you very much!)

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