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Author: charliebonds Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35400  
Subject: TMF Cog: Rating the Raters Date: 4/21/2011 4:06 PM
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Surely you don't expect everyone to have the same credit-analysis skills as your own? Each one of us has different skills to offer. If we don't understand, say architecture, should we not consult an architect, and then protest if he doesn't deliver the goods?

Cog,

If truth be told, I’m a crap credit-analyst with the most minimal of skills. When it became obvious that bond-investing was going to be important to me, I went back to school and took the lower-division accounting series, just so I could read financial statements in a more informed way, as well as dug into the various credit-analysis handbooks. But I have nowhere near the skills that Jack does, for example, who really can make the numbers tell their story. But that isn’t to say that I’m defenseless. Using techniques I’ve had to develop in order to survive in this game, I can make enough sense of financial statements and market prices to vet credit-ratings, or else I have the common sense to realize I’m in over my head and back away. That is exactly the same obligation any investor has. “If you don’t understand what you’re buying, then don’t buy it.”

By and large, credit-ratings can be trusted WHEN THEY ARE PROPERLY USED. But that isn’t what bond investors do. Instead, they try to find bonds with the lowest ratings they will accept and the highest yields. But, invariably, the reasons why those bonds have the yields they do is because the rating-houses haven’t yet caught up with where the market, in its collective wisdom, knows about the deteriorated prospects for the company. Thus, the typical bond-investor misuses ratings in order to justify the risks they are taking, and they get exactly what they deserve. The bond blows up, and the investor screams they were deceived. No, they deceived themselves. Ratings are merely opinions, not guarantees, for which the retail investor paid nothing. In other words, he got something for free, and then he proceeded to abuse it. So, of course, he's inclined to blame others for his own stupidity.

Charlie
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