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Subject:  Re: Graham-style Bond Investing, Again Date:  5/25/2009  6:14 PM
Author:  junkman02 Number:  27623 of 36786


When I reported the returns on my YTD bond bonds, I was pulling the numbers from an not-yet-updated spreadsheet.

YTD, I have added 32 new positions (not the previously reported 31). The CY for those positions is 9.1% (not the previously reported 9.2%. The projected YTM is 13.8%, (not the previously 14.4%). The differences are minor, but the corrections needed to be made.

One further point need to be made about those returns. The returns are what mostly due to the type of astute buying that characterizes value investing, rather than from the nature of the asset class being bought. In other words, when good quality merchandise goes on sale, the value investor is buying. He buys cheaply, creating a margin of safety for himself. Thus, I do not have to focus my buying on lower-quality credits in order to obtain the kinds of returns that are typically associated with lower-quality credits. Equally so, I do not avoid them either.

Here’s is the break-down of my YTD buys. As you can see, the distribution between invest-grade and spec-grade is roughly 2:1, or a moderate allocation to junk. Thus, reasonable, overall returns can be obtained from accepting a reasonable amount of overall risk. "Reasonable" and "Overall" are the two crucial words.

Average Descriptive Credit Weightings in Portfolio
Rating Quality by Par by Cost by Value
AA/Aa mid-tier 30.00% 25.90% 26.80%
A/A Invest-grade 7.50% 11.20% 10.80%

BBB/Baa lower-tier 27.50% 32.10% 30.80%

Sub-total Invest-grade 65.00% 69.20% 68.40%

BB/Ba upper-tier 17.50% 18.80% 18.70%

B/B lower-tier 17.50% 13.00% 14.20%
CCC/Caa spec-grade 2.50% 1.80% 1.50%

Sub-total Invest-grade 37.50% 33.60% 34.40%

Note: I consider triple-AAA and above to be top-tier. I consider double CC and lower to be highly speculative. I choose to group double-AA and single-A together, just as I choose to group single-B and triple-CCC together. Other people will make different choices. That said, I’ll buy anywhere up and down the credit spectrum, because I’m shopping for value wherever it is found. But my preference is to seek out the best quality I can find for the price, not the highest yield for the price. Safety trumps returns, and I'm in this game for the long haul, not just a few extra bps that soon flees.

How does one attempt to ensure long-term survival in the investing game? by buying what should be bought, at the price it should be bought. The bond game --and it is a game-- is all about value shopping, just the same way that buying one's groceries is all about value. Same-same, and Graham's book tells would-be investors how to shop for stocks and for bonds. You don't need to read anything else. Bond vocab is easy to pick up, and the market itself --if you're willing to pay attention-- will teach you the rest you need to learn.
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