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Subject:  Re: PPL Energy and Talen Energy Date:  5/5/2021  8:30 PM
Author:  Arindam Number:  36996 of 37083

Mdy S&P Cpn Due Call Price CY YTM Price
B3 CCC+ 6.50 06/01/25 06/05/21 102.167 7.48 10.54 86.911
B3 CCC+ 7.00 10/15/27 10/15/22 103.500 8.38 10.58 83.568
B3 CCC+ 6.00 12/15/36 - 0.000 9.40 10.86 63.810


I hate using TMF's table format. But I wanted the data available. (It's from ET and accurate as of a couple hours ago.)

I never discuss my open positions. But you've been hammering hard on Talen, and I own three of their 6's of '36. So let's dig in for the sake of broader points that might be made about investing in spec-grade debt.

For starters, their yield-curve is flat. That's not a neutral fact. But it's far less worrisome than an inverted one. Second, the debt is split-rated. So, which agency do you trust? It's been too many years since I did a study on how to deal with split ratings, and I don't remember which agency I decided was the more conservative. So, that's one broader problem needs to be dealt with, as does how their market-implied rating synchs with their agency-assigned ratings.

Thirdly, what's the bid-ask spread and lot sizes? That matters. If the debt is actively traded with tight spreads, then traders aren't worried, which is A Good Thing. Fourthly, what do price charts of their debt look like? (FINRA is a good source for this.) What do price charts of the common look like? Again, how worried are the equity traders? There are lots more "technicals" that could be considered, plus the whole options game, but that's enough to give a sense of what needs to be done besides and beyond just grinding through their financials.

Next comes picking an issue and sizing a position, whose specifics could be argued about from here to Sunday. But it's really a matter of genetics, not numbers. So let me step back and explain that remark. Economics --and sub-branches like 'behavioral finance'-- assume humans are monolithic, rational animals, not the 32 to 64 different types of lizard-brained creatures we really are who are horrible at estimating risks. There is almost no one in the investing world that realizes that fact. It's over-populated by overly optimistic idiots who think stock prices always go the the moon, or at least, that Buying and Holding is a low-risk recipe for success.

But traders --stock, bond, commodity, currency, whatever-- as group do realize that personality doesn't just matter, but that it's the key in determining whether they will blow up their account or go on to being able to pull more money out of markets than they bring to them and that they must they match methods to personalities, as Schwager --and dozens of others-- document.

Now consider the commonly-offered advice about where to buy on an issuer's yield-curve. Some prefer to keep maturities short. Others argue the "sweet spot" is to be found in the middle. Etc. But risk-adverse me looks at a yield-curve like Talen's and asks, What's my downside if I get in at 86 rather than 63?" How likely is the issuer to file BK? What's the workout likely to be? So I conclude that if there's going to be trouble, I want the trouble to be small. So I'm generally buying the longest-dated --hence, cheapest-- bonds available, be they invest-grade or spec-grade. In the case of Talen --currently bid at 62 for their 6's of '36, if I'm remembering right-- I'm ITM on them, because I got in a 56. That's a classic instance of obtaining Ben Grahams's "Margin of Safety". If you're going to screw around with junk, you gotta "Buy widely; buy cheaply; and buy small", or else you're not going to survive in the game. (IMHO. 'natch.)

But the instant I lay out a manifesto like that, I know full well other very successful bond investors can be found who do nearly the opposite. So what matters --to repeat an earlier point-- is matching methods to their would-be users, and the best that can be said is merely, "This is how I do it, and it seems to work for me." If you see no opportunity in Talen --as just one position in a portfolio of as much as 250 to 300 bonds, which is what I normally carry--, then dump it, and move on.

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