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I've run this exercise before of comparing whether it would have been more profitable to buy the bond rather than the common (or vice versa). Generally, them that bet on the common did better on an absolute returns basis, which --of course-- is only part of the whole story, especially for them that like to sleep at night.

Anyhow, last summer, I bought RIG's 6.8s of '38 at 26.400, clearly a lottery ticket. That same day, 07/27, the common closed at 2.20. So, how are the two horses now running? Fido is marking me to market on the bond at 44.750, meaning a gain of 169.5%, whereas the common closed Friday at 3.49 for a gain of 158.6%. Those numbers are a wash as far as I'm concerned. So, what might be the larger lesson to be drawn from this exercise?

There is zero difference between what is touted as "investing" and what is disparaged as "gambling", because both punters are making bets about an unknowable future. For sure, each tries to stack the odds in their favor by pointing to "fundamentals" or "technicals". But both are playing a probability game. In the upper tiers of credit-worthiness, a bond buyer is betting on the direction of interest-rates. If he/she gets that right, money is made. In the case of lower-tier credits, the bet is on the direction of an issuer's credit-worthiness. Get that right, and money is made.

With stocks, a different scam is happening wherein company specific "fundamentals" don't matter as much Fed policy. Get that right, and money is made, and right now, the Fed has promised that stock prices won't be allowed to decline. Meanwhile, of course, they're losing control of the yield-curve as rates at the long end edge up, which means prices for upper-tier debt are declining, which is why a prudent, risk-adverse, bond investor buys across the yield-curve and up and down the credit-spectrum.

(IMHO, 'natch)
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