No. of Recommendations: 3
A further correction to the previous becomes necessary, because I added another position just now, a lower-tier, invest-grade bond (Baa2/BBB+) with a CY of 7.8% and a YTM of 8.5%. That’s not the best of yields, but I thought the investment needed doing. Apparently, the market thought so too, because I’m being marked-to-marked on the buy in a real-time with a gain of 2.53%. In other words, due to spotting an anomalously low price and immediately executing, I have already recouped the commission I paid, and I’m showing an unrealized capital gains profit on the purchase.

YTD, I have now added 33 new bond positions to my portfolio. The CY on those buys is 9.08%, and the projected YTM is 13.64%. I would argue that those are merely benchmark numbers for a properly-diversified, moderate-risk, corporate bond portfolio such as anyone in this forum could have built for themselves over the same time frame. Anyone. Simply set up an account with a reputable bond broker and start shopping. The bargains have been there for one and all to find. If you can buy CDs, you can buy corporate bonds. This investing stuff ain’t rocket science.

The YTD unrealized cap gains on those 33 positions are 7.56%, which requires a further explanation. On a bond portfolio whose positions are intended to be held to maturity, unrealized cap gains (or cap losses) are just market noise best ignored. The size of the gains (or the losses) reflects daily re-pricing of the bonds, not the value of the bonds at maturity. Obviously, it is better to be showing gains than losses. But the back and forth of unrealized cap gains and losses is just mid-field scrimmaging. It’s what happens in the end zone that matters to the bottom line.

Part of the reason I have been reporting my purchases of corporate bonds (CBs) is to point out that there are alternatives to buying principal-protected securities (or PPs, of which a conspicuous example is CDs) as a means of moving purchasing power forward to the future. That’s the real game being played. Preserving nominal principal at the cost of losing purchasing power doesn’t make a lick of sense if one’s intentions are patient, long-term investing. Money isn’t a good whose value is itself. The value of money is what it can buy presently, or in the future. The difference between buying now and buying in the far-off future is the measure of purchasing power preservation. Principal-protected instruments never preserve purchasing power over the long term. Never. After taxes are paid and inflation is subtracted, short-term PPs never return the full equivalent of their initial purchasing power, much less appreciate that purchasing power, because that isn’t their intended purpose or best use.

Note: I do NOT dislike CDs. I buy them whenever I can find them being sold at attractive prices and/or when my intentions with the money is the short-term conservation of purchasing power.

When the yield difference between CBs and CDs is minimal, such as less than a couple hundred bps, and investment horizons are short, then CDs are the preferred choice. Why take on principal risk if one isn’t being paid to do so? Ben Graham is adamant about that point in his book, The Intelligent Investor. He says there is no middle ground between “Defensive Investing” and “Enterprising Investing”. The choice is one or the other. He says that for a Defensive Investor to reach for a bit more yield (by going beyond what is both low-effort and low-risk) is foolishness.

But he also says this. When the difference between “defensive” and “enterprising” becomes meaningful, which he defines as a premium of 5% or more, then doing the extra work and taking on the extra risk becomes sensible. So let me ask you this: In today’s interest rate environment, what is the highest yield a CD investor could get with new money? Less than 5%, right? On the other hand, what sorts of yields are investors obtaining from properly diversified portfolios of corporate bonds? What is the difference between the two? Would it seem that CBs investors are being adequately paid for the risks they are accepting?

The real question is whether that present, 9-10% difference between CDs and CBs is likely to persist. Obviously, it won’t. The “blue light specials” are becoming less frequent. The once plentiful bargains are drying up. But 33 new bond positions are now in my portfolio, just as some or all of them could have been in yours. You could have bought any or all of those same bonds. We both had access to the same information and the same market. I chose to buy. Presumably, you didn’t.

Which was the better choice? That’s the unanswerable question, right? because each person’s circumstances are different. But you should be aware that becoming a corporate bond investor (in addition to being a CD buyer) is a choice that you have. The place to begin is with Ben Graham’s book, The Intelligent Investor: a Book of Practical Counsel.
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