Skip to main content
No. of Recommendations: 15
In my long experience with fixed income investing, there is one truism. When a company is small, it is automatically penalized and trades with a higher yield. Additionally, small company bonds are often not rated so many institutions can't buy them and others stay away. So this is where the true bargains lay. If you become your own ratings agency, learn to read a balance sheet and do the homework, you find bargains. If you simply look at current yield to determine risk, you don't understand the small company penalty and you miss the bargains. Small does not mean dangerous. There can be much lower leverage in a small company than a large one, and they can be in a safer business than the large one, and still have a higher yield than a large risky company. Understanding that is the key to making big money in fixed income. If you believe that the market always prices everything correctly then you might as well let a monkey make your bond picks. A bond does not have a high probability of default simply because it has a yield greater than 6% and it may be a much safer bond than one trading with a 5% yield. Preferreds and smaller company bonds are traded mainly by retail investors, many of whom do not know what they are doing. This is where one can get the edge on the market.
Print the post  

Announcements

What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.