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Opps. By accident, I hit the 'SEND' key before I was finished.


Most investors run far more focused portfolios than I'm willing to risk, nor do they equal-weight their positions. But since it can never be known in advance what will work out and what won't, I buy "widely, cheaply, and small". That's me, and it needn't be what anyone else does, though I'm in good company. (Pull Raschke's lectures on risk and trade management sometime, or look at how Lynch ran his fund.)The problem all investors are now facing is that asset prices are at nose-bleed levels. It has to be one's working assumption that anything bought now is sure to lose money. But unless markets are engaged with real money --not paper trades-- markets can't be learned.

Some background. Graham distinguished between three types of bettors and their bets: "Defensive', 'Enterprising', and 'Speculative'. The credit-rating agencies offer 22 notches, which is too many to be useful on the fly. This is the scheme I use:

Cash & Equivalents (and a post for another time)
Defensive (roughly, AAA-AA)
Enterprising (roughly, A-BBB)
Speculative (roughly, BB & lower)
Defaulted (the banks use the term 'non-performing')

Those risk tranches can be this weighted any way one chooses, with this caveat. If your 'scrap rate" is 'negligible', you're not taking on enough risk. If it's 'excessive', you're taking on too much (with both of those terms being a post for another time).

By and large, a single corp bond isn't "marketable". So if one's allocation to spec-grade bonds (or spec-grade stocks) is the financial equivalent of two bonds per issuer, then going five's for 'Enterprising' and ten for 'Defensive' makes sense, with this caveat. That's two's and five's and ten's based on 'par', not 'price'. Thus, because spec-grade assets --be they bonds or stocks-- are generally offered at steep discounts to "intrinsic value", only small money needs to be put to work, and the penalties are equally small if you've screwed up on your risk-management/trade management.

Now, let's apply some of this stuff to pfds. There are roughly 740 of them. But Schwab includes coverts and ETDs, whereas other lists don't. Some issuers have just a single pfd currently trading, Some have as many as 13. All of them have different divs, prices, call date, risk characteristics, etc. That's why most investors access the asset class through a fund. But what are fund managers other than someone with an investing plan and a work ethic, which any investor could match --if he or she chooses-- plus have the freedom of not having to deal with stupid shareholders, who persistently want to buy market tops and sell market bottoms.

So, yeah, just as I used to run what amounted to my own 250-300 positions, spectrum-income bond fund, I'm doing the same thing with pfds. (Currently, about 170 positions, with the intention to pause at 200 for that being nice round number.) What I am doing, though, is being careful about 'size', which I'm limiting to 10% of what I'll put on once discounts become available. In short, right now, I'm just "tipping a toe" and liking what I see.

To see this, pull the corporate debt schedule of a prolificate issue and compare that with their schedule of pfds, keeping this fact in mind. Pfds are junior to corps and are rated 2 notches lower. But they're senior to the common. What you'll find is that --currently, AOTBE-- pfds should be bought vs corporates. Whether they should be bought in preference to the common is a whole 'nother matter that each person's investing plan will address.

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