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

Bill,

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.

Arindam
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quantum online used to be the most reliable source of info on preferred stocks. Not sure if they keep it up to date but yield, bond rating, link to prospectus, call details, etc is usually reported concisely.

Low interest rates and rising rates make bonds less attractive for most of us. Qualified dividends and capital gains are a better deal.

Tina. When it comes to investments there is no alternative to stocks.
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"When it comes to investments, there is no alternative to stocks.

Paul,

Your claim is total bullsh*t. Even on an absolute-returns basis --meaning, 'RISK' is totally ignored-- there are plenty of ways even a retail investor can beat the putative returns of stocks.

Why are stocks so wildly popular among the mathematically naive? For the same reason they buy lottery tickets. They're gambling on getting "the big score", but totally ignoring their downsides.
The next time you're near a university library, ask for a stack pass, and spend a couple afternoons working your way through some of the articles in the professional journals that deal with investing and portfolio management. What you'll discover is that the myths told to dumb money are just that, not sound strategies for growing wealth in a responsible manner. Or if that approach doesn't appeal to you, ask why and how rafters or climbers rate river or cliff faces the way they do. RISK MATTERS. It can't be spend at the grocery store or gas pump. But ignoring it --or downplaying its role-- might mean having no money at all, because you got yourself thrown out of the game.

In one of his earlier books, Talib asks this question: "Who's richer? A janitor who just won a $10 million-dollar lottery, or some dentist drilling teeth?" The answer is obvious, right? Do a Monte Carlo Simulation and run the events of those two lives another 10,000 times. In every one of them, the janitor will be pushing his broom. But the dentist will be buying a house in mid-class suburbs and sending his kids to college. The janitor happened a rare windfall. The dentist can always build wealth

Investing --trading/gambling/speculating. Call it what you will-- is a game of probabilities in which bets are made about an unknowable future. They're just guesses --based on imperfect evidence and often worse reasoning-- you hope/think will work out. If the downside of a bet is more. catastrophic than is tolerable, the bet can't/shouldn't be made. But that isn't what Wall Street pitches, and they have made their pitch believable to the naive due to regulatory capture. Think back to '98 and the blowup of LTCM. Greenie bailed out his buddies, the counter-parties to LTCM's leveraged bets. Bernanke did in '08 with sub-primes. The current Fed/Treas cartel is bailing out the whole economy, especially financial assets, especially stocks, which they don't understand aren't a leading indicator. When things blow up --and they will-- them who gambled in the equity markets without hedging their risks or even acknowledging they exist will look pretty stupid.

RISK MATTERS, and the arbs always step in to make adjustments, because they have the means and need to do so. Lastly this thought. 'Risk' and reward' aren't reflexive. If you got the 'reward', you took the 'risk', no matter that it might not be apparent. In that sense, markets are efficient". However, taking the 'risk' doesn't necessarily bring the 'reward'. Why does TMF pimp the risky stocks they do? Because they're reckless speculators who make their money from subscription fees, not from trading for their own accounts. If they tried to pull crap they do at a prop firm, they'd be fired.



Arindam
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For any bond offered, every broker will state YTC/YTW/YTM. But for pfds, they only state CY, which is meaningless. Therefore, spreadsheets need to be built.
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Makes sense, but I'm just curious: What other kinds of metrics do you incorporate? Credit quality ratings of the same issuer, for example?

Unless it's a convertible, to me a preferred stock is just a bond without a maturity, so yeah, there's no YTM or YTC and therefore no YTW. Also no duration. So what else do you track? Volume trading? Many preferreds don't trade much, so liquidity may be limited, and that's one argument in favor of preferred funds or ETFs.

Bill
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Bill,

Most pfds do have a stated maturity. What matters, though, is their stated call date, which becomes the basis for figuring YTW. Once the call date is past, it keeps getting updated, and the pfd is priced by traders to reflect that risk. Also, the call date is typically when F2F pfds reset their div.

As for metrics, sure, credit-worthiness matters. But many pfd aren't rated. So you've gotta do your own credit analysis, just the same as you have to do credit analysis for every stock or bond you buy. The research process is no different. "Is this issuer likely to default?" True, stocks don't default. They just get sold down when traders get tired of the scam the company is running. But the impact on a portfolio is the same. You traded an elephant for a rabbit.

Volumes can be thin. But 'volume' never matters as much as who is making a market in the stock/bond/ETF/whatever. It's 'spread' that matters. Some are tight. Some are miles apart. "It all depends...."

As for the 'funds vs the underlying argument', that depends --as always-- on one's means, needs, goals, etc. I'm willing to run hundreds of positions and create what amounts to my own fund. That's most most investors, but I
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No. of Recommendations: 2
Opps. By accident, I hit the 'SEND' key before I was finished.

Bill,

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.

Arindam
Print the post Back To Top