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Today quickly proved to be a waste of time for shopping. I ran some scan, just as I do every day the market is open. But I just couldn’t find an edge, and the best thing to do when you realize that is happening is to back away. You’ve got money in your pockets, just waiting to be spent. But if you’re having to force the trade, the trade isn’t worth doing. Instead, the far better thing is to step back and do some review. There’s an interesting post on TMF’s home page that is horribly mis-titled, “Should You Sell Everything? Here's How to Know”. The real value of Beyer’s post comes in the final paragraphs.

As I think back, I’d say 2003 was my best year of investing. No, it's not the year I put up my best numerical performance …Rather, it's the year I started thinking -- I mean really thinking -- about how I might sustainably beat the market.

Taking the time to figure out a process was important. I learned how to score myself and along the way developed basic buying and selling rules I still abide by. Sure, I've tuned my process over the past decade, but not so much that the investor I was then would find me unrecognizable today.

Which brings us back to the question posed in the headline. Should you sell everything? If you've yet to develop a philosophy and process that works for you intellectually and financially, then I say yes. Sell it all. Refocus on who you are, what you know, and what you want to achieve as an investor. Study the masters. Pick a style that fits your personality, even if that style is simple indexing.

I’d agree that doing the financial equivalent of burning down one’s house could provide the impetus to begin anew, unencumbered by past mistakes now sitting in one’s portfolio, and now, while prices are at historic highs, wouldn’t be a disadvantageous time to do some pruning. But don’t throw out the proverbial baby with the bath just yet, not at least until you’ve done the review and refocusing that the posts urges.

For all practical purposes, the only differences between ‘investing’ and ‘gambling’ are the spellings of the two words. In both cases, you’re making bets about unknowable future events. This isn’t to say there aren’t better and worse ways to be making those bets, so that whatever securities casino you’ve chosen to gamble in (i.e., the stock market, the bond market, the currency or commodity markets, etc.), you’ve chosen a game with a positive-expectancy and you’re making your bets in disciplined manner. If you’ve chosen to gamble in the bond market, you’ll be betting on one or the other of two things: the level/direction of interest-rates, or the level/direction of credit-worthiness.

OK, keep that thought in mind and consider Beyer’s injunction to “study the masters.” Daniel Fuss of Loomis Sayles is a master bond-investor, and the funds he runs always rank near the top of his category, ‘multi-sector bonds’. So let’s dig into his allocations to see what rules of thumb could be derived from how he structures a bond portfolio. According to Morningstar, this is the credit breakdown of LSFIX.

AAA 24.6
AA 5.9
A 11.2
BBB 19.8
BB 13.5
B 15.8
Below B 5.8
NR 4.1

Raw numbers are never very helpful. So let’s provide some context and interpretation.
Prime AAA 24.6 1/4 of portfolio = purely an interest-rate bet

Defensive AA 5.9 3/16 of portfolio = mainly an interest-rate bet and partially a credit-worthiness bet
Defensive A 11.2

Enterprising BBB 19.8 3/8 of portfolio = mainly an credit-worthiness bet and partially an interest-rate bet
Enterprising BB 13.5

Speculative B 15.8 1/4 of portfolio = purely a credit-worthiness bet
Speculative Below B 5.8
Speculative NR 4.1

Yeah, the allocations add up to more than 100%, but that’s minor junk. Instead, pay attention to the broader picture that emerges, namely, the nearly 40%-60% ratio of (Prime+Defensive) to (Enterprising+Speculative). In other words, Fuss isn’t using bonds to “play it safe”. He’s using bonds to make money. He's up 10.3% YTD and up 11.2% over the past 10 years, or twice what Buffet has achieved for his shareholders. Such ‘prime’ and ‘defensive’ issues as Fuss does include are there for a purpose, to offset the risks he is accepting elsewhere in the portfolio. In yet further words, he isn’t running a junk-bond fund, nor he is running the equivalent of a money-market fund. He’s buying, as he has said on many occasions, “across the yield-curve and across the credit-spectrum”. In short, he implements the advice that Ben Graham offered long ago to value-investors, “buy what should be bought, when it should be bought, in the sizes it should be bought.”

Right now, with bond prices being what they are, investors are going to have a hard time launching a totally new bond portfolio that isn't sure to lose them money after taxes and inflation. But if they have a clear map in mind of what they want their bond portfolio to eventually look like, and they allow themselves the long-term, 10 to 20-year time-frame that good value-investing really requires, they could begin filling in some of the pieces, even now.

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When Life Gives You Lemons
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