To be, or not to be: that is the question:Whether 'tis nobler in the mind to sufferThe slings and arrows of outrageous fortune,Or to take arms against a sea of troubles,And by opposing, end them? Hamlet’s same question could be asked of the asset-allocation choices we all make. Is it better to buy the common, or the debt, in each case suffering risk, but in one less so? “Less risk” is the reason generally offered for buying bonds, But, also, with that lesser risk comes less reward. At least, that is the conventional wisdom, and once upon a time, in the earlier and better days of the Motley Fool, the goal was to challenge the conventional wisdoms and, by doing so, to earn the better profit. In the Fall of ’07, I bought E*Trade’s 8’s of ’11 at 80.219, for a CY of 10% and YTM of 15.4%. In the Spring of ’09, I picked up some of their 7.875’s of ’15 at 48.000, for a CY 16.4% and a YTM of 23.9%. Obviously, I’ve done well by those trades. So this question has to be asked: “Would I have done better buying the common instead?” Obviously, the future can’t be known, and a lot could happen between now and the maturity-date for those bonds. But some guessing can be done. On 11/27/07, ETFC closed at $4.91. (My first entry date into their bonds),On 04/21/09, ETFC closed at $2.43. (My second entry)On 03/25/11, ETFC closed at $15.80. For the sake of making easier comparisons, let’s assume that equal money was spent to buy the debt and the common on the same days, that commissions were a buck a bond and a penny a share, and that everything was sold at Friday’s close. The stock gains are simple to figure. The CAGR over the holding-period was a respectable 42.2%. By contrast, the best possible CAGR for the bond (coupons not re-invested) would be around 15%, or a nearly 3x under-performance. Run the same exercise with the next bond-purchase. Now the stock CAGR jumps to 163.8%, but the bond CAGR languishes at a mere 56.0% (coupons not re-invested), or, once again, roughly the same 3x under-performance. Over the years, I’ve run this same pair-wise comparison of stocks versus bonds across dozens of companies. Always, the answer is roughly the same. The stock of a company will offer a return that is roughly 3x as much as its bonds, albeit with greatly volatility and uncertainty. If you want to eat well, buy the common. If you want to sleep well, buy the debt. But which ever you choose, your market-timing had better be good, or you'll end up making money from neither. There is a tide in the affairs of men, Which, taken at the flood, leads on to fortune; Omitted, all the voyage of their life Is bound in shallows and in miseries. On such a full sea are we now afloat; And we must take the current when it serves, Or lose our ventures.
You do realize that E Trade did a reverse split of 1:10 in mid 2010 right? The effective closing price of the common stock is actually $1.58 on 3/25/11. The bonds blew away the stock over this period.This is one of my biggest regrets. I bought an absolute ton of Etrade notes at 30 something cents on the dollar and sold way too early.
Thanks for catching my mistake.
<Over the years, I’ve run this same pair-wise comparison of stocks versus bonds across dozens of companies. Always, the answer is roughly the same. The stock of a company will offer a return that is roughly 3x as much as its bonds, albeit with greatly volatility and uncertainty. If you want to eat well, buy the common. If you want to sleep well, buy the debt.>Charlie, this is interesting, and I rec'd your post.The examples you use in your post occurred during a time of extraordinary crisis, when many smaller companies' common stocks and bonds were priced for a high probability of bankruptcy.I would like to see the same analysis run for stable, dividend-yielding companies (e.g. the Mr. Goodbuy companies from the BMW board) and their stocks over long periods of time, preferably including several business cycles (this is the practice at both the BMW Board and the Mechanical Investing board).You said, "I’ve run this same pair-wise comparison of stocks versus bonds across dozens of companies."What kinds of companies? Were most of them the high-yield companies that you favor? Did you include any of the low-beta dividend yielders I favor, whose stock prices are less volatile and whose growth tends to be slow but steady?What does your data show about the latter? I understand if you don't have data, since those companies are not your cup of tea.It's easy to find historical stock data on large companies. Where does one find historical bond data?Wendy
WendyBG,You wrote, It's easy to find historical stock data on large companies. Where does one find historical bond data?Try the FINRA bond screener at: http://cxa.marketwatch.com/finra/BondCenter/AdvancedScreener...Once you find the bond you're interested in, scroll to the bottom. There is an option there where you can enter a date range. That lets you look at the market history of the issue. Unfortunately I don't know how far back FINRA has this data.- Joel
From a book by Gerald and Marvin Appel named "Beating the Market 3 Months at a Time"(2008), table on page 6 ....and they get this from Ibbotson Associates, Inc.... From 1956 to 2005, S&P500 average yield 10.3% Intermediate Government Bonds, 6.8% Biggest one year loss for S&P, its says 24.9%. Biggest one year loss for the inter. govnmnt bonds, it says 5.1%, which I find hard to believe...but that's what it says. More importantly, in one of my 8 bracketsm, I did pick VCU to reach the final four and for NC to win it all. I watched VCU play in the "pre-tournament First Four", and I was impressed with their hussle and spirit. The contest is sponsored by Fox Sports and Hooters. You win a million dollars if you pick the perfect bracket, but those odds are a few quintillion to one. I looked at the other prizes, and was dismayed to see its either months or years supplies of chicken wings. Crud.
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