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No. of Recommendations: 4

It’s hard, expensive, or impossible for retail investors to get historical data for bond prices. But, as Joel mentions, one source is FINRA. Another is Investing in Bonds. A third would be the annual S&P Stock and Bond Guides. A fourth is a subscription/membership at a bond boutique. A fifth would be institutional data bases such as are available at MIT. The data is there. Getting easy, cheap access to it is the problem.

It’s not so much that I favor junk bonds, as I view-bond investing as a subset of Ben Graham-style value investing where buying at steep discount to intrinsic value creates the needed margin of safety. As I’ve said before, buying a triple-AAA at an over-priced price is a risky thing to do, just as buying triple-CCC’s at mere pennies on the dollar can be a relatively safe thing to do. It all depends.

In doing my comparison of E*Trade’s common versus its debt, I screwed up majorly in my calculations for failing to notice the 1:10 reverse split. (I’m not a stock guy. So I wasn’t paying attention.) But I have done this same sort of comparison with other bonds I’ve bought. After they matured and the dust had settled, I pulled my trade slips and went back into the data asking whether I would have done better buying the common instead of --or in addition to-- the debt. What I generally found is that the common offered about a 3x advantage over the debt, albeit, as I said, with far greater volatility and uncertainty.

Conventionally, that reward difference is explained as the risk premium that accrues to stocks. Dozens of academic studies have tried to measure exactly what that premium is. They fall into several categories. One assumes that stocks and bonds are different things. They typically find some number between 1.5% and 3.5%. Another group argues that risk is risk, wherever it is found, and –predictably— they find that there is no premium that accrues to stocks qua stocks. A third group, such as me, argues that bonds are puts and that that structural feature isn’t cheap, but that it's worth paying for.

Currently, Jeff is exploring the idea of treating stocks as bonds, and he’s loading up on mature, div-paying companies that might do well in the next downturn. He knows their prices will be flat to down, offering no cap-gains, but they’ll still kick out a bond-like yield. (Plus, there are other ways of using stocks to create synthetic bonds.) I’ve long argued in the opposite direction. “Treat bonds as stocks and look for those offering the best chances for capital gains. The coupon is merely icing.” Also, I’ve explored –but haven’t done much with— going long the debt and short the common.

Best wishes to you on the project,

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