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I heard that the bond market is way bigger than the stock market. Why are small investors so fascinated with stocks compared to bonds? Is there a way to look through all the different bonds? Thanks a lot.

 

Bonds are not where you want to be right now. Especially long term bonds.

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If you want to play in bonds... be VERY sure that you fully understand bond quotes, compound interest, duration, convexity, convertibles, credit ratings, debt to equity conversion, illiquidity, yield curve & arbitrage strategies. Most bond issues are very thinly traded, & are held by sophisticated investors to offset other liabilities (ALM matches).

 

Most folks would do far better exploiting the failures of issuers (too much, & distressed debt, that depressed their stock price) rather than buying the bonds themselves. Next step up is low priced convertibles (debs or prefs) that are acting like long term options; you have to be comfortable that the coy will not go bankrupt and you expect to either lose your bond investment or get a whack of equity at a very low price. There's a reason for the 20%+ cash yield; any cash interest or resale proceed actually received is bonus.

 

It is possible to profit by buying what institutional portfolios can no longer hold (decline in quality pushed an existing holding out of the 'permitted' universe) - effectively retail/institutional arbitrage, but you better know what you're doing. The classic example is an I-Bank partner buying the 'C' tranche of a securitization with the commission from the sale. Do you feel lucky?

 

SD 

   

 

 

 

 

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You ask about small investors:  If you have a broker, call and ask about a bond issue of interest to you.  What you'll likely find is that you can't afford to participate.  If you can, it's almost certainly on very unfavorable terms given the nature fixed income trades and the small investor's lack of good pricing data.

 

Best of luck to you. 

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I hate how the bond market is setup, there is such a lack of transparency. It's hard to get quotes, the comission fees are hidden, everything seems just not accessible in that market.

 

Personnally I'm not even looking for bonds, if I had to buy fixed income I would buy insurers. Right now, you can get profitable insurers with a 100% fixed income portfolio for 75% BV. You get free leverage+free float, it can't get much better then that.

 

BeerBaron

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Wait untill sovereign yields are in the 10%+ range & you want a long dated PO strip.

At age 35, your 30 yr PO strip would mature at 100 when you are 65. And be available to you today .... for 5.73 + fees & accumulated interest. No reinvestment risk (as its a zero coupon), guaranteed to reach 100, backed by none better than the central bank of the land, & if held in a TFSA .. entirely taxfree.

 

You buy & sell equities. You buy high quality bonds only when yields are very high, & you hold them to maturity.

 

SD 

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Agreed, If you had got hold of US government bonds in the early 80s yielding well north of 10% for 20 or 30 years... Thats a no brainer.  Right now bonds wont give you much, especially if rates rise. 

 

I'm curious whether it seemed like a no-brainer at the time, or if people were worried that long term inflation might push rates much higher for extended periods. After buying long bonds at 10 or 15% it must have been disheartening to see rates rise even further and wonder where it would stop.

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I was a baby in the 80s but from what i have heard is people simply thought the yield would go up. No one was thinking reversion to the mean. I plan to start laddering them at 10% and as said above will hold till maturity.

 

The only bonds I have been interested in was International Coal Group convertibles which were paying like 9% and were selling for 80 cents on the dollar. They rallied before I could buy and last I checked were above par. I was still learning about bonds and found the bond market to be very opaque.

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Agreed, If you had got hold of US government bonds in the early 80s yielding well north of 10% for 20 or 30 years... Thats a no brainer.  Right now bonds wont give you much, especially if rates rise. 

 

I'm curious whether it seemed like a no-brainer at the time, or if people were worried that long term inflation might push rates much higher for extended periods. After buying long bonds at 10 or 15% it must have been disheartening to see rates rise even further and wonder where it would stop.

 

I was a teenager at the start of the 80s so I cant answer but I expect it was the same as always.  Skilled value investors recognized it as a deviation from the mean and everyone else missed out.  Exactly the same as the stock market lows of last year.  Most missed it. 

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Agreed, If you had got hold of US government bonds in the early 80s yielding well north of 10% for 20 or 30 years... Thats a no brainer.  Right now bonds wont give you much, especially if rates rise. 

 

I'm curious whether it seemed like a no-brainer at the time, or if people were worried that long term inflation might push rates much higher for extended periods. After buying long bonds at 10 or 15% it must have been disheartening to see rates rise even further and wonder where it would stop.

 

I was a teenager at the start of the 80s so I cant answer but I expect it was the same as always.  Skilled value investors recognized it as a deviation from the mean and everyone else missed out.  Exactly the same as the stock market lows of last year.  Most missed it. 

 

To me it seems it may not be a question of skill. Hindsight is 20/20. Last year in February and March there was a lot of talk of a great depression type scenario. We might have entered such a scenario if the government had taken other actions that were less effective or took action that restricted trade. If we entered a great depression then the bargains of Fall 2008 and March 2009 might not have turned out to be bargains at all (i.e. no gains on these positions for the next 10-15 years).

 

I doubled down near the lows last year and did well. But in light of all the economic uncertainty at the time I think it is realistic to view that action as a speculation---a gamble that the US government would get the situation in hand and restore confidence in the banking system.

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During the early/mid 1990's the Cdn government 'hit the wall' & couldn't borrow from anybody, anywhere. Yields on Canadas went into the 10%+ range, with the major provinces higher still. Everyday 5 yr closed mortgages went up to 19%+

 

Spending was thought to be out control, inflation was biting, the $C was in freefall, & Canada had a lot of foreign currency denominated debt that was getting far more expensive to service. As the debts became due, foreign creditors chose to roll-over maybe only 75%, & the rest had to come from the domestic market. As the fed sucked out the market, yields rose. It took a long time to cure.

 

The US & the UK are now geting close to 'the wall' (downgrades) & most sovereigns have started moving BOP reserves out of USD & Sterling. Stimulus spending is proving hard to reign in, both currencies are dropping, but so far there's been little inflation in either country. We might not quite see 10% on a US treasury, but it would seem to be only a matter of time for a UK gilt.

 

SD

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Agreed, If you had got hold of US government bonds in the early 80s yielding well north of 10% for 20 or 30 years... Thats a no brainer.  Right now bonds wont give you much, especially if rates rise. 

 

I'm curious whether it seemed like a no-brainer at the time, or if people were worried that long term inflation might push rates much higher for extended periods. After buying long bonds at 10 or 15% it must have been disheartening to see rates rise even further and wonder where it would stop.

 

I was a teenager at the start of the 80s so I cant answer but I expect it was the same as always.  Skilled value investors recognized it as a deviation from the mean and everyone else missed out.  Exactly the same as the stock market lows of last year.  Most missed it. 

 

To me it seems it may not be a question of skill. Hindsight is 20/20. Last year in February and March there was a lot of talk of a great depression type scenario. We might have entered such a scenario if the government had taken other actions that were less effective or took action that restricted trade. If we entered a great depression then the bargains of Fall 2008 and March 2009 might not have turned out to be bargains at all (i.e. no gains on these positions for the next 10-15 years).

 

I doubled down near the lows last year and did well. But in light of all the economic uncertainty at the time I think it is realistic to view that action as a speculation---a gamble that the US government would get the situation in hand and restore confidence in the banking system.

 

This gets too much into semantics in luck versus skill.  Put another way:  If you had no value investing background could you have bought at all last March?  I say its a skill, and somewhat of a personality trait.  At a certain point one had to work on the assumption that the cavalry was coming over the hill.  I went all in, in Fall 2008, and even deeper in March 2009 (selling losing positions for the tax loss and buying other positions I had always wanted - I still have $7.50 GE 2011 leaps from March 09).  At a certain point last March, if things got any worse we were all going to be wiped out anyway so what did it matter at that point.  There was no defense for what happened, only offense going forward.  Kind of like pulling your goalie to get an extra man on the ice. 

 

In regards to bonds I would have no trouble pulling the trigger on something that yields north of 10% for the long term.  Again, where else in such an environment would returns be better and all but guaranteed?

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Just as an add on.

 

When yields are sky high, high quality stocks are beyond dirt cheap. But the optimal allocation is still only around 40% bonds - although it immunizes you, you still need to estimate the average inflation rate over your holding period, & adjust the FV upwards. A crap shoot.

 

Tweedy Brown cites the example of a widow staying in BRK vs going to bonds; the widow does materially better with BRK because it was cheap; the same argument applies to the high quality stocks.

 

TODAY, would you buy a greek sovereign zero coupon bond? Probably not if I'm resident in NA as I expect the currency to depreciate. But if I lived in Greece ? maybe. And if I had only a few more years to live? almost definately. Risk tolerance changes with residency & age.

 

SD 

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Most people get anchored by what has happened in the previous one/three/five/ten year trend. They then extrapolate. Buying treasuries yielding 14% was, at the time, a contrarian position. I remember in University in the early 90's being taught that the US model was broken and in decline and that the Japanese model was the new paradigm.

 

While I love to think about the macro environment and am certainly influenced by it (perhaps too much) I try to keep Buffett/Lynch in my brain... buy well run companies trading at a deep discount to their intrinsic value and hold for the long term. Right now I still think insurnace/re-insurance offers the best value (as a sector) compared to anything else I am comfortable with... 

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thats what i was wondering too. Why are insurance, energy (think big oil), pharma and the casino stocks have not bounced back but the banking industry has gone through the roof?

 

The bank shares are rallying because of a perception that loan losses have peaked.  Loan losses do not factor into the values of those other sectors you named.

 

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Viking thats a bout the only thing I find consistently cheap. Every insurer is cheap, but you can buy world class insurers under book value.

 

I find mind-boggling differences in valuation of insurers. Some local - local to me that is - insurers trade at 2-2½ times book  ??? 

 

Cheers

 

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