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Guess what one of the world's most famous living investors is buying (Hint: it's not stocks)



March 05, 2009 – Comments (7)

With the stock market down over 50%, one would think that one of the world's most famous value investors would be like as Warren Buffett once eloquently put it "Like an oversexed guy in a whorehouse."


The founder and co-chief investment officer of the famed Third Avenue Funds, Marty Whitman, is buying bonds and lots of them.  He's buying so much that he had to request special permission from his company's Board of Directors to raise his funds' cap on debt from 10% to 35% of their total assets.

Here's the explanation that Whitman recently gave Forbes as to why he's buying debt right now:

"With stocks you have to worry about the market.  With debt I just have to understand the contract.  If my analysis is right, I'll make money."

In the interview Whitman went on to talk about why investing in stocks is so dangerous right now and why doing so has crushed even some of the smartest investors out there, like Legg Mason's famed Bill Miller, who has been destroyed by purchasing stock in things like Citigroup, Bear Stearns, and Lehman Brothers on the way down:

"Bill is a smart guy. But in this environment it is not enough that a stock is cheap.  Creditworthiness is important."

Whitman's plan is to purchase high-yield debt aka junk bonds or near junk bonds cheaply in the hopes that he can collect double-digit yields while holding them to maturity.  I have been doing the exact same thing in my personal account.  Though I am not quite as brave as Whitman is in terms of buying messed up companies, mainly because the sheer size of his investments gives him more leverage than I have if a company actually filed for bankruptcy, I have been snapping up all sorts of corporate bonds with 8%, 9%, 10%+ yields over the past several months.

Don't get me wrong, there will come a time that I will consider purchasing solid dividend-paying common stock again.  That time is just not right now.

Definitely make sure to check out the Forbes interview with Whitman on this subject.  It's a great read:

Third Avenue's Distressed Debt Play


7 Comments – Post Your Own

#1) On March 05, 2009 at 7:46 AM, abitare (30.20) wrote:

There is a junk bond ETF, I have to find the ticker.

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#2) On March 05, 2009 at 7:55 AM, XMFRosetint (43.07) wrote:


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#3) On March 05, 2009 at 9:51 AM, kirkydu (89.81) wrote:

You do not want to use ETFs for bonds (PERIOD).  Use an active manager with a great track record if you can't analyze individual bonds or don't have a portfolio big enough to buy a dozen yourself.  There are plenty of articles on why not to use most bond ETFs, read them.

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#4) On March 05, 2009 at 10:41 AM, TMFDeej (97.73) wrote:

I don't use Bond ETFs either.  Instead I purchase actual bonds for individual companies in $1,000 increments on the open market.  I would rather know what I am buying than buy into some fund.


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#5) On March 05, 2009 at 11:16 AM, Schmacko (91.13) wrote:

How do you find the bonds you are purchasing?

Do you just got to your online brokerage and enter yield ranges and search?  Do you try and think of a company or sector and search via that?  Do you include/exclude callable or strip bonds in your searchs?

I'm not very savy on how bonds are actively traded and I'm sure there's a few others here who aren't as well.

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#6) On March 05, 2009 at 1:10 PM, TMFDeej (97.73) wrote:

Hey Schmacko.  Thanks for reading.  I suppose that one could go about searching for bonds a variety of different ways.  I run a query in my broker's trading tool that enables me to search all of the available corporate issues by yield-to-maturity.

I then scroll down the list and see what companies interest me.  I tend to ignore the most messed up companies and any banks that aren't the cream of the crop like JPM or GS.  Ideally, I like to find companies that have lots of tangible assets that can be sold in the unfortunate event of bankruptcy.  I prefer to buy bonds that will mature in ten years or less with the intention of holding them to maturity. 

I would lock into a longer bond in the right situation, but it would have to be a company that I can envision sticking around for the long haul.  For example, I wouldn't be opposed to buying a short-term bond of a tobacco company, but I wouldn't lock into one for 30 years because who knows what will happen with tobacco by then.  The same goes for the refiner Valero.  It's a great company and it has a decent yield, but who knows what cars will be like 30 years from now.  A massive adoption of electric vehicles would crush VLO.

Once I have found a situation that interests me I then drill down more into the numbers.


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#7) On March 10, 2009 at 2:27 PM, OctoStalin (33.90) wrote:

This is kinda what buffetts doing too. I'm buying a lot of JNK (junk bond etf)  now that is proably the closest I can get to what they are doing at the moment with little risk.

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