djshagggyd (82.37)

18 Comments – Post Your Own

#1) On April 01, 2010 at 5:50 PM, chk999 (99.99) wrote:

Keep the bonds short term. Interest rates are going to rise and when that happens bond prices go down. Short term (a year or so) bonds get hit a lot less than 30 year bonds. Only buy long bonds when interest rates are really high and are going to go down.

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#2) On April 01, 2010 at 6:03 PM, SockMarket (97.50) wrote:

a couple thoughts:

1) I would agree with CHK. be careful when you buy bonds. I

2) Graham wrote this at a time when most people were deathly afraid of the stock market. Suggesting 1/4 of your money in bonds was partly to reassure people. Personally I will never hold any bonds as I see no reason why I cannot accomplish the same sort of safety with stocks.

 

That said if you want to buy bonds that are entirely safe go with treasury direct. Otherwise look for good quality corporate bonds. Nuveen has some tax free funds that may interest you as well.

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#3) On April 01, 2010 at 6:15 PM, TMFBabo (100.00) wrote:

Because interest payments are fixed on bonds, rising interest rates will lower bond prices so that those fixed interest payments will be more in line with interest rates.  Buying when rates are zero means that your bond prices will go down as interest rates will go up. This is okay if you hold the bonds till maturity, but the 5 year treasury yielded 2.59% as of today's close, which I don't believe is adequate yield for tying your money up for 5 years.

danielthebear makes a great point that Graham did write the first edition of The Intelligent Investor after the depression and the greatest crash in history.  However, I can't agree about never holding bonds.  In times of high interest rates, bonds are quite attractive because you can buy bonds at such high yields (ie low prices) that you'll receive very nice interest payments AND also receive capital appreciation when you receive par value when the maturity date comes along, since you purchased below par.

Distressed debt and select preferred stocks were also selling for 20 cents on the dollar and less at times in the most recent crash.  You could possibly have made more money in bonds than in stocks in March 2009 based on some of the lows I saw.  

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#4) On April 01, 2010 at 6:37 PM, TMFBabo (100.00) wrote:

This is one of those times I would feel more comfortable if you furthered your investing education.  I've published a laundry list of books, many of which I've read twice.  If you don't know how bonds work (par value, coupon rates, maturity, yields and prices moving in opposite direction, the effects of interest rates on bond yield and price, etc), then I would actually recommend reading up on bonds.

I don't believe you should tie up your money for 1-5 years without understanding what you're buying first.

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#5) On April 01, 2010 at 7:49 PM, SockMarket (97.50) wrote:

bbabo,

I use utilities. Their yields are range bound, to some extent (usually 4-7%, with the norm being about 5%) and I have never invested in a period of massive inflation. If we get the early 80's again I suppose bonds would be rather attractive. I don't think I would ALWAYS want some money in bonds. 

Also, investing in low priced bonds at most times, the latest crash exempted, is a risky business because you may not get anything back (there is usually a reason why they are low). Although I don't trade bonds it strikes me that you would need to know what to look for and be very good to do well with junk bonds. 

I use utilities instead of bonds because I know them better (thus lowering my risk) and if done right it can usually provide a better return than bonds with equal risk can. 

I would recommend becoming familiar with a safe, high yielding industry instead of investing in bonds. But that's just me. 

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#6) On April 01, 2010 at 9:08 PM, TMFBabo (100.00) wrote:

I agree that distressed debt can be very tricky.  Distressed debt is only to be bought with some major diversification.  I also would avoid them until you can get those fire-sale prices.  I was looking at REIT and banking debt and preferreds when they were ridiculously cheap. 

I agree that bonds should not ALWAYS be held.  This is a particularly bad time.  I'll be buying in during times of higher rates and market crashes.

I think your utility approach works just fine, as long as you're diversified.  People always need water, gas, and electricity. I'd probably add a mix of big oil, telecom, tobacco, a decent REIT or two, and what have you to diversify income holdings further.  

 

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#7) On April 01, 2010 at 10:02 PM, djshagggyd (82.37) wrote:

chk999, bullishbabo, and danielthebear,

Thank you for your responses!

I am not looking to rush into anything, and will most definitely do some further reading and research before making a choice for my next investment. None-the-less, I appreciate all of your thoughts very much.

I had never considered bonds until I read Graham's ideas. But the way he explained it, it seemed reasonable and made sense. There are so many fools I respect out there who adhere to Graham's ideas... I figured I should probably start investigating what the bond "scene" was all about. 

I'm by no means "sold" on the idea of getting a bond. Especially in light of what you guys said about inflation and interest.

One of you was also saying  that Graham's suggestion regarding bonds was more of a historical strategy which might not fit exactly into modern times...

I could see that being true. I'll definitely have to do some more reading before I form any concrete opinions. 

One other thing... 

What are your thoughts on bonds vs. ETF bond funds?

Thanks again everybody... and happy April fool's Fools.

~djshagggyd

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#8) On April 01, 2010 at 10:25 PM, TMFBabo (100.00) wrote:

I think bond funds are the way to go, anywhere from AGG/BND (total bond) to LQD (corporate bond) to the closed ended funds.  Why? Because bonds are expensive and it's hard to diversify without having a ton of money like funds do.

The most important lessons I got from Graham were understanding that you want to pay less than something's worth, doing so with a margin of safety, and understanding market gyrations and reacting rationally.  I am sorry to say I don't follow the 75/25 to 50/50 to 25/75 equities/bonds splits that Graham advocates, but only because I'm 26 and I plan to hold equities for most of my life.

I will actually consider CDs and bonds in times of high inflation, since you can buy fixed income at enormous discounts when inflation is high.

Before I read Graham, I was not aware of the importance of value investing.  Chapters 8 and 20 are the best for sure, but I recommend reading the entire thing.  I thought the book was incredibly dry (and sometimes put me to sleep), but it remains my favorite investing book of all time.

Not only should you read Graham, but in the words of Buffett: "you should read everything in sight."  That's what I did, and I believe I'm doing extremely well for having invested in my own stocks for only 18 months.

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#9) On April 01, 2010 at 10:28 PM, djshagggyd (82.37) wrote:

And hey, in case anybody's still paying attention to this post...

What do you guys think about about this new LTTM thing that fool is promoting? I read up on it through-out the day... and it seems legit... but I don't like Tom and David's letter very much, because it makes it sound too good to be true. 

I sent them an email today asking more questions, it'll be interesting to find out more...

Just curious of any of you had any thoughts...

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#10) On April 01, 2010 at 10:50 PM, djshagggyd (82.37) wrote:

Bullishbabo-

Wow thanks... very interesting... I never would have guessed you are so young. I am 28 and have been investing for 20 months. I've managed a 28% return overall... but I can't really attribute any of that to skill... just a combination of beginners luck and watching you fools very closely. This year I decided it was high time to replace my luck with some skill... and some knowledge of my own. Which is why I started interacting on here finally... and also why I'm truckin' through I.I.

I had no background in finances (never even had a bank account till a few years ago). I also didn't go to college and don't personally know any investors in "real" life.

The reason I got into this is because I'm good at strategy games and I like statistics. And also because I'm a musician, and there isn't going to be any retirement fund waiting for me when I'm 60... not unless I create it for myself.

Anyhow... thank you very much for chiming in. I'm very glad to hear your thoughts on bond funds. Looking forward to following your blogs and commentary in the future!

And congrats on your great success so early in your career! Keep up the good work!

~djshagggyd

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#11) On April 01, 2010 at 11:22 PM, djshagggyd (82.37) wrote:

haha... guess I didn't read about LTTM close enough.

turning red...now.

that's what I get for multi-tasking!

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#12) On April 01, 2010 at 11:27 PM, TMFBabo (100.00) wrote:

I don't know how I get randomly drawn to certain blogs and ignore many others (there's just not enough time), but I'm glad to offer comments when I can.  This is what makes CAPS useful to all of us - fools helping each other out.  

I agree that we young ones need to lay the framework for our future retirement right now if we ever want to retire.  Graham's incredibly dry and a difficult read, but it will (hopefully) make you look at investing in a whole new light.

I didn't see the LTTM advertisements, unfortunately.  I wish I'd seen them.

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#13) On April 02, 2010 at 2:12 AM, djshagggyd (82.37) wrote:

Haha yeah, well at least you got to see the results of the LTTM ads via this post.

I felt like a true fool once I found out... especially with you top-10 types reading.

But I definitely got a good laugh out of my own foolishness... hopefully a few other people did too.

They even had a phone number listed... I wish I would have called it, but I was at work... ha.

 

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#14) On April 02, 2010 at 3:39 AM, djshagggyd (82.37) wrote:

I found some good articles that were written just last week covering the Bonds Vs. Bond Funds topic...

And they pretty much answered all of my remaining questions about the issue. So if anybody stumbles onto this post and wants to know more about Bonds vs. Bond Funds... check out these two articles:

TMF Bonds vs. Bond Funds

Dividends4Life's Blog

~djshagggyd

 

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#15) On April 02, 2010 at 4:14 PM, sentinelbrit (91.83) wrote:

If you're buying a bond fund look at the expenses - they can eat up the yield very quickly especially given how low yields are now. The other point to note is that the yield on bond funds can vary a lot over time and funds are constantly buying and selling securities so the yield will vary. Buying individual bonds gives you more control over the yield you can expect and capital gains.  I don't invest in bond funds except high yield or high yield floating rate note funds because yields are more attractive and capital appreciation is still possible.

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#16) On April 02, 2010 at 6:28 PM, arisktaker (83.64) wrote:

As bullishbabo suggests, per Warren Buffet, read everything! Learn as much as you can about everything.  Don't limit yourself or allow others to place limits on you.  Everything can be taken from you except knowledge, but with knowledge you can survive and prosper.

The others have it right - been there and have watched this happen many times.  When yields are dropping or low don't own bonds,  When yields are high (10% of more) buy bonds.  For as long as I can remember (that a long time) rates have moved up and down. You will makes lots of money, plus interest with little risk buying high rated bonds yielding over 10%.  When the yield falls back to 5% to 6%, sell.  

Buy bonds of a strong company that, when issued, were paying a 6% or less yield.  As yields go up the price of these bonds will go down so that the actual yield matches the higher yields the market demands.  Example; a $1000 bond paying 5% interest pays $50 a year.  When rates go to 10% that bond will sell for $500 because it is only paying $50 per year.  The company doesn't care because it is paying out the same $50, it is an earlier investor who looses if he has to sell the bond.   Lets say you buy that bond for $500.  Your are going to get a 10% return for the life of the bond and then you are going to get $1000 (double your money) from the issuing company for the bond. 

Bonds carry a call provision that allows the issuing company to buy them back (call them) after a certain time and paying a small premium. It isn't very likely that a company will buy back a bond that was issued with a 5% yield; it is very likely that the company will buy back bond issued with a 10% or greater yield, as soon a rates drop. Look out for this snag,

There is another factor to be considered – the length of time before maturity of the bond.  A $1000 bond is going to be repaid at $1000 by the issuing company at maturity.  The closer a bond is to maturity, the closer it’s price will be to $1000 regardless of the market yield rate.   Conversely, the price of bonds that will mature 10 or more years in the future will track in price very closely the market yield rate.

Something you might want to read:   http://www.marketwatch.com/story/ten-things-we-can-learn-from-michael-lewis-2010-03-23. This is a summary of the book.  I haven't read the book yet but based on the comments, I plan to.

When I was in my twenties I didn't think I wanted kids.  I have three and they are all in their twenties now.  Keep your plans flexible and go with the flow. Life is an adventure, live it to its fullest.

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#17) On April 05, 2010 at 1:23 PM, djshagggyd (82.37) wrote:

Risk Taker-

That was an extremely helpful comment, thank you! I will definitely be coming back to reference this blog once bond yields are looking more attractive.

In the meantime, I was able to come up with a new plan that I feel really good about. It incorporates a lot of Graham's ideas, and also a lot of the new ideas I gained from you and others here at TMF.

I'll probably be posting a blog about it within the next few days...

Thanks again for all your help! Have a good week friend,

~djshagggyd

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#18) On April 05, 2010 at 3:06 PM, djshagggyd (82.37) wrote:

And thank you too Sentinelbrit! Your thoughts on bond funds were very helpful!

~djshagggyd

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