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Stocks vs high yield bonds

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June 07, 2013 – Comments (72)

Not much to say, but I would like some peoples opinions on stocks vs high yield bonds?

Both asset classes fall a lot during recessions/corrections.  High yield bonds offer more income which is good, but are generally riskier companies which is bad.  Stocks have inflation protection which is good, but more leveraged in the sense they reinvest earnings which is bad for recessionary times.

Just want some peoples opinions...those who prefer one over the other 

72 Comments – Post Your Own

#1) On June 07, 2013 at 2:49 PM, somrh (86.83) wrote:

I guess I'm more interested in the investment grade versus junk grade question. How much spread is required for junk to be worth the extra risk of default?

Here's recent spread data from Fred:

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#2) On June 07, 2013 at 4:10 PM, chk999 (99.97) wrote:

Bond prices get hammered pretty bad when interest rates rise. I think they are going to rise, so I'm not much interested in holding bonds right now. Dividend stocks held for income have one advantage in that strong companies raise the dividend regular, which provides some inflation protection.

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#3) On June 07, 2013 at 4:18 PM, L0RDZ (82.12) wrote:

Are you  comparing  high yield dividend  stocks ? 

Currently those  high  yielding  bonds  are  so  low  in rates  paid  you'd be  lucky  to  get buzzed  rates.

Some  stocks  actually  do better  during  contractions up  to  a  certain..

For  instance  during  the  2008 everything  was going  to hell in a  hand  basket..

Pepsi  actually  reached generation  highs  that  have  been  recently  surpassed...

I remember  looking at my portfolio and  Pep  was my only up stock until  the  bs  finally  toppled  that one  and  it  went  down  with just about  everything else.

Luckily  I  didn't sell pepsi and  when  it went  down  I  got  more  at  better  prices.

Shoot  I  got  plenty of  other  higher payers  (dividend stocks)at  low prices  that  give me an  outstanding  income stream if only  I  had  Buffet money I'd  negotiate myself  sweet heart deals.

You  don't  see berkshire  buying  low yielding bonds.

 

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#4) On June 07, 2013 at 4:50 PM, Valyooo (99.38) wrote:

idk why people keep saying junk yields are low.  pgp, phk, hyf, pty, ncv.....10%+.  what stock is doing that?

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#5) On June 07, 2013 at 5:03 PM, somrh (86.83) wrote:

@Valyooo

Some of those are leveraged funds so they aren't really comparable. PGP even appears to have significant exposure to stock futures. I'd also be curious if any of them have exposure to CDS. 

The other factor is that current yield is different from yield to maturity.  Most of the bonds in these portfolios are trading at a hefty premium to par value so current yield wouldn't be terribly informative.

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#6) On June 07, 2013 at 5:10 PM, L0RDZ (82.12) wrote:

You are now comparing  funds  ~  not true  bonds...  

now if  you wanna compare  closed end  funds  to  stocks...   these  funds  are  just if not  more  suspectible  of  tanking...

and  PHK  is    simply  returning  to  its  fund holders  their  own  capital  and  has  a  nav  like 8 a share... 

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#7) On June 07, 2013 at 7:14 PM, awallejr (83.74) wrote:

I know you asked me elsewhere about this topic, and since I don't really follow them I will defer to the others here.

Bonds do have a place in a diversified portfolio.  General rule is you start young at 80% stocks and 20% bonds and by the time you retire it goes 40% stocks and 60% bonds.

Personally I never got into them since I like to actually own things.  Bonds are basically a debt instrument that in theory has a higher preference than stocks.  I say in theory because GM kind of stuck it to the bondholders, and look at ATPG.  I swear management and Credit Suisse are trying to steal that company.

Since I don't see interest rates rising anytime soon I think bonds are semi safe at the moment.  It will also be interesting to see how things will play out when all the boomers retire.

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#8) On June 08, 2013 at 12:51 AM, grahamsway (< 20) wrote:

Pricing is key. If you buy junk anything at too high a price, bonds or stocks, you'll probably get taken pretty good.

At or near all time highs, you can probably be pretty sure you're paying too much for junk.

With good quality stocks, particularly with a decent dividend, even if you pay too much. Unless its outrageous, you'll usually be OK if you hold it during a downturn as the chances it will eventually recover is much more likely than anything of poor quality. 

 

 

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#9) On June 08, 2013 at 2:00 PM, ikkyu2 (99.16) wrote:

Right now I am looking for stocks that are fairly priced, decorrelated with the market as a whole, and have room for organic growth in their markets.  This aims me at smaller market caps.  It has been so favorable for companies to take on debt recently that I am relaxing my no-debt rule.

I wouldn't be a net buyer of bonds of any flavor right now.   A year ago Mark Notkin, the guy who runs Fidelity's Capital and Income B-C grade high yield bond fund, said to "expect coupon-like returns from here on out."  I think for the next year this may be optimistic as I expect bond prices to fall like a stone.

Good companies - companies that can do well in any economic environment - preserve capital because they preserve their ability to generate earnings.  Valuemoney was commenting in my blog about "earnings yield" which is of course just the inverse of the P/E ratio; the power to sustain an earnings yield, when you can buy a piece of it in an equity stock, is in my opinion the best investment for all seasons.

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#10) On June 08, 2013 at 3:13 PM, Mega (99.96) wrote:

I think there are relatively fewer people who have the ability to outperform by picking junk bonds, compared to stocks. It requires a more specialized approach.

Right now as a broad asset class I wouldn't touch them.The equity premium is too large and the junk premium too small.

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#11) On June 08, 2013 at 11:20 PM, valuemoney (99.99) wrote:

Listen to MegaShort and chk999  and ikkyu2. They pretty much hit the nail on the head.

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#12) On June 08, 2013 at 11:56 PM, valuemoney (99.99) wrote:

I will try to get a list of books on valuing a business. But for starters a must read simple book is "Warren Buffett and the Interpretation of Financial Statements". Pretty basic stuff but you have to go thru it and truly understand it.

I would also go thru YOUTUBE and listen to every Warren Buffett interview there is. It is funny because he is like a broken record. You will find he ALWAYS likes stocks and the key is to learn how to value a business. You only need 1 out of thousands to make money. Value it properly, buy it at a big enough discount and you can make a lot of money over time doing it repeatedly. You don't need a high IQ to do this either. The BIGGEST thing I would say is BE EMOTIONLESS! Use numbers and like your other blog says in the headline in a certain way "All the rest is just noise" that is the key....if you can FILTER OUT THE NOISE. Not to pick on awallejr  but in you last blog he states the market did nothing in the late 70's and early 80's. SO WHAT! That's noise! Look at what I said. Look at the YIELDS the market was giving you. Price matter but the MARKET MISPRICES a lot of times and it can do it for a while. That is the time you what to buy. Believe it or not and you have to think this when you buy a stock. You ARE getting that yield. Maybe not directly per say but indirectly because sooner or later the market will value it correctly. Go back and read my comments on gold and y I value it the way I do. Sure gold may be priced at 1400 an ounce but is it really worth 1400 and ounce? Same goes for stocks. Lets say a stock trades for 50 dollars and then it goes to 100. A lot of people would say they made a good investment. Maybe at first glance but maybe it was just a good TRADE. If later the same stock goes from that 100 dollars to 25 dollars and then never goes back up I would say you made a POOR INVESTMENT and you just got lucky TIMING the market. I know a few times you have stated you can make more money trading than just buying and holding. Sure sometimes you can but LONG run if you learn how to value something instead of trade it you will almost never lose if you get good enough at valuing something.

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#13) On June 09, 2013 at 12:02 AM, valuemoney (99.99) wrote:

Listen to this youtube video. http://www.youtube.com/watch?v=Lc791is6X0o and tell me what you think.

If you buy something and KNOW it is worth way more than you bought it your chances of making money skyrocket. Who care what the market is pricing it at. That is short term. If it goes down you cheer. Why? Because you can buy more at a cheaper price. Thing is with a great business you don't even have to wait for bottom dollar or a great deal. Over time a great business will earn more and be worth more.

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#14) On June 09, 2013 at 12:09 AM, valuemoney (99.99) wrote:

And this one is a must watch just like on its headline.

http://www.youtube.com/watch?v=4xinbuOPt7c

watch the whole thing and UNDERSTAND what they say....not hear it....truly understand it

 

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#15) On June 09, 2013 at 12:15 AM, valuemoney (99.99) wrote:

I am pointing out Buffett because he talks the most and stuff he says is most readily available. But all the other value investors...... THE GOOD ONES do the same thing. They value a business. They better you are at this the more money you will make.

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#16) On June 09, 2013 at 12:19 AM, valuemoney (99.99) wrote:

The better you are at this the more money you make. Sorry I don't spell or proof read well.

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#17) On June 09, 2013 at 12:42 AM, valuemoney (99.99) wrote:

grahamsway you make a good point also I didn't realize it or read it I guess.

And I am going to pick on awallejr again because I just read through his comments again.

Since I don't see interest rates rising anytime soon I think bonds are semi safe at the moment.

See that is short term in my mind. Interest rates are at ALL time lows. They will go up. BONDs ARE CRAZY TO BE IN!!!!!!!!! Same goes for the late 70's and early 80's. Bonds were CRAZY CHEAP like stocks. Just because stocks didn't do anything for those couple of years DON"T mean you should have been in cash instead of the market. SAME thing today with bonds. Sure short term they might be alright. Look many people thought yields couldn't go any lower a couple of years ago but they did. As I stated before about the stock that went from 50 to 100. Was it a good idea to buy bonds? NO but did they go higher. YES. That doesn't make it a good investment though! NOISE. FILTER IT OUT AND USE NUMBERS AND YOUR BRAIN.

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#18) On June 09, 2013 at 12:46 AM, valuemoney (99.99) wrote:

Sorry I am not trying to offend awallejr. I am just stating an example of how I look at things. Always try to step back and look at the big picture. K I have to stop. Sorry I can ramble on and on.

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#19) On June 09, 2013 at 12:58 AM, awallejr (83.74) wrote:

They will go up.

Value it is not a question of IF interest rates will rise, it is a question of WHEN they will rise.  And they (meaning the FED) simply aren't rising anytime soon.  You are free to ignore me.

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#20) On June 09, 2013 at 1:01 AM, valuemoney (99.99) wrote:

I don't want to ignore you. WHEN is my point. Don't try to time the market. That is what I am saying.

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#21) On June 09, 2013 at 1:05 AM, valuemoney (99.99) wrote:

You say this...

Since I don't see interest rates rising anytime soon I think bonds are semi safe at the moment. 

Then you comment WHEN on #19.

I SAY DON"T do that. By saying when you are timing the market. I price stuff. At this price bonds are bad to be in.

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#22) On June 09, 2013 at 1:33 AM, valuemoney (99.99) wrote:

awallejr believe it or not I like hearing what you have to say. You make some good arguments. I like hearing how you think. It makes me think more. I just think sometime you hear stuff and you think it is right because a lot of other people think it. Or it was something you were told a long time ago and never really dug in and seen if it was right or not.

Bonds do have a place in a diversified portfolio.  General rule is you start young at 80% stocks and 20% bonds and by the time you retire it goes 40% stocks and 60% bonds

That is how you get poor returns. Think about it. I would want NO bonds in my portfolio right now. ESPECIALLY if I was 62!!!!!!! I feel sorry for people who are 62 and have someone managing their money and putting them in 60% bonds right now just because they are retiring. I would fire my money manager in a second. Any guess why 80% of the money managers underperform the market. It is because they stick with this diversified portfolio thing and don't know what anything is worth. They just go with mainstream and do what everyone else is doing and what they have been told.

Ever hear this?

There should always be some gold or silver in everyone's portfolio at all times. B.S. in my opinion.

O I like this one....

You are young so you can be riskier. That is the one of the biggest blunders in investing!!!!!!!!! You don't EVER want to be risky!!!!!!!!!

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#23) On June 09, 2013 at 1:39 AM, awallejr (83.74) wrote:

Value there is an old saying, "no guts no glory."  If you are young I advise to heed that.  Take advantage of time.  It is on your side.  Older people don't have that advantage.  So they play it conservatively, as they probably should.

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#24) On June 09, 2013 at 2:28 AM, valuemoneygreen (83.25) wrote:

"Live by the sword die by the sword" is another one. I choose just not to play with the sword.

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#25) On June 09, 2013 at 2:31 AM, valuemoneygreen (83.25) wrote:

Valyooo

here is another video to listen to..http://www.youtube.com/watch?v=N9Ny6pjCS-8.

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#26) On June 09, 2013 at 8:12 AM, somrh (86.83) wrote:

@valuemoneygreen

I'm actually with awallejr on this one. I suspect that interest rates will stay low for some time. But that's another discussion.

Even if you expect rates to go up, that doesn't imply bonds are speculative. 

It's one thing to suggest that other assets are more attractive but, say, sitting on cash instead of using bonds would actually be speculating on interest rates. Because that's making a very specific statement on the future development of interest rates. I'll illustrate this with an example in a moment.

One key to sound investment is asset-liability management. You need to buy assets that match your time horizon. If I'm saving for 20 years, I can go out and buy some stocks and long term bonds. If my time horizon is 1 year, I should avoid anything but short term bonds, money market funds and the like unless I'm interested in speculating on something short term.

The fluctuations in valuations, interest rates and the like is just noise. You may suffer short-term, "opportunity cost" losses but those are temporary. 

Here's the example. Suppose you have a 10 year time horizon and suppose you consider 1 of 2 alternatives:

Scenario 1: Buy a 10Y treasury yielding 2.16%

Scenario 2: Buy a 5Y treasury yielding 1.09% and roll that over into another 5Y treasury 5 years from now.

How high would 5Y rates have to be 5 years from now to justify going with scenario 2 over scenario 1?

Answer: About 3.24%. 

So if 5Y rates are lower than that 5 years from now, you would have been better off with the 10 year bond. 

So I contend if you don't want to time the market, you should simply buy the asset that matches your liability (what you're saving for). Insisting that buying bonds now amounts to timing the market is the opposite conclusion I would draw.

On the contrary, waiting on rates to go up is speculating on interest rates. 

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#27) On June 09, 2013 at 8:40 AM, crazygood (< 20) wrote:

Hello folks, we're having success with  a simple bond ladder strategy, combined with dividend stocks.

For us, bonds are a bank account that earns decent interest.  The reason to be in bonds right now is to reduce your risk and exposure to market fluctuations.  But we would say do NOT plan on trading your bonds.  Treat them like you would a CD from a bank. With stable investment grade bonds you can get about 4% for 3 to 5 year bonds.  Municipal bonds are Fed tax free, but rates a little lower.

Check the ratings reports to make sure they're not on negative watch. Be sure to stay away from bonds with weird things like Sinking Funds and beware of "extaordinary redemption provisions." 

I wouldn't go out further than 8 years now, since rates are so low. But if you invest $10K each in 3 bonds, 4, 5 & 6 years out you might get 3, 4, & 5%.  That's not thrilling performance, but they should be investments that help you sleep better when the economy is stormy.

Combine Blue Chip and riskier dividend stocks to your comfort level, knowing there are bonds coming due every year.  $10K happily shows up each time a bond comes due.  And don't forget all those lovely interest payments along the way.  

Cheers,

Mr. Crazygood 

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#28) On June 09, 2013 at 12:51 PM, valuemoney (99.99) wrote:

It's one thing to suggest that other assets are more attractive but, say, sitting on cash instead of using bonds would actually be speculating on interest rates.

I never said to do that. I said you don't want to be in bonds. I would argue you never want to be in cash also. I can't remember a time when I thought cash was best. Another thing people don't realize is when you turn 62 your time horizon isn't 1 year or 5 on investing. It should be 10 to 15 or even 20. Why? You don't die when you are 63 or 67. If you do YOU DONT NEED THE MONEY ANYWAY!!!!

I will can give you a basket of 25 stocks and give you the numbers and compare the yields to the 10 year or the 5 year or the 1 year treasuries and lets say today I am 62 and in 5 to ten years lets see how the portfolios do with the 60% bonds to 40% stocks compared to my 0% bonds and my 25 stocks. My time horizon is 10 to 15 years. I will be 72 to 77. I am gonna need an income because it sure aint gonna come from work because I am not going to and it sure isn't going to come from 1.09% on my 5 year treasury. HECK that don't even beat inflation. I would be LOSING money by investing in a 5 year note! And if I needed to cash out early my 5 year might or pry WILL go down in price. I am arguing anything less than 3% on my money will make me POORER. That is what inflation does. Anyone think all this money being printed won't cause inflation is a fool. And to think of it..... getting less that 3% on their money will they will become poorer. Good luck if you want any of those returns in you portfolio. I sure am not going to have ANY bonds especially treasuries in mine. NOT 20% and surely not 60%. I choose a portfolio of stocks 100% invested. Diversified if I am 62. And not so much if I am 25 or 35.

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#29) On June 09, 2013 at 12:58 PM, valuemoney (99.99) wrote:

I will state this again so it is clear. I am PRICING the market. NOT timing it. 1.09% and 2.16% are horrible yields. It is a FACT you will lose money if you have them in your portfolio if you have a 5 year or more time horizon. If you want to sell a five or 10 year before that you are the one trying to time the market. And if you don't you will lose money. It may seem like you are gaining but with inflation you are losing.

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#30) On June 09, 2013 at 1:18 PM, valuemoney (99.99) wrote:

I can give an example and 25 to 30 if anyone would like on how to easily beat the returns on bonds.

Buy some WMT buy some WFC buy some PEP buy some SYY buy some USB buy some XOM buy some.........I could go on and on I depends how diversified you want to be. O and you will be getting an income with the dividends if you are worried about cash. Every quarter pretty much.

Yield on WMT you ask? Trades at a PE of 15.06 inverse that and you have a yield of 6.64%. Safety? one of the biggest companies in the world. How many times has it made LESS money over a 5 year time horizon? 0  Probability of it making more money over time and its price increasing.....HIGH. If you need an income does it give you a dividend. YEP. Does that dividend beat the 5 or 10 year. YEP. 2.46%

Would I be a fool to own a 5 or 10 year treasury note instead of WMT? YES.

I could go on and on. Stocks aren't as cheap now as they were a year ago or a couple of years ago but there are many great stocks with far better yields than bonds. A know brainer on which one I would choose. I use math and common sense when choosing and investment NOT MARKET TIMING.

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#31) On June 09, 2013 at 3:22 PM, somrh (86.83) wrote:

@Crazygood

Guggenheim actually makes it pretty easy to set up a ladder. They have ETFs that mature in a variety of different years for both investment grade and junk bonds. 

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#32) On June 09, 2013 at 3:33 PM, awallejr (83.74) wrote:

"Live by the sword die by the sword" is another one.

Ooh a battle of the idioms, hehe.  In response: sometimes you have to roll the dice.

Actually Value if you have been following me over the years I have been one of the few bulls on this site since the crash.  You can search all my blogs (not just my threads) to see my  real life accuracy rate, but you would be nuts to do that.

You would also see how I told people I don't time the market since I suck at timing.  Don't follow me when going to a supermarket check-out counter.  I always pick the slowest one.

However, you are ignoring a critical fact when people retire, namely they are no longer earning a salary.  It would be prudent to devise a more conservative, yet somewhat predictable investment allocation for them.

Back during the late 70s early 80s you were getting no risk 15-20% interest on cash while the stock market was languishing.  That isn't an issue of timing, that is a recognition of what was happening.  You had a FED that was raising rates to try and crush inflation.  After this recent crash you have a FED that has kept interest rates near zero with little indication of raising them any time soon.

As they say, don't fight the FED.  It was "wrong" to do so back then and it is "wrong" to do so now. So while I agree with you that I would choose stocks over bonds, that is not axiomatic.  There are circumstances where bonds belong in one's portfolio.

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#33) On June 09, 2013 at 3:41 PM, somrh (86.83) wrote:

@valuemoney

I concur about age 62 and time horizon but even 20 years isn't that long to be 100% stocks in my opinion. Using the Gordon Growth Model, Hussman derived a simple formula for the duration of stocks: Price/Dividend (or 1/dividend yield). That puts stocks pretty close to 50 year duration. 

I think it's fair to say someone in retirement in this environment has it pretty lousy but I don't think going 100% stocks is the answer. It carries the same sorts of risks that you're concerned about when you state:

If you want to sell a five or 10 year before that you are the one trying to time the market.

And this I wholly agree with which is why I insist on asset-liability matching. But stocks can suffer substantial losses via revaluation. If you buy WMT and hold for, say, 3 years (what you call "timing the market" in reference to bonds) and WMT's PE drops from 15 to 10, how well are you going to do?

In other words, the same principal applies to stocks. Stocks are a long duration investment. I see no sense in devoting a huge portion of your portfolio in stocks when you have a short-time frame. It's a form of market timing because the asset doesn't match your liability.

And while there are some reasonably priced stocks, the market is hardly cheap, trading at an almost 50% premium to average Shiller PE.

I think you have a valid point with the inflation issue. But even TIPS right now have a breakeven at 10 years. 

I would also point out that you aren't restricted to treasuries. I think investment grade corporate bonds are, in many situations, more preferable to treasuries. There is typically additional yield (above default risk) built into corporate bonds that is typically attributed to things like liquidity and tax treatment which should be irrelevant to most retirinement savings. 

And I would expect you should beat inflation with corporate bonds even on a relatively short horizon (say 5 years). 

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#34) On June 09, 2013 at 4:33 PM, awallejr (83.74) wrote:

You are young so you can be riskier. That is the one of the biggest blunders in investing!!!!!!!!! You don't EVER want to be risky!!!!!!!!!

I did want to comment on this.  If people listened to you Gates never would have formed Microsoft, Jobs with Apple,  and so on and so on.

One of my biggest peeves with the Kudlowites is when they keep saying it is the 1% that are the job creators.  Baloney,  and something Romney finally acknowledged during the debates.  The individuals that take risks in starting a business are the real job creators.

I submit one of the reasons we are having such a slow recovery is the fact that these risk takers don't have access to start up money.  Many times they take home equity loans, but hard to do so now with depressed prices and strict loan standards.

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#35) On June 09, 2013 at 4:37 PM, Valyooo (99.38) wrote:

Value,

Buffett always says things like in the video that are general like "I like stocks" and "buy low sell High". The part I need the most help with is coming up with a price for particular stock. I'm more macro. I need improvement on individual stocks  

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#36) On June 10, 2013 at 3:08 PM, Frankydontfailme (27.25) wrote:

Valuemoney, it sounds like you are trying to time the market.

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#37) On June 10, 2013 at 5:50 PM, ElCid16 (96.46) wrote:

Good thread gents.

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#38) On June 11, 2013 at 1:53 AM, valuemoney (99.99) wrote:

I will set up a profile Valueagainstbonds if you guys want the to see how I do over a long period of time. You guys pick the bonds. And I will pick the stocks. We can use HYG, LQD, TLT if you want. Just tell me the ones and I will pick them and buy and hold and I will pick a basket of 10 stocks against them. We will see over the years who was right. I will never end any picks. In ten years I bet I crush the bonds.

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#39) On June 11, 2013 at 1:56 AM, valuemoney (99.99) wrote:

Frankydontfailme Tell me how so. I just stated I am pricing the market not timing it. What don't you understand about comment #29?

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#40) On June 11, 2013 at 2:50 AM, valuemoney (99.99) wrote:

I would bet I could get 10 CAPS players to pick 10 stocks and crush bonds over a 10 year period also.

chk999 MegaShort BravoBevo edwjm PLynchJr

TSIF JakilaTheHun bargainstocks JohnCLeven bbmaven truthisntstupid

could all do it....want to be less risky? have them pick 15 to 20 they will still beat bonds, not by quite as much, but beat them for sure then.

Those are just a few. I could come up with at least 20 others I would think.

 I would like to add many others are not good stock pickers and have no idea on how to value a business. I suggest you stick with what somrh  and awallejr are saying. Then you will be safe. Because if you aren't good with numbers and can't value a company or take risks or try to time the market you will have poor returns. But you wouldn't lose all you money by doing what they suggest.... you just won't make much either.

 

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#41) On June 11, 2013 at 1:27 PM, awallejr (83.74) wrote:

valuemoney I honestly don't know how many times I have to say this, I do not follow bonds I personally prefer stocks.  For years I have been advising people to buy them.  However, how old you are SHOULD dictate what to invest in.

Your contest proposal accomplishes nothing since you are comparing apples to oranges.  Bonds have a set duration, stocks do not. I would submit, however, had you "timed" this contest from March 1999 to end March 2009 you would have gotten crushed.  But that is just picking out past points.

The point you are missing about bonds is there use for retired people.  They are NOT looking for capital appreciation.  They are looking for income.  Bonds or annuities fit that bill. That isn't saying they should sell all their stocks, but you should start switching out of any high beta growth stocks into low beta utilities or mlps for example.  Someone in their 20's, however, should not be doing this.

Most people probably won't be able to retire anyway since most will be relying on Social Security and that will put them in poverty especially if Norquist has his way.

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#42) On June 11, 2013 at 2:55 PM, somrh (86.83) wrote:

I concur with @awallejr.

I will set up a profile Valueagainstbonds if you guys want the to see how I do over a long period of time.

You may want to reread my posts above because you're missing the point. Time horizons matter. I agree holding over a long period of time stocks may win out (especially if you're doing good due diligence and pick some high quality stuff at reasonable prices). 

But over shorter horizons, your chances are not as good.

If you check Damodaran's figures:

Year over Year Stocks:

. . . had negative returns 28% of the time.
. . . lost to T-Bills 34% of the time.
. . . lost to 10Y T-Bonds 39% of the time.

And as I pointed out here (see Figure 3), it's not even clear that stocks will beat Baa bonds over the next 10 years.  If we were to suffer a real "bear" market and actually saw Shiller PEs revert below 10, you would be better off in bonds. 

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#43) On June 11, 2013 at 6:06 PM, valuemoney (99.99) wrote:

Yup I agree. So you should be in 0% bonds if you are under 40 because your time horizon is more than 20 years. Bonds suck right now. That is what I am saying..... you should not be in them. Even if you are 62 you shouldn't be 60% bonds because your time horizon should still be at least 10 years. If you need money in the next 3 years be in cash for whatever amount you need. If you can't value stocks buy the SPY and do the bonds like you guys are saying. Your returns just wont be very good. I KNOW THE SHORT TERM NUMBERS. If your time horizon is 1 year you should be in cash. Same goes for 3 years. You sure don't want to be in HYG if your time horizon is only 3 years. Answer that ? for me. Whould you what to be in HYG if your time horizon is 3 years?

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#44) On June 11, 2013 at 6:08 PM, valuemoney (99.99) wrote:

Would anyone want to be in HYG which is a basket of high yield bonds if their time horizon is 1 year? NOT ME!! I choose cash!

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#45) On June 11, 2013 at 6:14 PM, valuemoney (99.99) wrote:

Stocks vs high yield bonds

That is the title. Over a ten year time frame I would buy NO high yield bonds vs stocks. If my time frame is less than 5 years I would be in NEITHER!!!!! Is that better? High yield bonds will not outperform good stocks over a 10 year time frame if interest rates rise. I think interest rates will rise alot in the next 10 years. They certainly wont go down.

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#46) On June 12, 2013 at 12:16 AM, valuemoney (99.99) wrote:

I would submit, however, had you "timed" this contest from March 1999 to end March 2009 you would have gotten crushed.  But that is just picking out past points.

I would have never said that in 1999. Why you ask? Just as I keep repeating. I am pricing the market and judging the quality of earnings.

In 1999 the yield for the 10 year treasury was

1999-01-01

4.72

 

And in 1999 the yield on the S&P was

1999

3.52%

 

I would have never said I would crush bonds. Look at the yields. Yields tell you what to do. That is what I am trying to say. The ten year gave you a WAY better yield and that is 100% guaranteed. Back by the US gov. The quality of earnings on a company isn't. I know what you guys are getting at if you don't have a long time horizon. I would have suggested then in the market as a whole to be waited in bonds 100% compared to the S&P as a whole if you were even in you 20's and still young. Yield gives the answers on what to do. Along with quality of earnings and a little common sense. Now look at todays yields in the S&P compared to the ten year. Jeepers it is so simple but nobody seems to get it. You can't argue with numbers. That is why I like investing in the market. It is a very easy game for me. I try to be emotionless, patient, and look for the best yields.

 

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#47) On June 12, 2013 at 12:20 AM, awallejr (83.74) wrote:

Valuemoney it is pointless with you.  Talk to me when you are about to retire. Maybe it is a language barrier.

I think interest rates will rise alot in the next 10 years.

Ok you made a prediction here at least. You make a prediction but don't support it.  I think otherwise.  My reasoning is I don't see massive inflation since we have been keeping wage growth low. Without wage growth by the Average Joe, prices can only increase so much.  Demand destruction eventually rules.

Why do you think Bernanke is doing what he is doing.  He is trying to INFLATE not DEFLATE.  But without fiscal support he can only do so much.

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#48) On June 12, 2013 at 12:38 AM, valuemoney (99.99) wrote:

Todays 10 year is about 2.16% yield

S&P earnings yield is roughly 1650/ 104 earnings= 15.84 pe giving you a earnings yield of 6.3%

2.16% vs 6.3% Which would you choose? It is that simple. Jeepers I could ask a 14 year old which one to choose I bet he or she would say 6.3%

Are either yields that great? nope. I like getting yields of 15% to 25% personally. I won't look at an investment if I don't think I can get less than a 15% return year over year. If I am a little wrong on judging it I hope to get at least a 7.5% return year over year. So would I buy the market as a whole right now nope. Would I buy one single ten year bond at 2.2% never in my lifetime. If I HAD to choose one it would be the S&P right now. Simple as that. OK I think everyone gets it now I hope. Good luck all.

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#49) On June 12, 2013 at 10:12 AM, valuemoney (99.99) wrote:

awallejr

I think interest rates will rise alot in the next 10 years.

Ok you made a prediction here at least. You make a prediction but don't support it.

You are being silly. How much money are central banks pumping into the system here and all over the world? When you give everyone a bunch of money things will inflate.

Example; a room full of people have 20 dollars each and bid on one item. Lets see how much they pay for it. Max twenty dollars. Now give each person in the room 40 dollars. The new max bid will be 40 dollars.

If you think the ten year will trade at a yield of 2.16% in ten years you are crazy. Even if it does stock will surely outperform. Watch interest rates and the 10 year when the fed tapers off QE3. I think you will be in for a big surprise. You just can't print money like no other and think there will be no inflation ten years from now. It is pointless to keep talking to you if you `don't `understand this concept.

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#50) On June 12, 2013 at 10:26 AM, valuemoney (99.99) wrote:

somrh do you agree with awallejr here. Will interest rates be this low in ten years? I am not talking 1 year or three. Ten. Will the ten year yield 2.16% in ten years or even 5? Will mortgage rates be under 4%. Lol I think not. And like I said. Stocks will outperform anyway if rates do stay that low.  The only way they won't is if there is a huge natural disaster or a massive war. If the cost of money is near 0 you will have inflation and rates will have to rise. Plain and simple. Lets give everyone in the US a million dollars and see if prices increase. The fed is effectively doing the same thing but on a smaller scale.

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#51) On June 12, 2013 at 12:37 PM, awallejr (83.74) wrote:

Value this is my last try since you are ignoring the points being made.  You are focused on Pct returns on 2 different assets and in your mind the higher number wins.  That is not what I am talking about.  I am talking about demographics.  People at different stages of their life have different financial requirements. 

First, don't compare TBs in the discussion since the only people buying them are governments and wealthy people who just want to preserve the principal.

Second, a retiring person is looking for INCOME to replace his salary.  That person wants to be as conservative as possible while still generating sufficient income.  100 pct stocks is a horrible idea for him.  Imagine what would have happened to this guy if he bought in 2007-2008.  

Third, the FED is not putting cash into the hands of people to go spend on whatever they want.  They are buying Tbills from our Government to support the annual deficits and mortgages which is used for a person to buy a house.  This is why you aren't seeing runaway core inflation.

Also, retirees tend to spend less, and since spending is 70% GDP you will see deflationary pressures that could cover an extended period of time absent some unknown future significant catalyst.

Well enjoy.

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#52) On June 12, 2013 at 2:05 PM, valuemoney (99.99) wrote:

You suggested 60 percent in bonds when you retire did you not? 20 percent if you are young. I am saying this is not right. Since ten your gives you 2.16 percent no money of mine would be put torwards that. I am 35 you tell me what percentage of bonds I am suppose to be in and what bonds. I won't buy ten year note and I won't buy 5 year and I certainly won't buy LQD and DefinAtely won't buy HYG exactly for the reasons I am stating. Their yields say stay away. If I need money next year it will be in cash. My time horizon is more than 20 years in my retirement account that is why it is there. You r saying I should have 20percent in bonds no matter what. I am saying no matter what 0 percent of my money should be in bonds. Same goes for if I was 62. I could have a portfolio of stocks that yield 2.5 to 3 percent dividend if I need cash flow. Plus if I needed more I could sell the most expensive stock. I don't know what there is not to get. If you have any money in bonds good luck. And if you think rates are going to be this low for ten years good luck.

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#53) On June 12, 2013 at 2:16 PM, valuemoney (99.99) wrote:

Look at what you said about a retiree. If he bought in 2007 08. Think about that statement. He is 62 he should have been buying for the last 40 years. Use your brain. I turn 62 in 37 years my buy in price isn't the year I retire duh! Lets say I buy WMT today when I am 62 I don't base my point of reference to that day. Look at berkshires purchase of KO do you know what the bond yield is on that equity at his purchase price a long time ago? Give me a break on some of your examples.

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#54) On June 12, 2013 at 2:25 PM, somrh (86.83) wrote:

@valuemoney

In regard to HYG's time horizon, I would start with duration. Duration for junk bonds is often quite low because yields are higher and junk companies may not be able to obtain longer term financing.

For HYG, the portfolio's average weighted duration is 4.18 years. 

So perhaps 3 years would be  too short of a time span.

The simplest way to apply an Asset-Liability management technique is to take the average weighted duration of  all your assets (cash, bonds, stocks, etc) and set it equal to your time horizon. This would enable you to mix in a variety of stocks and bonds to get an appropriate asset mix.

The other question, of course, is how to factor in the default losses (since bond returns are yield - losses due to default). As my initial question in this thread suggests, yield spreads are low which raises the question of whether or not a portfolio of junk will do better than investment grade. If they won't do any better than investment grade, I might as well get a portfolio of investment grade bonds with the same duration. 

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#55) On June 12, 2013 at 2:27 PM, valuemoney (99.99) wrote:

I want to do that challenge of building a profile and comparing it to bonds today to show how bad of an idea it is to put ANY money in bonds compares to the stocks I pick. I am saying it is the 1999 of stock yields. I am trying to show the average person why it is dumb to buy bonds instead of stocks right now. My time frame is ten years and longer

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#56) On June 12, 2013 at 2:36 PM, somrh (86.83) wrote:

@valuemoney

As your other question, if I had to make a prediction, I would think interest rates will stay pretty low for a while. See Japan as an example (although there are definitely differences between our situations). 

We're in the midst of a deleveraging recession and will probably be so for some time. I don't see rates going up a lot. I also don't see a lot of inflation which isn't driven by the Fed but primarily by the private banking sector through credit expansion. And as long as debt levels are high, people shouldn't be willing to borrow (whether or not they will is another matter).

But I don't have any magic crystal ball. My whole point with asset-liability management is if you apply it, you don't need the crystal ball. 

If I buy a 10 year bond that earns, say, 2.16% and hold it for 10 years I'm going to earn 2.16% per annum. What interest rates do in the mean time won't matter. Interest rates will only matter if I have to liquidate early.  

If I buy a stock and hold for 10 years, my returns will depend on the dividends paid, the growth of the dividends/earnings and the price multiple that the market is putting for that stock 10 years from now. In that case interest rates will matter (as they correlate pretty well with that price multiple).

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#57) On June 12, 2013 at 4:03 PM, valuemoney (99.99) wrote:

This is what you don't get same as stocks is that rates do matter. Why would rates go up? Inflation. You are only getting 2.16 yield if inflation goes over that you ARE losing money. Quality stocks will beat inflation over time. Check out comment #2. If you don't understand that the is a problem. So rates do effect you even if you hold that ten year to maturity. 

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#58) On June 12, 2013 at 4:06 PM, valuemoney (99.99) wrote:

Lets do ? At a time. Answer this. I am 35. Would I want any money in bonds? 

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#59) On June 12, 2013 at 4:11 PM, valuemoney (99.99) wrote:

I will use none of the money till I am 62. So we don't have an issue with time horizon.

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#60) On June 12, 2013 at 6:09 PM, ElCid16 (96.46) wrote:

http://av.r.ftdata.co.uk/files/2011/03/JM_SevenImmutableLaws_312.pdf

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#61) On June 12, 2013 at 6:16 PM, awallejr (83.74) wrote:

valuemoney: You suggested 60 percent in bonds when you retire did you not? 20 percent if you are young. I am saying this is not right.

No I did not say that.  Re-read my comment #7.  I said I don't follow bonds.  I prefer stocks over bonds.  But HOWEVER, for a DIVERSIFIED portfolio, the GENERAL RULE is to allocate more towards bonds over stacks as one nears retirement. Each person is unique and each person's investing goal and tolerance for risk is unique.

Your snide commentary aside, maybe when you actually learn how to read English, and even understand the term "axiomatic" I might wish to continue discussing.   But come time for you to retire rest assured you won't be staying 100 pct in stocks.

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#62) On June 12, 2013 at 7:04 PM, valuemoney (99.99) wrote:

 the GENERAL RULE is to allocate more towards bonds over stacks as one nears retirement that is what you stated wasn't it?

I understand that and I say the general rule you are using is wrong at this point in time. That is what I am saying and for some reason you keep arguing with me.

#7) On June 07, 2013 at 7:14 PM, awallejr (79.85) wrote:

I know you asked me elsewhere about this topic, and since I don't really follow them I will defer to the others here.

Bonds do have a place in a diversified portfolio.  General rule is you start young at 80% stocks and 20% bonds and by the time you retire it goes 40% stocks and 60% bonds.

Personally I never got into them since I like to actually own things.  Bonds are basically a debt instrument that in theory has a higher preference than stocks.  I say in theory because GM kind of stuck it to the bondholders, and look at ATPG.  I swear management and Credit Suisse are trying to steal that company.

Since I don't see interest rates rising anytime soon I think bonds are semi safe at the moment.  It will also be interesting to see how things will play out when all the boomers retire.

Then you continue to state since I don't see interest rates rising anytime soon I think bonds are semi safe at the moment!

You say this and I say you are wrong. I say I can get much better returns in stocks at this point in time. I had no snide commentary. State it please. You just said when I actually learn how to read English. That is snide.

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#63) On June 12, 2013 at 7:10 PM, valuemoney (99.99) wrote:

Do you see you stated that? It was in comment #7. I am arguing you are wrong and showing why. I am arguing the general rule is wrong and what you are saying about rates is wrong. Jeepers.

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#64) On June 12, 2013 at 7:16 PM, valuemoney (99.99) wrote:

Second, a retiring person is looking for INCOME to replace his salary.  That person wants to be as conservative as possible while still generating sufficient income.

You also stated this. I say buying a ten year treasury is not the way to go. I think you are wrong about this statement. So do you think he or she should be 60% bond and 40% stock right now or what. If you do I DISAGREE WITH THAT. I say buy quality dividend paying stocks.

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#65) On June 12, 2013 at 7:31 PM, valuemoney (99.99) wrote:

And I still didn't get an answer for comment 58. I am 100% invested in stocks right now. Bonds will give me bad returns is what I am saying. If you think I should have ANY money in Bonds at this point in time I disagree with that. My dad is 59 and a half. 0% in bonds. If I asked him if he wanted a 2.16% yield in the ten year he would laugh in my face. Same goes for my mom. 0% in bonds. She is two years younger. I am 35 0% in bonds. Bonds will give you bad returns AT THIS POINT IN TIME. I like our chances in stocks. Yields show where to put my money. If you need cash in the next three years above and beyond the cash you get from dividend your stocks are paying you should be in cash with that amount of money today. I can't put it any more simple than that and if you disagree that is fine. It is just I think your returns will be poor if you do.

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#66) On June 12, 2013 at 7:57 PM, awallejr (83.74) wrote:

My last comment then reply a dozen times after if you wish.  Life is too short arguing with a nasty internet punk.  I tried to remain civil, but I can't with you.  Learn what the term DIVERSIFIED PORTFOLIO means.  THAT was what I was addressing in #7.  Learn what GENERALITIES are.

I am the last person that wants to get into an argument over bonds.  Talk to Rd80 he is far more knowledgeable. You are arguing why bonds are always bad over stocks.  You said I advise people to be 60% in bonds by retirement, which I did not, but financial advisers will GENERALLY advise that. 

I have no problem with you being 100% stocks.  If it works for you great.  But your making blanket statements such as no one should be in bonds is, sorry,  ignorant.

Now shoo.  Stop trying to get a further rise from me.  Consider my failure to reply further  here as me not reading this thread anymore.

And as to your question in 58, that is up to you.  If you could get a 5 year corporate bond off say MCP that would pay 15% interest per annum, would you take it?  I used MCP purposefully since it has its risks. I would never advise that to someone who just retired unless the position is small and they could easily absorb any loss if the company went belly up.  There are plenty of corporate bonds out there that yield more than Tbills, which in your mind is the only thing we are talking about. This was the point Valyooo was trying to address but you are too obtuse.

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#67) On June 12, 2013 at 8:24 PM, valuemoney (99.99) wrote:

I have no problem with you being 100% stocks.  If it works for you great.  But your making blanket statements such as no one should be in bonds is, sorry,  ignorant.

See you are the one not reading. I addressed this in comment # 43. You need to look what I am saying. Because with that statement above you are not.

Here is what I said "If you can't value stocks buy the SPY and do the bonds like you guys are saying. Your returns just wont be very good."

Please comment on that.

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#68) On June 12, 2013 at 8:29 PM, valuemoney (99.99) wrote:

I specifically replied to MY thoughts on this blog on this comment.

REREAD IT

#45) On June 11, 2013 at 6:14 PM, valuemoney (100.00) wrote:

Stocks vs high yield bonds

That is the title. Over a ten year time frame I would buy NO high yield bonds vs stocks. If my time frame is less than 5 years I would be in NEITHER!!!!! Is that better? High yield bonds will not outperform good stocks over a 10 year time frame if interest rates rise. I think interest rates will rise alot in the next 10 years. They certainly wont go down.

 

 

Notice the word I and my.  

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#69) On June 12, 2013 at 8:33 PM, valuemoney (99.99) wrote:

You don't have to read it anymore because it clear to me you are not reading it right in the first place.

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#70) On June 12, 2013 at 8:44 PM, valuemoney (99.99) wrote:

a nasty internet punk

I have made no comments to you like that. I don't know if you are just mad I am saying you are wrong or what. I am stating facts. Please show me where I am directly being mean to you. Jeepers you are starting to make me angry. You are the one making direct rude comments.

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#71) On June 12, 2013 at 9:00 PM, valuemoney (99.99) wrote:

I have no problem with you being 100% stocks.  If it works for you great.  But your making blanket statements such as no one should be in bonds is, sorry,  ignorant.

O I also addressed this in comment #40 also so you missed it TWICE!!!!!!!

 I would like to add many others are not good stock pickers and have no idea on how to value a business. I suggest you stick with what somrh  and awallejr are saying. Then you will be safe. Because if you aren't good with numbers and can't value a company or take risks or try to time the market you will have poor returns. But you wouldn't lose all you money by doing what they suggest.... you just won't make much either.

Jeepers it is like you are not even reading what I am saying.

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#72) On June 12, 2013 at 9:07 PM, valuemoney (99.99) wrote:

Now it is on here 4 times. Would you like to retract this statement? But your making blanket statements such as no one should be in bonds is, sorry,  ignorant.  You are the one making the blanket statements. Ignore it you might as well. You must have the 1st two times. If it were me I would say sorry I didn't read that. How could I be saying no one should be in bonds when I said it twice? Jeepers.

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