Gyroscopic Investing

In his radio shows, Harry of course recommends long-term treasuries for the bond portion of the pp, but says that if you don't want to buy them (for ideological reasons), you can buy corporate bonds. He states that one of the benefits of the treasury bonds is that you don't have to monitor them, and that you do have to monitor the corp bonds.

I hold treasuries for the pp, but have been looking into corp bonds and notes here and there for my vp.

Obviously, you can follow the news about a company, and if a bond is callable, you'll find out soon enough when it's called. Other than that, though, what am I supposed to be doing when I'm monitoring a bond?

Downgrades and cash flow issues mostly.  I think there's only a handful of AAA bonds left.  I disagree with HB about them being a substitute for the LT Treasuries; their performance in the 30's wasn't suggestive.

He certainly didn't like corp bonds, but I suppose he was trying to accomodate those who just won't buy treasuries.
Just like there are people here who refuse to buy short-term treasuries because of the zero yield, but still want to try the pp or something close to it.

If holding corporate bonds you really need to monitor exactly like you would for a stock position in the same company(s).

Yes, bonds have a legal claim on company assets.  But there are only two times that comes into play.

#1 is if the company is in a little bit of trouble such that the stock suffers and yet they keep making their interest payments.

#2 is if the company is in a LOT of trouble and you are part of the creditors lined up in bankruptcy court.

The first is your warning.  The second is when all you have left is the hope that you'll get something.

If holding corporate bonds you really need to monitor exactly like you would for a stock position in the same company(s).

Makes sense, although I don't monitor my stocks all that closely. I don't have that much in any one stock so it's ok if one blows up. On the flip side, I hold enough of them that one will probably blow up before I notice. With bonds, I'd like to keep a closer eye, but I'm not sure how. I'll take those downgrades and cash flows into consideration.

Someone (not me) started a thread at bogleheads about individual corporate bonds.
http://www.bogleheads.org/forum/viewtop ... 8#p1643788
Someone used the word "treacherous" for the secondary corp bond market. Indeed.

dualstow wrote: Makes sense, although I don't monitor my stocks all that closely. I don't have that much in any one stock so it's ok if one blows up.

I'm in about the same spot with allocation.  And my monitoring varies greatly by company.

Since I am mostly in dividend growth, I monitor closely for dividend announcements.  The WSJ has a web page that is updated every day and usually correctly summarizes dividend announcements within a few days after each announcement.  Sometimes they miss things, but not often and usually it is just late rather than never.  I set up a script to grab that page and e-mail it to me every day with a prepended summary of my companies.

Typically at least every week I record each increase in a spreadsheet with the year and month.  I bold entries in that list if a year anniversary passes without an increase.  All my holdings are in that list, with those in bold my "needs extra attention" list.

The extra attention list includes any company I am uncomfortable with, including those companies with overdue dividend increases and the few positions I own for other than dividend growth.  Right now it has 4 companies and one partnership so the overall monitoring takes longer to write up than to do...

For those that need extra attention I monitor FAST Graphs on each to watch the trends.  I watch for earnings announcements and conference calls, news articles, press releases, EDGAR filings, and quarterly reports.  In roughly that priority of usefulness.  For those less covered by the press, such as smaller companies and my more speculative positions, I will set up a google search to email me new results every day.  I continually refine those searches to tune for relevant results.

My non-dividend growth positions I read conf call transcripts before buying (I read MUCH faster than I listen), so I keep current as events happen.  For overdue dividend growth I'll go back and read one or two previous conference calls to get a feeling for what is going on.

If I don't like what I find out while monitoring I'll either sell or set up a trailing stop.

dualstow wrote: Someone (not me) started a thread at bogleheads about individual corporate bonds.
http://www.bogleheads.org/forum/viewtop ... 8#p1643788
Someone used the word "treacherous" for the secondary corp bond market. Indeed.

Not just corp bonds, ALL bonds.  The post directly linked is quite good.

It is a good introduction to the issues you face buying individual bonds on the secondary market.  I am less concerned with Treasuries because that market is so big (hence liquid) but the difference is in degree rather than kind.

dualstow wrote:

If holding corporate bonds you really need to monitor exactly like you would for a stock position in the same company(s).

Makes sense, although I don't monitor my stocks all that closely. I don't have that much in any one stock so it's ok if one blows up. On the flip side, I hold enough of them that one will probably blow up before I notice. With bonds, I'd like to keep a closer eye, but I'm not sure how. I'll take those downgrades and cash flows into consideration.

Corporate bonds are a little different in that the minimum purchase is $1K, so even with a historical average failure rate of 3%-5%, you still need a significantly sized portfolio to get each bond's influence minimized.  BTW, even with such average failure rates (it does zoom up to 15% or so during crisises), the average recovery under bankruptcy is about 50%.

I don't think there are too many conceptual differences between investing in dividend growers and corporate bonds actaully.  You can control the duration risk with bonds, but not with stocks.  But on the other hand, if the company screws up you definitely have a maturity deadline for them to get their act together, whereas you don't with stocks.  You also cant have watch list like you can with stocks because liquidity is very limited and dynamic and is all about the now moment.  If I had to choose between dividend growers and corporate bonds, I'd go with the latter because of the predictability and certainty.  Unfortunately, there's slim pickings in both fields at the moment if you don't want to buy "above par".

I do find it interesting that people would buy stock in a firm that has low-rated junk bonds and think nothing of it.  If you wouldn't buy their junk, why would you buy their stock?

Unfortunately, with all the "yield chasing" going on, I fear the individual investor's edge in corporate bonds may be gone by the end of the decade.  The same thing is happening right now with tax liens.  The increases in the number of bids over last year is simply astronomical (as an example, 2.5 million total bids in one county in Arizona last year, is now 54.2 million bids this year) and the absolute garbage that is being bid down is astronomical too (below 0% in some cases).  I feel lucky to have gotten in a few years ago.

dualstow wrote: Someone (not me) started a thread at bogleheads about individual corporate bonds.
http://www.bogleheads.org/forum/viewtop ... 8#p1643788
Someone used the word "treacherous" for the secondary corp bond market. Indeed.

That thread is about municipals, not corporate bonds.  If you're that confused already, you've got a lot of homework to do before you do any investing in either space.

MachineGhost wrote: That thread is about municipals, not corporate bonds.  If you're that confused already, you've got a lot of homework to do before you do any investing in either space.

Ah, you're absolutely right. I'm interested in those too, but I sloppily connected them here. Sorry about that. I do know the difference.

MachineGhost wrote: I do find it interesting that people would buy stock in a firm that has low-rated junk bonds and think nothing of it.  If you wouldn't buy their junk, why would you buy their stock?

The short answer is that way back when, when I bought individual stocks, bonds (junk or otherwise) were not something I knew about. I started out buying well-known companies, mostly the same ones that make up the top 10% of S&P index funds and a lot of popular funds. The dividends have grown, as have the share prices. I can keep collecting the dividend or sell the stock to someone else. I don't know which of these companies offer junk bonds, and which don't.

I don't know how other people view bonds, but I wouldn't buy them with the intent to resell them later.

One possible thought set which leads to buying the stock of a company issuing "junk" bonds...

• Stock market is more liquid with more competitive price setting.
• Bonds are bid up so far beyond par the 'junk' premium is gone.
• Rating agencies aren't reliable/correct for this company OR the downgrade to junk is relatively recent OR rating is about to change for the better.

I don't believe I currently own any stock in "junk bond" companies, but a couple I have are likely pretty close.

Frankly I just don't pay any attention to their bond rating unless I really cannot decide.  And seldom does it get that far.

AgAuMoney wrote: Frankly I just don't pay any attention to their bond rating unless I really cannot decide.  And seldom does it get that far.

I'm not sure I've ever considered it either.  You could argue the present or forward-looking volatility of the stock is factoring in the credit risk anyway, which is why buying low volatility stocks outperform.

There more I think about the various weaknesses of direct corporate bonds right now, the more I'm convinced a ladder of HY Bulletshares is the only way to go.  It would be very expensive to get a similar level of diversification by doing it yourself.  You will give up capital gains paydays, but I think the market is so overpriced right now, that just doesn't happen anymore except on low probability call dates.  So a yield of 7%+ may be worth flipping the bird to the Fed for in ultra-short maturities.  I would do this as a carve-out or complement to stocks because HY bonds share the same economic environement.  The advantage is if the stock market decides to work off its speculative froth soon, your capital would be returned back much sooner than waiting potentially another decade just to get back to breakeven (nominal, I'd hate to consider real...)

Of course, it's not about flipping the bird to the govt because I hold so many long and short treasuries for the pp. It's more like a slice-and-dice. Treasuries in the pp, so in the vp I have:
munis in taxable
corp in tax-deferred.

But, right now those are mostly in bond funds. One is kind of like the bulletshares you mentioned.

This is interesting.  Too bad the yields are low.

https://trader.motifinvesting.com/motif ... #/overview

Thanks for that MG.
By the way, are yields really low? How come no one ever posts about that fact on this forum

The yields really are low when you can buy the junk bonds directly for double digit yields at par.  I get the impression BulletShares have to buy too much bonds, so they have to chase after lower and lower yields to fill out the portfolio, instead of being selective.  But no matter, I wouldn't touch those ETF's now.  I'll stick to investing in dividend growers and individual bonds.