All right, all right. I'm not that darn smart at all. But I still can lay claim to investing results that match, or exceed, those of some awfully smart people (yup, Warren, Bill, Will, etc). How can that be?
If there's one truism for the past fifty years, it's that it is VERY hard to beat the averages in the stock market. Active investors, whether individuals or fund managers, consistently fall short of the indexes they attempt to best. Frankly, the contest is so uneven that most rational investors have long since given up. They have fled to index funds, or ETFs in droves. That's a good thing. Very few active fund managers beat the averages over time. Most underperform drastically. Are the ones who succeed really that good? Well, a dart board will probably answer that question. If enough people toss darts, a few will hit the center. Are they geniuses, or just lucky?
Still, I have had great results, for quite a long time, with my bond investing. I've only tracked my results in detail since 2008, but over the years, I've had additional home runs (RJR Nabisco, AT&T and AT&T Wireless bonds). One issue, one only, defaulted: a stupid, fortunately tiny, purchase of CCC rated Southeast Bank in 1991. I have, upon occasion, sold a position for a loss (Clear Channel springs to mind), once my comfort level was breached. However, through thick and thin, the overwhelming majority of my bond positions have flourished. Time and again, an issue bought at a substantial discount has recovered to (and frequently above) par. (Update Feb 2017: And this is not just due to past good luck. My bond-investing results for the year just completed are very solid: 15%. This in a time of historically low bond yields! What about 2017? Well, too soon to say, but the year has started out well, and that 15% doesn't look unobtainable at all.)
One possibility is that I'm a bond-picking genius. Pause for applause. But far more likely is the fact that most bonds find a way to avoid default. They may experience violent up- and downdrafts, but ultimately, the great majority limp through. Bond owners, on the other hand, are a frantically skittish bunch. The slightest whiff of trouble sends them heading to the exits. In their rush to sell, bond prices are disproportionately depressed. Suddenly, an investment-grade company will trade, temporarily, with yields far above its cohorts. Here is a partial list of such companies (all of them presently in my portfolio): 21st Century Fox, Abbey PLC, AXA, Bed Bath and Beyond, First Union, GTE, Goldman Sachs, Hartford, HP, Lombardy, Morgan Stanley, Protective Life, Southern Copper, Telecom Italia, Telefonica Europe, Time Warner, Transatlantic, Union Carbide, Validus, Vale, Viacom and Xerox. Folks, that's a long list. Most of the companies are at the lower end of investment grade, but every single one has recovered from its swoon, and made every interest payment along the way.
So, in a nutshell: the stock market is so frantically efficient that it's really really hard to beat the averages. And the bond market is so wildly inefficient that a doofus like me can tiptoe through it and harvest the low-hanging fruit.
How is this possible? Well, the very things that make me unable to compete on the stock battlefield seem to favor me in bond-land. I'm tiny, I can only buy small driblets of things, and my activity has no effect whatsoever on the prices of what I buy and sell. That idiot who dumped his Time Warner bonds because a merger fell through passed them to me. A bond manager won't waste his time on a five or ten-bond position. I'm happy to. I keep nibbling until the opportunity passes. What's astonishing is that the opportunities keep cropping up. Right now it's energy. To be sure, the most outrageous bargains have disappeared (25% yields for distressed Transocean), but 12% is still available.
Now, why will YOU be unable to make this work for YOU? Because, my dear reader, you are probably human. Your fear will make you wait until the best opportunity has passed, your greed will make you grab for things that are overpriced. Really. How do I know? Because my own fear and greed have snared me time and again. It takes real stones to buy when others are bailing. It takes Spartan discipline to hold back when the market has just hit an all-time high. I think I'm best at the low points. A solid record of success in troubled times makes me willing to dip my toes in. I'm no longer taking huge chances: just bite-size ones. But enough morsels make a very good meal, eventually.
I've been writing this blog for over six years now. To date, a grand total of perhaps ten people have looked briefly, and walked away (metaphorically) forever. Yet I persevere. Why? Well, the pain is quite low, and I remain optimistic that, at some point, more than one person will take it seriously. Then there might be a geometric increase in interest. Why this optimism? Because I am convinced that I'm on to something, something valid, actionable, and potentially life-changing. I has been so for me, and could be for many other folks as well. How many? An excellent question I just asked myself. Clearly not millions. A flood of folks pursuing the same approach would quickly overwhelm the limited array of opportunities. It would be just like the demise of the January effect. But dozens, hundreds, thousands? Yes indeed. My approach to bond investing has been hiding in plain sight for generations. I doubt intensely that I'm unique in seeing it all. Scattered around the country are undoubtedly dozens, perhaps thousands of fellow travelers. Perhaps they're looking at my blog in secret, cursing me in secret for giving it all away. Perhaps.
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