Before I begin, I want to thank longtime readers, and ask them to give me some feedback. I have a category entitled Best Articles; what would you nominate to be in there. Also, what would you take out? I’ve tagged a few articles from the early days, but since then, have not done much with it. If you have ideas, please let me know. Thanks again.
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As bond investors go, I tend to focus on what can go wrong more than most, so when I looked at the cover of Barron’s today, I said, “Oh, no. Pushing yield now?”
It’s no secret that most safe investment grade debt does not yield much now. Many investors, hungry for yield, must look for other ways to earn income, even if it means greater hazard of capital loss. That is another impact of the federal reserve flooding the debt markets with liquidity — the safe investments yield little, forcing those that want yield to take significant risks, whether those risks are lending long, high credit risk, operational risk (common stock and MLP dividends), or subordinated credit risk (preferred stocks).
The history of chasing yield is not promising. In general, average retail investors reach for yield at the wrong time, and Wall Street is more than happy to facilitate that through structured notes and other high yielding investments where the risk is greater than the excess yield.
But wait — I can endorse some of the article. I like utilities here. I don’t own Verizon or AT&T, but I could imagine owning them. MLPs in energy distribution? Probably safe; consider their competitive positions and consider where things might go wrong. I’m not jumping to buy them, though.
Where I can’t sign on is with preferred stocks and convertibles. All of the preferred stocks that the article cites are financials with marginal investment grade ratings. The convertibles are from a grab bag of low junk-rated securities.
How quickly we forget the ugliness of 2008. If we have a second dip in the financial economy for whatever reason, the preferred and convertible securities will do the worst. In order to get significant yields one must take credit risks in excess of average loss costs — it is safe to say at times like this, the purchase of risky securities is not rewarded. Be wary with all purchases of risky debt at present.
Hi David,
A bit of a seasonal sidelight on your post: I was rereading Dickens’ “A Christmas Carol” this weekend, and loved this quote:
This was a great relief, because “Three days after sight of this First of Exchange pay to Mr. Ebenezer Scrooge on his order,” and so forth, would have become a mere United States security if there were no days to count by.
Ahh, for the 1840′s, when to reach for yield you bought Treasuries, and London factors were the solid credits!
Steve
David,
Your blog, over time, has been the source of very valuable ideas, and understanding, to me.
That said, it is not trivial to readily come up with a list of the posts that I found particularly useful simply because I wasn’t particularly tagging them that way.
Yes, with a bit of time, I could, and would happily, look through the back-listings and offer up my selection. In the meantime, though, it might perhaps be useful to institute a system that enables us readers to rate forthcoming posts, on a scale of 5 say, right as we finish reading it. Some formula might be applied to those scores to then rank your posts, I’d imagine.
I liked the article from the “Best Articles” section on statistical analysis of momentum.
One book I came to know about from your reviews was _Investing by the Numbers_.
A couple of suggested topics that I think you could do a job with: 1) Quantitative view of how to evaluate closed end funds trading at a discount to NAV with a given NAV and discount history, fee/cost structure, and dividend history; 2) How to evaluate the fundamentals of the return of capital distributions from MLPs – e.g. what fraction of them is true dividend and what fraction is true return of capital and how should one arrive at a reasonable profile of the future to put a DCF value on it?
Sorry to be a bit late to this post, but I really like this thread (bond investing with particular regard to sovereign risk). One thing I’m trying to figure out is the set of tools an individual investor needs to invest in bonds globally. In comparison to the US equities market, for which there are countless platforms, data feeds, blogs, etc., I am having trouble finding good sources of analysis, pricing, and access to product for international bonds, so here is my vote for a primer on selecting, pricing, and purchasing international bonds.
David — You ask a good question. As I have often found, it is difficult to answer in the comments.
Instead, I have used it as the basis for a broader article.
http://oldprof.typepad.com/a_dash_of_insight/2009/12/the-value-of-financial-blogs-answering-david-merkels-good-question.htm
Sorry to be late to the party!
Jeff