Wednesday, March 19, 2008

The Bonds of Love

I just finished reading The Only Guide to a Winning Bond Strategy You'll Ever Need. It's the first bond book I've ever read which has practical advice for individual investors, as opposed to lists of easily available equations and technicalities. Overall, it's a helpful book, and I plan to make some changes in my bond-buying behavior after reading it.

There are some important points, though, in which I disagree with it. The first is the author's emphasis on the way the professionals take the individual investor for a ride as far as markups and the quality of the available bonds go. I don't see why that should interest me. Why should I compare the price I pay for a bond with the price someone else pays for the same bond, or the bond I can buy with the similar bond someone else can buy? It makes more sense to me to compare my estimated risks and probable rewards from buying that bond - absolutely - or the risks and rewards of buying that bond with the other places I can put my money - relatively. (You notice I've said "the other places I can put my money", not 'other investments'. There have been times recently when I felt that I was better off using my money to buy pretty things for my wife, or taking off to France for a few weeks to rest, and that's what I did. Sometimes people ignore the other possibilities.)

Another point on which I disagree is Messrs. Swedroe and Hempen's dislike of CMOs. Their objections to CMOs are based mainly on the unpredictability of yield to maturity due to the unpredictability of prepayment. This would be true if one were forced to buy CMOs at prices far from par. However, in fact it is much easier for individual investors to obtain CMOs very close to par or at par, in which case the YTM is perfectly predictable however they are later prepaid. I don't know what will happen tomorrow, but so far, for the last eight years, the numbers suggest that my ideas about CMOs have tended to be correct.

My conclusion: Read the book. And forgive the title.


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