The great financier Bernard Baruch was asked what the 7 wonders of the world were. He replied that he did not know but he knew what the eighth was-compound interest. You can use the rule of 72 to find out how long it takes compounded money to double. At 7% its 72/7 =10.01 and at 10% its 7.2 years.
In 1981/2 you could buy treasuries and corporate bonds with yields of 14-18%. Exxon is a discounted zero coupon bond at 2 cents on the dollar which was paid out at 100 in 2012. Here was a way of increasing your money 50 fold with limited risk as long as Exxon remained solvent as they still are today. The late great investor Robert Beckman advised his subscribers to buy bonds and “grow rich slowly but surely”. Gary Shilling did likewise in his publications and appearances on CNBC(or the equivalent at the time).
Some of Beckman’s subscribers wrote and said, “You mean all I have to do is listen and I will become rich”. “Yes”, he replied, but most of you will not do it.
Most people are impatient and this kind investment strategy is not exciting. Bob knew most would get bored with it and buy the Tesla or exciting stock of the day. I listened to Bob and turned a few thousand dollars into millions. Unfortunately the ability to compound both interest and capital gains together has gone because the interest component is so low. Gary Shilling on the other hand focused mainly on the capital gain potential of bonds as interest rates fall. This is a mathematical relationship which I will not go into but it is possible to get tables or a bond calculator to determine exactly how much money you will make when rates fall.
There is another reason why serious bond investors are successful. Profits from bonds are limited but QUANTIFIABLE. Unlike stock investors bond investors do not fall in love with their investments and dispassionately sell them when the time is right and the bond has achieved what it can. As a stock investor you are convinced the value of the stock will go to the moon which makes it difficult to sell and makes it probable that you will ride it all the way down again.
I am convinced a point will be reached where long term interest will become negative. In a previous commentary I explained why. This can be leveraged using an ETF like TMF. This is a highly speculative position and should only be undertaken with ‘cool money’, money you know could be lost, like all speculative investments.
When the stock market corrects the opportunity to buy investment grade and even some speculative grade corporate bonds with high yields to enable income compounding will return. This will be the result of widening credit spreads. This occurs when investors expect much higher yields on less safe investments. It will not be like the 1980’s however, that is many decades away. Bonds are a very heterogeneous group of investment vehicles. So whenever you hear someone talk about a ‘bond bubble’ you know they do not have a clue about bonds. I always ask, “Do you mean, sovereign bonds, corporate bonds, short dated bonds(really called notes), dollar bonds, euro bonds or Yen bonds. Perhaps you mean floating rate notes, index link bonds or sukkuk bonds, because I don’t know what you are talking about”.
So while corporate, especially junk seem overpriced at the moment, this is not the case with treasuries. (read more about Corporates: "Don't under estimate the Fed's playbook")
Finally the real kiss of death for bonds will occur if the public or CNBC were to discover. I used to think this might happen but I seriously doubt it. If CNBC or the financial papers tell you to buy Treasuries that will be an automatic sell signal.
NOTE: The Writer has an investment position in United States Treasuries and other long term fixed investment instruments. This is not investment advice.
China is the world’s second largest economy and often not seen anymore as an emerging market. China...
In a true and complete financial panic where everything is suspect liquidity will become paramount....
Assuming the vaccine is as protective as best case scenario, there remain more hurdles; never befor...