One Minute Summary:
Supervision of fixed value investment is necessary. However, to achieve an additional 1 to 2.5% yield on top of the U.S. government bonds, an investor is required to buy the right securities and monitor their corporate developments. Yet, with all the effort entailed, he/she is still exposed to a chance of loss. If the spread between corporate bonds and government bonds are within a limited range, say 1% to 2.5%, government savings bonds would a better choice, unless the investor is educated enough to speculate or identify investment opportunities.
New terminology / Concepts / Ideas / Technical Items / Useful Examples:
“Gilt-edged securities”—securities that are thought to have the highest level of quality.
Additional thoughts:
Currently, for 10 Year bonds: US Treasury—3.57%; AAA Corporate—4.24%; A Corporate—5.41%; BBB Corporate—6.52%. From the suggested practice, an investor should consider US Treasury bond much the same way it was 70 years ago.
Practical Application:
Large interest coverage—the margin of safety—is an excellent quantitative trait in fix-value investments. However, an operating loss would immediately eliminate that margin of safety. Therefore, earning stability from the issuing corporation is an essential requirement for fixed-value investments.
Three Quotes:
1. “It is doubtful if trading in bonds, to catch the market swings, can be carried on successfully by the investor…we are convinced that any combined effort to advise upon the choice of individual high-grade investments and upon the course of bond prices is fundamentally illogical and confusing”
| Type | U.S. bond market (CY2009) | NYSE/AMEX/NASDAQ combined (Jan 2010) |
| Average daily trading value | $815 billion | $71 billion |
2. “The degree of safety enjoyed by the issue, as shown by quantitative measures, must be so far in excess of the minimum standards that a large shrinkage can be suffered before its position need be called into question.”
3. “If only small investors would resolutely reject…an ostensible “sure income return” of 4 to 6%, and thankfully take advantage of the 2.90% available on United States Savings Bonds, we are convinced that they would save an enormous amount of money, trouble and heartbreak.”
A question to the group to test understanding:
1. Why some investors (retail or institutional) must consider types of fixed-value investment?
Clarifications & Group Discussion:
1. Superiority of United States Savings Bonds—has this changed?
2. Why has bond trading become such a dominate force?
3. Systematic supervision—how are you addressing this requirement with your investment?
4. Sources of investment advice—if most sources are terrible by design, why is their popularity in perpetual growth?
5. If a company lacks inherent earning stability, but has a history of large interest coverage. Would you consider purchasing its corporate bonds, and if yes, at what price point?
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