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TAG | Oxford Club
5
Investing in Bonds: Three Steps to Smarter Bond Investing
0 Comments | Posted by Alexander Green in Alexander Green
Investing in Bonds: Three Steps to Smarter Bond Investing
by Alexander Green, Investment U Chief Investment Strategist
Monday, March 5, 2012: Issue #1722
At our Oxford Club Chairman’s Circle conference at The Ritz-Carlton in Naples last week, I noted a decided optimism about the outlook for the bond market. This enthusiasm is almost certainly misplaced.
We’re at the tail end of the biggest 30-year rally in bonds the nation has ever seen. Recall that three decades ago, Fed Chairman Paul Volcker pushed the prime rate all the way up to 21.5% to squelch inflation. Long-term Treasury yields reached 16%. But from that pinnacle, long-term yields have plummeted to around 3% today. Bond prices have soared accordingly.
It isn’t just unlikely that today’s bond buyers will see annual double-digit returns going forward, it’s mathematically impossible. And yet I sense that many fixed-income investors don’t understand this.
It’s not unusual to meet an investor who has plunked money in a bond fund because “its long-term track record is excellent.” They don’t seem to realize that it’s also irrelevant. Never has the old saw, “Past returns are no guarantee of future results,” been more apropos.
This doesn’t mean you should avoid bonds altogether, of course. But if you’re going to buy bonds, now more than ever you need to be smart about it. Here’s what you should do:
- Ladder your maturities. You should buy two-year, five-year and 10-year bonds. If rates go up – as they will eventually – your bond prices will fall, temporarily. But you will get your principal back at maturity and be able to reinvest your principal at higher rates. And paltry as bond yields are today, they still beat the heck out of the 0.05% that the average money market fund is paying.
- Keep a close eye on expenses. In the world of fixed-income investing, keeping a Scrooge-like eye on expenses is essential. Why? Because it’s difficult to work magic in the button-down world of fixed-income investing. Managers rarely earn their fees. And 12b-1 fees can eat away at your returns like termites in an antebellum house. My advice is to stick with individual bonds, Vanguard funds (whose expenses are one-sixth of the industry average) and low-cost ETFs.
- Avoid leveraged bond funds. Ever wonder how bond yields can be so low and yet the yield on your closed- or open-end bond fund is higher, even after expenses? Open your eyes. Unless you’re holding junk bonds, your fund manager is using leverage, the fixed-income equivalent of buying stocks on margin. By borrowing cheap, he or she is leveraging the portfolio to add yield. This works just fine while bond prices are flat or rising. But when bond prices fall – as they will when interest rates rise – these shareholders will take a shellacking. Consider yourself forewarned.
Some fixed-income investors tell me they feel safe for now since Bernanke has pledged to keep interest rates low through 2014. Think again. The Fed has only announced its intention to keep rates low. (Future economic conditions could quickly change that.) The Fed is also keeping long-term bond yields artificially low by buying these instruments to goose the economy.
Inflation could tick up. The Fed could raise rates and/or quit buying long-term Treasuries. In the end, the Federal Reserve sets short-term interest rates, but not bond yields and prices.
Know this. Understand it. And act accordingly. Bond investors today should be in a defensive posture, capturing higher yields than what’s available in cash instruments, but prepared for that point in the future when bond yields will rise and prices will fall.
Good Investing,
Alexander Green
25
Why Stock Investing is Like Skiing
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Why Stock Investing is Like Skiing
by Alexander Green, Investment U Chief Investment Strategist
Friday, February 24, 2012: Issue #1716
Over President’s Day weekend, I took my family to Massanutten Ski Resort in the beautiful Virginia Mountains. (It’s not Telluride, but when you have an eight-year-old son who yells “Woo-Hoo!” all the way down the slopes, it really doesn’t matter.)
We had admittedly low expectations for skiing when we arrived. It’s been an unusually warm winter and the snowfall has been virtually nil. Yet the night before we skied, the snow dumped fast and furious on top of the base of artificial snow.
The next day we woke up to a winter wonderland. Everything was covered with snow. The sun was shining. And it ended up being a perfect day. I couldn’t help thinking this was a lot like the stock market.
Here’s what I mean…
As well as being the Chairman of Investment U, I’m also the Chief Investment Strategist for The Oxford Club – a private fellowship for investors trying to achieve and maintain financial independence.
And our club has won numerous industry awards for editorial excellence. (The independent Hulbert Financial Digest ranks us among the top-performing investment letters in the nation for 10-year performance.) Yet much of our success actually comes from being well positioned to take advantage of completely unexpected circumstances.
Right now, for instance, the nearly two dozen recommendations in our Oxford Trading Portfolio are up an average of 43%, even though our average holding period is just 188 days.
Our portfolio is beating the market by a wide margin for two primary reasons:
- The first is that we have a proven system for identifying great companies at attractive prices.
- The second is that we don’t try to time the market. So when it suddenly puts on an impressive rally, as it has over the last three months (tacking on more than 1,500 points), we’re set to enjoy the benefits.
I don’t have a crystal ball. And neither does anyone else. Three months ago, we couldn’t have told you that the market was about to power higher. And two weeks ago, when I made my reservations for a mountain villa at Massanutten, I couldn’t have known that the skies would suddenly open up. But in both cases, it did.
Of course, stocks might not have rallied and the snow might not have fallen. But at least we took a chance. Successful investing is about hedging your bets, taking intelligent risks and being prepared for whatever happens.
Folks who wait for that mythical day when the investment landscape looks perfect will regret it. Just as those who wait for ideal conditions before planning a ski trip will find the fares are higher, the lift lines are longer or, if they wait too long, the snow is already gone.
Market bears will counter that the conditions may look right today, but that can change quickly. I don’t disagree. But we’ve thought about that, too.
We own plenty of investments outside the stock market, so our performance isn’t based on equities alone. We abide by strict position-sizing rules to limit our risk. And we run a trailing stop behind all of our stocks, assuring ourselves that our profits don’t slip through our fingers.
It’s not a perfect system, but it works, delivering high returns during the good times and protecting capital during the bad ones.
It sure beats sitting at home… wondering if it will snow.
Good Investing,
Alexander Green
7
Why Your Investment Advisor Was Dead Wrong
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Why Your Investment Advisor Was Dead Wrong
by Alexander Green, Investment U’s Chief Investment Strategist
Monday, March 7, 2011: Issue #1463
Happy two-year anniversary!
What? You say this isn’t your anniversary? Sure it is. Two years ago, the S&P 500 – after falling 48% from its October 2007 high – hit bottom. It was one of the great buying opportunities of your lifetime.
The only question is: Did you take advantage of it?
Some folks tell me they were too scared. Others say their trusted advisor told them to sell their stocks… and certainly not to invest precious cash in the market. In other words, at the point of maximum opportunity, their advisors told them to do precisely the wrong thing.
How about us here at Investment U and The Oxford Club? What did we say at the time?
Ignore “The Great Humiliator” and Buy Anyway
I have a fairly good memory, but I didn’t want to trust it. So I recently dug back through the archives to see exactly what we told readers to do.
Was it good advice? You be the judge. Here’s what I said in Investment U articl on the stock market rally dated March 23, 2009:
“Let’s consider what many investors simply refuse to believe: That we’ve seen the market lows.
Why are so many skeptical on this count? Because virtually everything they see and hear tells them the economy is going to get much worse in the months ahead.
And they’re right. It will. The economy is losing 600,000 jobs a month. The banking system remains dysfunctional. Real estate is mired in quicksand. Retail spending is anemic – and still falling. And consumer confidence is at record lows.
It doesn’t take an Isaac Newton to see that the economy will get worse. If there were a direct correlation between the economy and the short-term direction of the stock market, we’d know just what to do with our money now.
But there isn’t. Perversely, the market often tanks when times are good and rallies when the outlook is poor. Money manager and Forbes 400 member Ken Fisher doesn’t call the stock market ‘The Great Humiliator’ for nothing.
Should you buy into this market? Of course you should.”
Skepticism Reigns… But Ignore That, Too
At The Oxford Club, we were busy grabbing many of the market’s most flagrant bargains. (No wonder the independent Hulbert Financial Digest just reaffirmed that our Oxford Club Communiqué is one of the top investment letters in the nation over the last decade.)
Yet I was bombarded with more than a little skepticism:
“I’ve tried to get this message across to members over the past few weeks. Yet many react as if I’m asking them to stick their heads in an oven. Certain that I must be living on the dark side of the moon, they keep insisting that we’re in a Depression. I disagree.
What some fail to realize is that the severity of the economic downturn is universally recognized. It’s fully apparent even to those who have never invested a penny. Yet too many investors are sitting in cash and talking about ‘how bad it is’ as if they’ve suddenly grasped something the rest of us still haven’t cottoned onto.
The bleak economic outlook is fully discounted in stocks. The Dow hasn’t dropped below 7,000 because the world is wearing rose-colored glasses.”
The Simple Equation That Creates Huge Moneymaking Opportunities
I don’t cite these quotes to make it sound like we had a crystal ball. We didn’t. In fact, I wrote a column just last week explaining how many investor gurus and forecasters claim that their prognostications were right when their reasoning was dead wrong.
Ours wasn’t. And in recent months, I’ve spoken to hundreds of investors who made boatloads of money following our advice.
Any investment advisor worth his salt should know that whenever you have extreme valuations combined with extreme sentiment, it creates an historic opportunity.
If your advisor didn’t know that, shame on him (or her). But if you’re still taking advice from that same advisor today, shame on you.
There’s a good reason why we’re the world’s largest investment club. If you’re not currently a member, I invite you to join us now. I think you’ll be surprised by what we see just ahead.
Good investing,
Alexander Green
23
How The Oxford Club Beat The Financial Crisis… And What We See Now
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How The Oxford Club Beat The Financial Crisis… And What We See Now
by Alexander Green, Investment U’s Chief Investment Strategist
Thursday, September 23, 2010: Issue #1351
Investment forecasting is an inherently humbling business.
No matter how many good calls you make, there is always the possibility of getting it wrong the next time. Unexpected events happen. Markets turn on a dime. And an investment advisor often learns – in the cold reality of hindsight – that just when he felt like sticking his chest out he should have been covering his privates instead.
Yet there is a time for celebration too. And there is no denying that The Oxford Club and its members just came through the biggest financial crisis and the nastiest economic downturn in modern history with flying colors.
Perhaps the most surprising part is this: We can’t claim we foresaw how it would all unfold. If we had, we might have told readers to plow their money into bonds before the stock market meltdown and then switch back into stocks at the very bottom.
Unfortunately, there’s only one type of investor who does this consistently. You may have heard of them. They’re called liars.
So how did we succeed when tens of millions of investors stumbled?
Guesswork, Forecasting, Market Timing: Three Things You DON’T Need to Invest Successfully
Our investment system is built on the fundamental premise that to a large extent, the future is unknowable. Seasoned investors agree but then insist, “But of course you have to guess.”
No, you don’t.
We’ve taken the guesswork out of investing. For long-term investors, we use a proprietary asset allocation model, rebalance annually and keep taxes and investment costs to the absolute minimum.
No economic forecasting or market timing required.
Our short-term traders focus on buying great companies that are likely to beat consensus earnings estimates by a wide margin and run trailing stops behind them to protect both their principal and their profits.
How has this worked? You be the judge…
How We Notched a 28% Average Return Amid the Chaos of 2008
2008 was one of the worst years on record for the S&P 500. It posted a return of -38.5%. That caused us to stop out of 45 stocks in our Oxford Trading Portfolio. Here is the entire list. Nothing has been omitted. Although we took some lumps like everyone else that year, the average return on our closed positions was 28.6%.
With the financial crisis unfolding, we set aside our market neutral position. Why? Because you shouldn’t be afraid to aggressively buy or sell when market sentiment and valuations reach extremes. (That means either extreme optimism and sky-high valuations or extreme pessimism and rock-bottom valuations.)
Going into 2009, most investors were scared out of their pants. Stock market players were cashing in their chips. Bank depositors were running down to their local branch to withdraw their savings. The world seemed on the edge of financial collapse. And so did the markets.
Yet the headline on our annual forecast issue was: “Our No. 1 Prediction for 2009: Economic Disaster AND a Soaring Stock Market.”
Bear in mind, almost no one was saying this at the time. But that’s exactly what investors got. While the economic slump only deepened in 2009, the S&P 500 came roaring back – and our recommended stocks outperformed it handily.
If the Market Gives You Lemons… Don’t Get Sour, Just Suck Up Profits
This year we’ve maintained our optimistic stance on equities and have been rewarded with even more big profits.
While the S&P is only up 4% year-to-date, we’ve already realized gains of 229% on La-Z-Boy (NYSE: LZB), 103% on Tiffany & Co. (NYSE: TIF) and 54.7% on Emergency Medical Services (NYSE: EMS).
We’re also sitting on current gains of 321% on the Vanguard Emerging Markets Index (VEIEX), 299% on the Templeton Dragon Fund (NYSE: TDF) and 94% in Discovery Communications (Nasdaq: DISCA).
Yet over the past year and a half, at investment conferences around the world, I’ve heard almost nothing but talk of stagnation, double-dip recession and gallons of gloom and doom.
This week the National Bureau of Economic Research reported that the longest and most severe recession since the Great Depression is over. That doesn’t mean we’re out of the woods yet. We’re likely to have high unemployment and low economic growth for many months – and perhaps the next three years.
But we’re fully prepared for that, too. In fact, we’re already capitalizing on it. Perhaps that’s why the independent Hulbert Financial Digest ranks our Oxford Club Communiqué among the top investment letters in the nation for 10-year performance.
In short, we’ve taken the lemons the market handed out during the financial crisis and turned it into a Tom Collins with a fruit slice and a maraschino cherry.
If this sounds a little brash, I apologize. But we’ve enjoyed enormous success during the toughest economic period in more than 80 years.
And as Dizzy Dean famously said: “It ain’t bragging if you can do it.”
And if you want to do it, too, consider joining The Oxford Club and we’ll show you exactly how in our five model portfolios.
Good investing,
Alexander Green
Do Trailing Stops Really Work?
by Alexander Green, Chief Investment Strategist
Monday, June 14, 2010: Issue #1280
While I was in Baltimore last week, one of our Oxford Club researchers, Matt Carr, told me over lunch that one of the most controversial aspects of our investment policy is trailing stops.
But they shouldn’t be.
If you don’t have a premeditated sell discipline – and the vast majority of investors don’t – you’re flying by the seat of your pants. And that rarely leads to superior investment performance.
But do trailing stops really work?
Survey Says: Use Trailing Stops
In a word: Yes. Trailing stops protect your profits and your trading capital. And there’s much more than just anecdotal evidence.
In a study published in The Journal of Portfolio Management, Christophe Faugere, Hany A. Shawky and David M. Smith – finance professors at the State University of New York at Albany – researched the performance of money managers who oversee pension funds, endowments and high-net-worth accounts.
Because most institutions work under strict investment guidelines, these academics were able to analyze performance based on differing approaches to selling stocks.
The result? Institutional managers who fared best were those with restrictive rules that didn’t allow much leeway for holding stocks for emotional reasons. Managers who relied on “flexible” sell strategies did far worse.
Count me as unsurprised. Institutional money managers are just as prone to rationalizing as individual investors when they make a mistake. (Hence the old Wall Street chestnut, “What does a broker call a trade gone wrong? A long-term investment.”)
Trailing Stops: Providing Protection… Securing Profits
The culprit is almost always pride, ego, or emotion. Without any kind of sell strategy, emotions come into play. And emotions are almost always wrong.
But by adhering to a disciplined trailing stop strategy, our Oxford Club investment system mows down emotion-driven trading errors like a field full of dandelions.
It cures greed. Eliminates fear. And does away with wishful thinking – as in, “I hope this stock turns around and starts going the right way.”
Of course, trailing stops aren’t the only sell discipline out there. But they’re one of the easiest to implement. They serve two purposes…
- They make sure we never let a small loss become an unacceptable loss.
- They keep us from selling stocks while they’re still trending up.
According to the independent Hulbert Financial Digest, over the past 10 years our Oxford Club portfolios have beaten the S&P 500 by a wide margin. Part of our success has come from diligent research and careful stock selection. But part has also come from cutting our losses and letting our profits run.
Maneuver Past the Market Makers With TradeStops.com
The one knock against using trailing stops is that unscrupulous market makers will sometimes take out your stop order right before a stock takes off.
But Richard Smith, President and Founder of TradeStops.com – and a PhD in mathematics – has a service that provides an ingenious solution.
If you visit www.tradestops.com, you can enter the stocks you own, the price you paid and the percentage trailing stop you want to use. There are several valuable benefits…
- If any of your stocks close beneath your selected stop, TradeStops sends a message – to your cell phone, e-mail, or account page – alerting you.
- Some brokerage firms, like Fidelity, offer trailing stop alerts with their accounts. But they generally expire after 30 or 60 days. TradeStops information never expires and even offers a 30-day risk-free trial.
- You can track up to 50 stocks at a time. (And whenever you stop out of one, you can replace it with another.)
- TradeStops is easy to use. It’s specifically designed for technophobes.
- It’s reasonably priced. Ordinarily, the cost is $7.95 a month or $79.50 a year. (If you’re an Oxford Club member, you get a special rate of $39.95 a year.) There are additional services available for dedicated short-term traders who want even more.
- It’s important to note that TradeStops notifies you of stops, not your broker. And it doesn’t enter sell orders. But the key is to make sure you have an acknowledged point where you’d be willing to sell any individual stock.
Trailing stops don’t just offer to cut your losses and protect your profits. They guarantee it.
Good investing,
Alexander Green
Editor’s Note: Much of what it takes to become a successful investor comes down to knowing the best times to buy and sell. Some investors rely on technical analysis; others pinpoint fundamentals. But regardless, trailing stops are essential to protect yourself from a volatile, unforgiving market.
Adhering to a disciplined trailing stop policy is just one of the core wealth-building strategies that has made The Oxford Club one of the most of the most successful investment publishers. In fact, over the past decade, the independent Hulbert Financial Digest has ranked The Oxford Club’s Communiqué as one of the top five investment newsletters.
So if you want to take all the guesswork out of the buying/selling process and let the Oxford Club analysts do the work for you, then consider becoming a member. For $79, you’ll receive an entire year’s worth of stock recommendations, with instructions on when to buy and when to sell for maximum profits. (You’ll also be eligible for the special TradeStops rate mentioned above, too). Take a look at the full list of Oxford Club membership benefits.
