Investing in individual bonds?

[Tybee]

Do any of you invest in individual corporate bonds? I have Treasuries, and a couple of individual corporate bonds that I found in investing newsletters, but it is not something I know much about and I always feel nervous about trying it.

I also bought a New York hospital bond because it seemed like a solid thing to do and it is up 39% and earns 4.7% so I got really lucky with that one.

If you do or don't, why or why not, and what parameters do you use?

Thanks!

[GeorgeParker]

Do any of you invest in individual corporate bonds? If you do or don't, why or why not, and what parameters do you use?No, I don't.

Buying individual bonds can be a safe profitable way to invest, but it requires a specific set of skills and knowledge that I don't possess.

If I were going to do it, I would stick with big companies that dominate their field and pay a good but not outrageous interest rate. When bonds pay an outrageous interest rate it means professional bond investors are skeptical about getting their money back.

Of course on an old bond like your New York hospital bond, if the stated rate is 4.7% and the price of the bond has gone up 39% since you bought it.... The price you're paying to hold it is 139% of what you paid for it but the interest is still just 4.7% of the original price. IOW the bond price went up because inflation went down. If inflation goes up and bond yields follow, the price of your bond will go down. Since 39% capital gains equals 8.3 years of interest at 4.7%, you're betting that inflation will stay at the current historic lows. Is that a good bet? Or should you cash our and thereby eliminate your inflation risk? Or should you cash out and put your money in an inflation-resistant investment?

Beats me! That's why I stick to what I know: investing in individual stocks. Specifically I buy big-name companies with good dividends that have been paying (preferably raising) their dividend for a long time. S&P 500 Dividend Kings and S&P Dividend Aristocrats are a good place to look for such stocks.

So are the Dow Underdogs https://dowunderdogs.horizonpublishing.com/ with the caveat that a DJIA 30 stock that has a big dividend because its price has fallen, may be in financial trouble and about to eliminate that dividend. GE and DISNEY are two recent examples of big names that cut their dividend and their stock price fell as a result.

I also keep about 20% of my portfolio in "Deep In The Money" option spreads, which allows me to buy stock for a fraction of its current price in exchange for limiting my potential profit. It's a high yield, low risk way to invest, but not totally risk free. I lost money last year because the Covid market crash killed some of my option positions and thereby wiped out all of my stock profits plus an extra $5000. So it's not a game for amateurs or people who get nervous when their account balance goes up or down $3000 in a single day for no apparent reason.

[Tybee]

"Since 39% capital gains equals 8.3 years of interest at 4.7%, you're betting that inflation will stay at the current historic lows. Is that a good bet? Or should you cash our and thereby eliminate your inflation risk? Or should you cash out and put your money in an inflation-resistant investment?

Beats me! That's why I stick to what I know: investing in individual stocks."

Right, that has been my take on it, too. I also buy individual stocks the way you do, with much of the same criteria. So I am quite comfortable buying individual stocks--that is why I am asking about bonds. I don't have the same comfort level with bonds that I do with stocks.

Thanks!

[iris lilies]

The closest I have come was buying specific municipal bonds for two library systems.

[dado potato]

I have recently sold most of the corporate and municipal bonds in my portfolio, primarily because they were trading at premiums that would all disappear when the bonds matured in 2023-2025. For the bonds and CDs that remain I intend to hold as a portfolio stabilizer until maturity.

I was a buyer of Treasury I Bonds (I bought my legal limit for the year) from Treasury Direct. I have been buying my limit for 6 years now. I see the I Bonds as a last ditch reserve in case of a financial shock. The real return on them would probably be about zero when I cash them in, but zero is better than the negative real return that is available in other types of fixed income or savings/CDs.

As an old croc, my main objective is capital preservation and income. with capital appreciation secondary.

[Tybee]

Good points, Dado. Maybe I should sell the hospital bond, just don't know where to put it then.

[LDAHL]

I only buy them through mutual funds. I’m willing to pay a bit more to have somebody else do the credit research and bookkeeping, and to be more broadly diversified than I could manage on my own. I might feel different if my portfolio was significantly larger.

[SteveinMN]

Mutual funds only here, too. I don't pick individual stocks; I don't pick individual bonds.

[GeorgeParker]

For what it's worth I just bought a few shares of Chevron Oil. It's been beaten up and it's had a rough ride because of the oil glut and Covid and general fear about Biden pushing eco-friendly energy to the detriment of oil. But there are also some reasons to like it and to believe it will stay profitable for a long time. CNN Business https://money.cnn.com/quote/forecast/forecast.html?symb=CVX predicts Chevron's stock price will go up 18% during the next 12 months. Moreover Chevron goes ex-div $1.29/share on Feb 17th (5.78% annual yield).

By contrast AT&T, which I also own, has a 7.1% dividend yield and a flattish stock price.

I'm not specifically recommending either of these, just holding them up as examples of the bigger risk/reward ratio in stocks vs bonds.

Disclaimer: I am not a lawyer, accountant, professional investment advisor, or anything else like that and I don't even play one on television. I'm a self-taught investor and I'm probably not the sharpest tool in the shed. So do your own research and please be aware that any advice you read on the internet or hear from a friend of a friend is likely to be over-optimistic or out of date by the time you get it.

[iris lilies]

When I bought library bonds it was a significant amount of money: $25,000 invested in the bonds for the library system I worked for.


Later, my broker called to see if we were interested in a suburban library bond and so we put $10,000 into that. Both of them paid nicely, but then they cashed out.

[Rogar]

Bonds made better sense to me when interest rates were higher and you could lock into a reasonable rate of return. I'd assume a serious bond investor would want a small portfolio for diversity or to manage other risks. My best guess is that there would be a way with our low interest rates to squeeze out a little more return, but I'd just as soon take my chances on a short term bond fund and let someone else handle the details.

[ApatheticNoMore]

No only muni fund and trying some long and intermediate government bond funds. And have some corporate bonds from a balanced fund mutual fund. If I was a much better investor maybe.

[Tybee]

When I bought library bonds it was a significant amount of money: $25,000 invested in the bonds for the library system I worked for.


Later, my broker called to see if we were interested in a suburban library bond and so we put $10,000 into that. Both of them paid nicely, but then they cashed out.

Were they called out early, IL? I assume that's what you meant by them being cashed out, although you might have cashed them out for other reasons.

The ones I am looking at are all callable bonds. So you might get the good interest for a bit, then when they look too good they will get called out. But you'd have a nice rate of interest for as long as that took. That happened with some wonderful bonds I bought back 20 years ago that were earning 11%. Of course my savings account was earning 5%.

[dado potato]

With individual bonds there is an obligation to the holder to pay interest of a certain amount on a certain date, and there is a certain date when principal will be paid to the holder (there may be a call provision that allows the borrower to pay the principal sooner). With a bond fund, in contrast to individual bonds, the buyer does not have certainty about future payments.

In the bond market's recent pursuit of yield, some bonds have come to market with duration out to 100 years, which is unprecedented. Junk bonds yield spread likewise has been bid down to an all-time low, as of a few days ago. I believe there is a possibility of great losses for investors in long-term and junk bonds.

I do not see opportunities to obtain a positive real return in the bond market without taking on a significant risk of loss of principal. Treasury I Bonds will likely have a return equal to the CPI (reset 2x per year)... a zero real return before tax, backed by the full faith and credit of the United States. The annual purchase limit is $10,000 per Social Security Number. Thus, this opportunity is limited.

[iris lilies]

Were they called out early, IL? I assume that's what you meant by them being cashed out, although you might have cashed them out for other reasons.

The ones I am looking at are all callable bonds. So you might get the good interest for a bit, then when they look too good they will get called out. But you'd have a nice rate of interest for as long as that took. That happened with some wonderful bonds I bought back 20 years ago that were earning 11%. Of course my savings account was earning 5%.

Yes, “ called out” is the right term.

Arent there some pretty hefty minimum amounts for corporate bonds?

[Tybee]

I think 5000 is the minimum.

[Charlie]

Tybee,

I buy corporates (as well as treasuries, agencies, munis, foreign sovereigns, and CDs), but no REITS, MLPs, or stocks which I hate with a passion that knows no end.)

Mention 'bonds' to the "average" investor and their eyes glaze over, or else they repeat the usual myths and misunderstandings. But the 'bond game' is no different than the 'stock game'. "How much am I being paid to take on how much risk?" Answering that --whether one is buying stocks, bonds, commodities, currencies, whatever-- means doing research, and each person will have their own style. So me describing the parameters I use probably won't work for you, because every investor's situation is different.

Normally, I'm carrying 200 to 300 positions, or what amounts to my own multi-sector, spectrum-income bond fund. These days, the bond market has gotten tough, due to the Fed's ZIRP. But I'm still finding things to buy. It's just a matter of running scans, doing one's due-diligence, then sizing a position and trying to get a fill. In that regard, E*Trade has the best scanner, and Fidelity is the best place through which to execute. (IMHO, 'natch.)

Charlie

[Tybee]

Tybee,

I buy corporates (as well as treasuries, agencies, munis, foreign sovereigns, and CDs), but no REITS, MLPs, or stocks which I hate with a passion that knows no end.)

Mention 'bonds' to the "average" investor and their eyes glaze over, or else they repeat the usual myths and misunderstandings. But the 'bond game' is no different than the 'stock game'. "How much am I being paid to take on how much risk?" Answering that --whether one is buying stocks, bonds, commodities, currencies, whatever-- means doing research, and each person will have their own style. So me describing the parameters I use probably won't work for you, because every investor's situation is different.

Normally, I'm carrying 200 to 300 positions, or what amounts to my own multi-sector, spectrum-income bond fund. These days, the bond market has gotten tough, due to the Fed's ZIRP. But I'm still finding things to buy. It's just a matter of running scans, doing one's due-diligence, then sizing a position and trying to get a fill. In that regard, E*Trade has the best scanner, and Fidelity is the best place through which to execute. (IMHO, 'natch.)

Charlie

Thanks, Charlie! That is really interesting. You are right that most people's eyes glaze over, and to me, it doesn't look that different than buying individual stocks. I will look on Fidelity since I don't have an etrade account anymore.

[Charlie]

Tybee,

With bonds --any type-- you're mainly making one of two bets. Either you're betting on the level/direction of interest-rates, or on the level direction of an issuer's credit-worthiness. With upper-tier corps, the bet is mainly an interest-rate bet, and scant credit analysis has to be done. With lower-tier corps, --aka, spec-grade bonds, aka, junk bonds-- you're mainly making a credit-worthiness bet. So, either your research process has to be sound, or else you've worked out how to game the default-rates, so that, on average, you're profitable despite sustaining some losses.

It's the mid-tier stuff, the triple-BBBs, that's problematic. Some truly awful stuff is put into that category and given a pass by the rating agencies who can be bribed, as the book/movie, The Big Short, makes clear. That said, the Moody's report should always be read, because --by a large-- the credit analysts and raters are doing a good job, as are the stock analysts, whose reports should also be read, because both groups are talking about the same underlying company. There are dozens of other checks that can be done. How's the company's stock trading? What's the short ratio? If the company pays a div, what's the payout ratio? What are the trends in their balance sheet? Etc.

In short, the question you're trying to answer is this: Will the company be able to make coupon payments and return principal? If there is uncertainty about this, Is the discount price sufficient to accept the risk? In other words, bond investing is nothing but classic, Ben Graham-style value investing as he laid it out in his book, The Intelligent Investor. If you're over-paying --as most stock investors are doing currently-- you're making a bad investment. But if you're failing to act on a scary, but very under-priced opportunity, then you're also making bad use of your time and money. (Umbrellas in July; straw hats in December, etc.)

Charlie

[Tybee]

Thank you; you make an excellent point at the end about opportunity and fear.

[Charlie]

Tybee,

Value investor, Marty Whitman, made the same point in his book about fear and opportunity. "If there's not something wrong with it, it's not worth buying." Said another way, investing is as much about psychology as accounting. The truly fearless blow up their account in short order. The overly-timid never reach even reasonable goals for always being afraid to act.

"Balance. It's all about balance", as Mr. Miyagi would say.

Poke around in the bond market. Even now there are opportunities whose risks can be mitigated by backing away from the truly questionable stuff and by not over-betting one's hand on what does decide to buy.

Charlie

[GeorgeParker]

Value investor, Marty Whitman, made the same point in his book about fear and opportunity. "If there's not something wrong with it, it's not worth buying."That sounds similar to the stock-buying theory that the best companies to buy are the ones that have bad public relations. If they collect garbage, run landfills, handle toxic waste, or do something else repulsive they're worth looking at because their unsavory public image is probably keeping mainstreet investors away from them and keeping their PE low.

But as with any theory, you have to do your due diligence to separate the unworthy companies from those that are merely unloved.