Why Hold Bonds?

[yakers]

Originally Posted by Nords

Gross isn't fit to wipe the mud off Lynch's boots. And any debate would have to include Mr. Gross' "interpreter"... the one who used to clarify Greenspan's Congressional testimony.

IMHO Gross is a better investor than Lynch although in significantly different fields. But you have to look at what he does, not what he says. And as a public speaker, yeah, OK, you got that right.

[brewer12345]

Originally Posted by yakers

IMHO Gross is a better investor than Lynch although in significantly different fields. But you have to look at what he does, not what he says. And as a public speaker, yeah, OK, you got that right.

Ignore what Gross says. He likes to "talk his book" as they say in the trade.

[magellan_nh]

Originally Posted by brewer12345

Ignore what Gross says. He likes to "talk his book" as they say in the trade.

I read gross on the PIMCO website every month and I've often wondered if that was the case. Either way, at least his musings can sometimes be entertaining.

FYI - My only PIMCO holding is PCRIX (commodities)...

Jim

[bbuzzard]

Originally Posted by Nords

The case between a stock/bond split is usually an investor's tolerance for volatility and the ability to sleep at night.

I think this sums things up for me. I very seriously doubt that I will even hold more than 30% bonds. OTOH, I have been wrong before.

I definitely do see than if one is retired with only cash in the bank (no pension) and your withdrawals must stay at some nominal level, say 4%, to preserve a basic living standard, one would be more interested in bonds. Fortunately, this is not the case for myself. That was the whole point of my original post. If you can tolerate the volatility, you do not need as much in bonds.

[. . . Yrs to Go]

Originally Posted by bbuzzard

That was the whole point of my original post. If you can tolerate the volatility, you do not need as much in bonds.

People are notorious for over estimating their tolerance for volatility - especially after double digit equity gains. Having a bi-weekly pay check also makes a big difference.

As far as the premise that more equity is always better if you can stomach the volatility - I'm not convinced. FIRECalc shows that a 4% withdrawal from an all equity portfolio survives 92.5% of historic 30 year periods. The same withdrawal from a 70/30 portfolio survived 95.3%. Higher survivability and lower volatility all at the expense of possibly missing a huge payday, which won't likely be realized until the last 10 years of your life, seems like a good deal to me.

[rmark]

"Long-term past performance of the total market tells us much about long-term future performance of the total market."

http://papers.ssrn.com/sol3/papers.c...ract_id=476981

Magellean fund was originally a private fund for Fidelity's Johnson family, with 2 failed funds folded into it when it went public. Peter Lynch invested mostly in mid-cap stocks, at least until the fund was too big, and he apparently didn't beat the market when properly measured against that benchmark, after costs and taxes.

[haha]

Nasty, nasty- you should not link that paper here. We are optimists, and in the long run, in America, the Optimists always win.

All together now, "In America, the Optimists Always Win!"

Ha

[figner]

I'm currently in the 100% stock allocation camp, though also in the process of refining my AA over the next year or so. I'm leaning towards a pretty minimal (maybe 10%) allocation to bonds, just enough to get some of the diversification benefits. Since I still have 10-13 years to go before withdrawals, I figure the worst case scenario just means I work a few more (ok, maybe several more) years. Once I ER, I'll probably consider moving somewhere in the 20-40% bonds range - hopefully I'll be in my 40's, so planning on a long portfolio survival time.

It sounds like at least some here would consider this foolhardy. Maybe I'll post my proposed AA for you kind folks to poke and prod.

[Hamlet]

I call bull.

From this link:
http://www.streetauthority.com/peter_lynch.asp

"Lynch secured his reputation as one of the most successful fund managers in history while in charge of the Fidelity Magellan fund between 1977 and 1990. During the 13 years until his retirement in 1990, Magellan was the top-ranked general-equity mutual fund. A $10,000 investment in Magellan in 1977 would have grown to $288,000 by 1990. During this period Lynch achieved and average annual return of 29%."

I'm pretty sure that even with being very tax inefficient, a return of 29% annually is higher than what MidCaps returned during that 13 year period.

I also take issue with saying that he invested mostly in MidCaps. He invested in almost ever equity class available. SmallCap, MidCap, LargeCap, International. Heck, early on one of his largest holdings was 30-year government bonds. That holding did quite well as interest rates plummeted.

Originally Posted by rmark

"Long-term past performance of the total market tells us much about long-term future performance of the total market."

http://papers.ssrn.com/sol3/papers.c...ract_id=476981

Magellean fund was originally a private fund for Fidelity's Johnson family, with 2 failed funds folded into it when it went public. Peter Lynch invested mostly in mid-cap stocks, at least until the fund was too big, and he apparently didn't beat the market when properly measured against that benchmark, after costs and taxes.

[cute fuzzy bunny]

Thing is, you have ten million monkeys flipping coins and one of them will flip 'heads' an awful lot.

The monkey wasnt a genius, he was just a bit lucky.

Out of all the investors in the world, we have a handful that have kept flipping heads. As Lynch's tenure lengthened and his fund grew, his returns reduced. Which has a lot of explanations in terms of bloat and market conditions, but its also what you'd expect from a monkey with a coin...eventually the luck runs out. Towards the end Lynch was "thrash trading" the fund to try to keep up a positive return and burned out.

Bill Miller's another lucky monkey, I think.

By stepping in and running (or at least seriously influencing) some of the companies he's invested in, Buffet's been making his own two-headed coins for a while, so I dont think he counts. I suspect he's less a great investor and more a good business manager that can spot a good value...and has the money to do something about it.

[magellan_nh]

Originally Posted by El Guapo

Thing is, you have ten million monkeys flipping coins and one of them will flip 'heads' an awful lot.
The monkey wasnt a genius, he was just a bit lucky.

To take an even more skeptical view, imagine that just when one of the monkeys gets a long winning streak, everybody starts calling him a genius and he gets loads more money to invest. The "new" money gets poured into the existing holdings and drives up their prices still higher. With huge cash inflows, nearly anything the monkey picks becomes a winner by the time the position is fully bought. Magically, returns are even more stellar.

Unfortunately, the house of cards eventually comes tumbling down once the inflow of cash slows and one or two bad years occur. Then the process works in reverse and the returns are driven ever lower from the weight of redemptions driving share prices of the existing holdings lower and lower.

By stepping in and running (or at least seriously influencing) some of the companies he's invested in, Buffet's been making his own two-headed coins for a while, so I dont think he counts. I suspect he's less a great investor and more a good business manager that can spot a good value...and has the money to do something about it.

I think this point about Mr. Buffer is spot-on.

[Nords]

Originally Posted by El Guapo

By stepping in and running (or at least seriously influencing) some of the companies he's invested in, Buffet's been making his own two-headed coins for a while, so I dont think he counts. I suspect he's less a great investor and more a good business manager that can spot a good value...and has the money to do something about it.

Exactly-- and look how he's moved from stocks to entire businesses over the last 10 years.

[cute fuzzy bunny]

I suppose the next logical transition is to...what...countries?

Hey...lets tie a few loose ends together. I'm sure we can make a sweet deal selling iraq to buffet.

What a value...

[lswswein]

Originally Posted by El Guapo

I suppose the next logical transition is to...what...countries?

Hey...lets tie a few loose ends together. I'm sure we can make a sweet deal selling iraq to buffet.

What a value...

TH - Buffet does not provide management. So you need to install a management and have the country running smoothly before offering it to him as a value play. Guess he will buy when the whole country could be bought for around 30% discount on Total number of proven barrels of oil * $20 per barrel of oil. need the margin of safety

-h

[magellan_nh]

Originally Posted by lswswein

TH - Buffet does not provide management. So you need to install a management and have the country running smoothly before offering it to him as a value play. Guess he will buy when the whole country could be bought for around 30% discount on Total number of proven barrels of oil * $20 per barrel of oil. need the margin of safety

I think you're right, Iraq really wouldn't be Buffet's cup of tea. Are there any dictators or monarchs in the region that are ready to retire and want to monetize the value of the country for estate planning reasons?

[rmark]

"I call bull."

well maybe, the study was one I read some years ago - but note

Magellean was a private fund with 2 failed funds "disappeared" into it - kind of like Stalin airbrushing out the people he had imprisoned, so we have survivor bias from day one.

The early years had high returns, but few people were invested in Magellean - so its investors as a whole have lower than published returns on a dollar weighted basis.

It was actively managed, with unpublished transaction costs mostly hidden from investors.

That same active management triggered taxes for taxable accounts, further reducing the net return to investors.

None of this shows up in the return record, yet it costs investors real money.

Depending on how the story is reported, Mr. Lynch seems to have or have not beat the market from the investors point of view. Maybe its too close to call.

[clifp]

I don't know enough about Bill Miller to comment on. But I think Lynch's legacy has a significant skill element involved as well as excellent timing. In some ways Lynch's tenure at Magellen demonstrate even more skill than Buffett's stock picking skill. (Warren ability to acquire good business at low prices, and allocate capital is obviously unprecedented.)

By owning several hundred stocks at time, which significantly outperform the market for a decade is statistically more improbable than Warren hold a few dozen companies for a long period of time which have done phenomenal well. By way of analogy consider the batting average of a DH or a pinch hitter with a 100 or so at bat over handful of season, vs a Pete Rose. or Ted Williams with 400 or 500 at bats over 20 seasons. The shear number of attempts and hits generated by a Pete, Ted make their accomplishments very impressive.

On the other hand Warren deserves all of the accolade he has received (disclosure BRK is my 2nd largest holding) because has the courage of his convictions and doesn't deworsify just for the sake of diversification.

[clifp]

I have a mixed feelings about bonds especially long-term ones given today inverted yield curves.

Still I think there is a place for bonds in a early retired portfolio (I have about 35% which probably more than is optimal).
I think that you should purchase bonds when they provide an income rate close to what you need, because they do significantly reduce the volitality of ones portfolio.

For instance in the late 90s before retiring, I found California Tax free muni yielding 5%. I figured that with a $2 million portfolio + an IRA (for inflation) $2 million at @5% was $100K after tax and more than I needed. More recently in 2000, and 2001 the real yields of TIPS bonds I purchased was between 3.8 and 3.92%, so if you need a 4%+inflation withdrawal rate, a portfolio of TIPs in that ranges is very attractive. Unfortunately for me my TIPs bonds were only 10 years, and I am not sure what I will do in 2009-2011 when they mature. I find the current coupon of the TIPs bonds to be unattractive.

[Nords]

Originally Posted by clifp

I have a mixed feelings about bonds especially long-term ones given today inverted yield curves.

Here's another perspective on today's bond markets, despite the inversion: "Buffett, Verizon Buoyed by China, U.K. Debt Appetite"