Why Hold Bonds?

[magellan_nh]

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]

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]

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]

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]

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"

 

[audreyh1]

The yield curve is barely inverted. It seems more flattish to me.

I have been more concerned about the unusually narrow credit spreads, but Nords' article reference above seems to indicate credit spread will remain narrow due to foreign demand for corporate bonds.

Audrey

 

[Hamlet]

The two failed funds were not run by Lynch, so I don't know what that has to do with his record (although the tax-loss carryover from them offset some of the tax consequences you mention).

I imagine that at least a few people actually owned the fund in a retirement account and avoided the tax problems.

As to the early returns being larger than the later returns, that's not exactly surprising. It is alot easier for a small fund to beat the market than a small one. Buffet's returns show the same issue. It doesn't do a large fund any good to find a drastically undervalued smallcap. It can't buy enough to matter.

I haven't claimed Peter Lynch is a genius. He could very well be the lucky monkey coin-flipper this board claims he was. That doesn't change the fact that anyone who held Magellan from the beginning of his tenure to the end got investment performance better than pretty much any other option available at the time.

It also doesn't change the fact that the people who held after he left got decidedly mediocre investment performance.

"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.

 

[cute fuzzy bunny]

BTW, i'm not claiming that Lynch is a moron. Just pointing out that if genius were a factor, we'd have a lot more funds run by geniuses that perform well consistently vs the market over long periods of time.

I mean, how hard can it be to beat a bucket of investments that has the worst along with the best? How smart do you have to be to at least fork the really obviously crappy performers off the plate and beat the index?

Yet, the results we have over the long haul is that even presuming lucky coin flipping odds, we dont have enough successful long term winning active managers to account for just good luck. Which sort of means that putting your hands on the thing produces worse results than luck, with coin flipping monkeys still not doing as well as the total market...over time.

Which I think means that market movements are simply unpredictable and resist even highly intelligent efforts to improve returns. Not just resist them, but turning such efforts into manure.

So Lynch might have been the lucky monkey, or actually good. Either way, I doubt a lot of people would have known at the outset that he was the "good" one to put their money on, and by the time it was really evident, it was a little late to bet on that horse.