Don't Ignore the Bond Market

When investors think of putting money in the market, they usually think only of stocks. However, there's a huge bond market out there (consisting of corporate debt) that, depending on the economy, can offer value investors even more bargains than do stocks. For example, when we met with Warren Buffett a few months ago, he mentioned that while he saw some bargains in stocks, he currently saw allot more inefficient pricings in debt markets.

Finding value in debt markets is nothing new for value investors. In "Security Analysis," Ben Graham and David Dodd go into extensive detail for intelligent investors to help them decipher what to look for in order to find bargains in debt markets. Debt holders have certain advantages in that they have first claim on company assets (ahead of stockholders). On the other hand, debt holders don't have the possibility of receiving gains above what is promised. For this reason, Graham and Dodd suggest only purchasing a company's debt (for the purpose of gains) if the bond price is severely depressed (by 30% or more). This way, outsized gains (approximately 50%) can be made for those who can spot the inefficient pricings. (For income purposes, debt securities may still be purchased close to par.)

Unfortunately, information on debt issues is not as prevalent as it is for stocks. Nevertheless, information exists for those who seek it. Yahoo! Finance has a decent "Bond Center" devoted to corporate debt. For example, here's a look at The Home Depot 's (HD) debt issues. These securities can be purchased in the same manner as are stocks, but few individual investors are aware of this market.

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