Gary Griswold's  Instablog

Sometime after the current recession started to affect stock prices, it also depressed junk bond prices.  When Sept 2008 happened, their prices collapsed along with everything else.  The only rational for the depressed bonds is the risk of default, but their prices fell far below any probable rate of default.  While they have risen in value since their recent March lows, there are a number of closed end bond funds (ETF) that are trading well below their 2007 prices.  As a result, they not only return a high yield based upon their interest income, but are appreciating in price.

For example: EAD - Evergreen Income Advantage Fund is returning a 13.08% dividend from an average coupon of 6.95%.  It has 50% upside in price to reach its pre-recession highs.

HSA - Helios Strategic Income fund is returning a 16.22% dividend from an average coupon of 6.58%.  It is trading at 1/15th of its 2007 high.  It no longer holds the CDO's that got it down there.

High risk and high return are generally understood to go together, but are there exceptions?  Are there ways to find a higher return with a lower risk?  The strategy described here is to select countries based upon a positive current account as a percentage of the countries own GDP.

Those countries with the highest current account are those countries most likely to weather the storm should world economies take a turn for the worst, because these are the countries with the most investment assets under their own control.  If there is a market down-turn, these will decline along with everything else, but if we start to see soverign defaults, I think these are the countries least likely to fail.

Notice that an investment in these countries over the past few months produced a much higher return than the average world return of +6.0%.

More »

 Recently, it has become very popular, to deride buy and hold as a strategy for investment.  It is reasonable to ask how much of this change in investment philosphy is a result of the losses that most of us experienced from late 1997 through 1998. and how much is the result of more rational insight.

Those who still support buy and hold, focus on the difficulty of timing the market; and those who disagree with buy and hold focus on the need to time the market in order to have consistently good returns.  Clearly, almost anyone can time the market well some of the time, the important question is how frequently does this occur.  Or, what is the probability that a decision to time the market will in fact be a good decision.  There is a simple way to answer this question.

Whenever the market reaches a peak as it did in October 2007, the peak in the market prices is also a peak in the amount of money invested in the market. Whenever the market reaches a (local or recession) bottom as it did in March 2009, that bottom also corresponds to a time of the least money invested in the market.  From these two facts we can conclude that the average equity investment that attempted to time the market was bought back higher than it sold.  That is, the buy and hold investor did better than the average investor who did not buy and hold.

More »