Value Investing Quotes

Here are 30 pieces of wisdom.

http://www.oldschoolvalue.com/blog/investing-perspective/value-investing-quotes-wisdom/

More Good Sites

Here are a couple more good sites that you may like. 

The Graham Disciple has some interesting investment ideas.
http://thegrahamdisciple.com/

While Abnormal Returns provides links to various sites covering a wide array of subjects.
http://abnormalreturns.com/

I will continue to post sites that provide ideas, education, information, etc. that I think are beneficial to follow.

Another Good Blog

Below is another blog that I found that is really good. 

http://25iq.com/

It goes over 12 things that I've learned about . . .

The author goes over 12 things he's learned from different people or about different subjects.  You can read through the blog in one night if you like or if you are really busy just read one of the 12 things I learned subjects each day.  Read them carefully as each thing he has learned is important about investing.

Where to Learn More About Investing

I wanted to provide some more sites that do a good job of teaching people about investing.  Below is the link for Howard Marks memo's.  They are a wealth of information and go all the way back to 1990.  So, there is plenty of reading material. 

http://www.oaktreecapital.com/memo.aspx

If you would rather have a video format than Consuelo Mack WealthTrack may be more enjoyable.  She quite frequently talks to some very good investment professionals.  Her link is below.

http://wealthtrack.com/

Finally GMO has a wealth of material, but you do have to sign up first.  Don't worry signing up is free.  They can be found at:

http://www.gmo.com/America/

Seeking Alpha Article on Redwood Trust

Below is a link to my article about Redwood Trust on Seeking Alpha. If you have been following this blog, however, most of this is covered in Redwood Trust Part I & II. 

http://seekingalpha.com/article/1578802-redwood-trust-competitive-advantages-growth-prospects-and-risks?source=email_rt_article_title

What to Read - Links

The first link is to a blog post by David Merkel.  I was going to do my own post on market cycles, but since Mr. Merkel already did a good concise one I will just share the link instead.

http://alephblog.com/2013/07/20/the-rules-part-xlv/


This second article is by Morningstar and provides more ammunition for my Contrarian Manager strategy which I posted about earlier.
http://news.morningstar.com/articlenet/article.aspx?id=603031


This last post is also about contrarian investing and where to look for potential ideas.
http://goinfront.com/blog/article/the_everyone_hates_it_portfolio


Enjoy

Beware of Bonds

Beware of Bonds

As some people have started to realize over the last couple months, bonds can be dangerous for your investment health.  Even so called “safe” bonds can be dangerous and even more dangerous than “risky” bonds at times.  There is no such thing as a “risk-free” bond.  While a bond may have low credit risk (i.e. low chance of bankruptcy) it still will suffer from interest rate risk, inflation risk, and/or opportunity risk.  The lower interest rates go the lower the future return and the more dangerous a bond becomes. 

Let’s start with inflation risk.  If you purchase a 10-year U.S. Treasury Bond, for example, with a yield of 5% and the current inflation rate is 3% then you are still earning a “real” (inflation-adjusted) return of 2% (5% -3% = 2%).  However, if interest rates are 2% and inflation is 3% then you have a negative real return of 1% (2% - 3% = -1%).  By investing in the 2% bond you are losing purchasing power.  

Interest rate risk also increases with low interest rates.  In this example let’s assume you own a bond with a yield of 5% and duration of 5.  Duration is simply a measure of the interest rate sensitivity of a bond.   So, in this example, let’s assume that over the next year interest rates increase by 1%, then your bond with a duration of 5 will DECREASE in price by 5%.  You gain 5% in interest over the year, but the price of the bond has dropped 5%, so you have broken even (+5% -5% = 0).  With a bond yielding 2% with duration of 5 assuming the same scenario with interest rates increasing by 1% over the next year then you will lose 3%  as the price of your bond drops 5% while the interest you earn is only 2% (+2% - 5% = -3%).  This ignores another factor.  If you have two bonds with the same maturity and different coupons then the duration for the bonds will be different as the lower coupon bond will have a greater duration.  Assuming both bonds have the same maturity date then the 5% bond may have a duration of 5, while the 2% bond may have a duration of 7.  As interest rates increase by 1% the 2% bond decreases in value 7% while the 5% bond’s price only drops 5%.  This also works in reverse, so if rates decrease the price of the higher duration bond increases by more. 

Over the last couple months rates have increased dramatically causing significant losses for those holding intermediate-to-long duration bonds.  I’ve been shorting (betting the price will drop) the 20+ year treasury bond ETF for a little while now and increased my exposure as interest rates decreased earlier this year.  Since then interest rates have increased significantly causing the price to drop.  This means if I wanted to cover my short (close my position) I will make an okay profit.  However, over the next several years I expect interest rates to continue to increase and bond prices to decrease more, therefore hopefully creating a larger profit for myself.  This position has its risk though, so I would not recommend it unless you understand the risks.  If you want a better explanation of the pros and cons of this position let me know.

Finally, if you invest in 3 month U.S. Treasury bills you could argue that you have limited to zero interest rate and credit risk.  However, in this environment of near 0% yields on these assets they not only suffer from inflation risk, but also opportunity risk.  If you haven’t been paying attention stock prices have been going up, so if you’ve been invested in short-term assets like money market you have missed out on some large gains.  This is the opportunity risk that you obtain when you purchase lower risk/lower return assets. 

 
There are other risks to certain bonds or for foreign investors, for example, currency risk.  But for U.S. investors investing in dollar-denominated assets this is not a concern.   Hopefully, I’ve shown that even “low risk” bonds can actually be quite risky and that the lower the yield the higher the risk.