Sunday, August 5, 2012

Stock Talk - Enterprising Investor

We pick up this next article on stocks by heading into Chapter 6: Portfolio Policy for the Enterprising Investor: Negative Approach.  The same rules applies as the defensive investor in some aspects.  Both the defensive and enterprising investor should divide their funds between high-grade bonds and high-grade stocks bought at "reasonable" prices.

The book writes that preferred stocks should be left to corporate buyers and avoid inferior bonds unless they can be bought at bargain levels which means prices at least 30% under par for high-coupon issues, and much less for the lower coupons.  You should be wary of all kinds of new issues of stocks.  This means no Facebook IPO off limits...which is what I discussed previously.

This brings me to 2008-2009.  I remember when I was working at Fidelity Investments and understood that the great bear was coming.  I had no idea it was going to be as bad as it was however.  There was a ton of great deals that were being offered as people were selling like mad.  This brings me to some of the greatest investments in paper assets that I felt was available at the time with low risk.  Namely, corporate bonds...

Many of the corporate bonds for some reason took a nose dive along with the stocks.  This made little sense to me because the bonds were not in any risk of not being able to pay their interest payments.  Some of these bonds went down as low as 50% with 2 years or less maturities.  It was still a seemingly frightening time, so I myself didn't purchase as much as I would have liked to have.

The chapter goes onto talking about why Foreign Government Bonds and New Issues are bad news for most investors.  In my next article, I'll continue discussing the enterprising investor.

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