On Long Term Bonds

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Jul 7, 2006 11:29 am

Around 1972 I was introduced to a casual friend's mother.  Her husband had died about six months earlier and she had $200,000 in life insurance proceeds to invest.


She was concerned that it had to last her the rest of her life--she was early 50s.  She also wanted a check every month, so she needed at least six issues.


I asked the home office for help in selecting at least six issues--at least AA rated--with attractive coupons.  They came back with a suggested portfolio that had an average rate of return of just under 6%.  These were thirty year corporate bonds, she did not have tax issues so there was no need for municipals.


I can remember as if it were the other day as she sat there and said, "Are you sure that I'll be getting an average of $1,000 per month? That's more than John's paycheck was."


At that point her son jumped in and said, "Mom, Dad was a good man there is no reason to say that!"


She said she knew he was and she missed him with every fiber of her being--but then she told her son to not deny the truth.


Remember it was 1972, $1,000 a month take home was actually not bad.  New brokers were guaranteed $500.


Anyway, she bought the portfolio as suggested--we kept them in street name and sent her a check every month for 1/12th  of a year's interest.


When I moved to the Regional staff I was not allowed to produce, but my assistant could. She went with me but kept about thirty accounts--two of them were for this woman and her son.  She also had mine and my wife's.


Now go to 1979--six and a half or seven years later.


Sheila got a call from the son asking if he could come speak to me.  She told him he could, then told me that he was coming.  Sometime one must wonder who is the assistant and who is being assisted.


When he came in she brought him to my office.  I looked up and shook his hand and asked him to have a seat.  He asked if  he could close the door--I indicated that he could.  He did, and then sat down again.


He spoke in hushed tones that he did not want to see Sheila go to jail, but that he and his family could not simply ignore what she was doing with their account.


I asked what he meant and he pulled out two statements.  The first one was that first month when his mother first bought the bonds.  They showed that the portfolio was worth $200,000.


He then showed me the current statement which showed that the portfolio was worth about $120,000.  He then changed his tone and said that as much as he liked me and Sheila he was going to put at least one of us in jail if we didn't give back the money.  It was clear that he thought I must have been involved too.


I instantly stood up, grabbed a yellow pad and asked him to join me at the small table in the corner of my office--what you never EVER want to do is defend your point of view or action with a desk between you and the client.  That desk is seen as part of the arrogance, the symbol of power, whatever--it's not good.


So, we're sitting at the small table, knees almost touching.


Now, he's an engineer so he understands numbers.  I started by asking him what mortgage rates were at that time--he said they were about 20% and then muttered something like, "Phucking Carter doesn't...."


I asked what he thought the bonds in his mother's portfolio were paying.  He said about 6%.  I asked if he would buy a 6% that day.  He said no.


Then, almost like the cartoons when the light goes on over the guy's head, he displayed a flicker of understanding.


When I thought he was stabilized I asked if I could take him to lunch.


You know what?  He understood exactly what was happening and assured me that he would explain it to his mother and brother.  But he never did any more business with Shelia--and he had been a guy who traded in and out of stocks every month or so.


He didn't transfer his account--instead he'd call and ask to have the proceeds of a sale sent to him.


I don't know if the older woman is still alive--she'd be in her eighties so she very well may be.  As far as I know she collected that $1,000 per month each and every month until after the millenium when the bonds would have been maturing.


I'll bet she didn't have a really great retirement like she thought she would that day long ago.  The danger of the long term bond market is that the price of bread doesn't stay at a quarter a loaf.


I know the son is alive because we had/have mutual friends.


I wonder what happened to Shelia--she got married and moved away.


The one thing that is certain is that nothing remains the same.

Jul 7, 2006 12:33 pm

gee what heart felt story.


Is this an approved cult story as I've heard almost the exact same thing from about 5 visiting vets and 4 GPs.


Step away from the pickle barrel and just get over your past "heroics" and just fade away.

Jul 7, 2006 1:52 pm

Wow...that's almost an admission of malpractice from my perspective.  I don't know what all you had at your disposal or what this lady would have tolerated risk-wise, but this is an example of something I see alot in local competitor-managed portfolios.  The entire focus is on current income, with no thoughts of inflation hedging, adequate diversification or staggered maturies to protect against interest rate risk.  Edd, why on earth would Jones tell a story like this?  It's certainly not a very flattering picture if you're in the position of recommending such a portfolio.  It sounds almost like the old Boones & Claussens story that American Funds tells to sell being in the market.

Jul 7, 2006 2:01 pm

Thanks for another good post NASD......did you start taking your meds again or something?  We all need to hear these stories from time to time to remind us of why we are needed so desperately.


Jul 7, 2006 2:14 pm
Indyone:

  Edd, why on earth would Jones tell a story like this? 



pssst... "Touch down bonds".....

Jul 7, 2006 2:27 pm
Indyone:

Wow...that's almost an admission of malpractice from my perspective.  I don't know what all you had at your disposal or what this lady would have tolerated risk-wise, but this is an example of something I see alot in local competitor-managed portfolios.  The entire focus is on current income, with no thoughts of inflation hedging, adequate diversification or staggered maturies to protect against interest rate risk.  Edd, why on earth would Jones tell a story like this?  It's certainly not a very flattering picture if you're in the position of recommending such a portfolio.  It sounds almost like the old Boones & Claussens story that American Funds tells to sell being in the market.



Malpractice?  You are lucky that you have the benefit of history so that you would not make the same mistake.  Those of us who were offering advice in the late '60s and early '70s did not have the benefit of realizing that interest rates could soar into the double digits.


The industry today is filled with smart ass punks who think they're golden because they have ridden the biggest bull market in history.


Get back with me when you're a real veteran instead of simply older.

Jul 7, 2006 2:55 pm

The industry today is filled with smart ass punks who think they're golden because they have ridden the biggest bull market in history.


Get back with me when you're a real veteran instead of simply older


Ditto that statement.


Nothing personal Indyone. I think you are a level headed and experienced advisor from your posts.  We would never position a client today in the portfolio that NASD said he did back in 1970 because we know from history the pitfalls of that strategy.  In 1970 the idea that rates could get as high as they did was unimaginable. Now we know it is possible.


I get the feeling that some on this board refuse to look at history, think that 10 years ago is the distant past and think that things couldn't possibly be different or get worse in the future.  And I'm not just talking about investing but life in general.  This current generation (people aged 35 and younger) has grown up never knowing real hardship or struggle and have no frame of reference since schools stopped teaching anything vaguely resembling an education starting in the 1970's.


The inability to listen or even attempt to learn from people who have been in the business longer than you have probably been alive is evidenced by the snotty attitude in eddiejones response.  It is also a general cultural disdain of people who are older.  Why bother to learn anything from your Grandfather after all what does he know....he's old and doesn't even own an IPod.



Wow I'm cranky today.    I should go beat up on some golf balls.

Jul 7, 2006 2:57 pm
babbling looney:

Wow I'm cranky today.    I should go beat up on some golf balls.



A great therapy and pretty inexpensive I use it often. 

Jul 7, 2006 2:58 pm

[quote=NASD Newbie


The industry today is filled with smart ass punks who think they're golden because they have ridden the biggest bull market in history.


Get back with me when you're a real veteran instead of simply older.


[/quote]


Although I'm probably not as dated as you gramps as I only started in '85 I seem to be open to new ideas instead of those that are mixed in with kool-aid.


Baldwin United ring a bell? Perhaps that was one of those "highly" rated bonds you sold and might that also be why the son came back to speak with you and NEVER invested with you again?


Might you also be good 'ole JB or $3 mill Bill?

Jul 7, 2006 3:02 pm

I actually enjoyed that story and lesson.  Than you for sharing that NASD Newbie.

Jul 7, 2006 3:11 pm

So the point of this story is that you do watch cartoons. Got it. I'm going to go play some videogames now and be awesome (maybe do some reflecting on your story).


In all seriousness, thanks though.

Jul 7, 2006 5:09 pm
NASD Newbie:
Indyone:

Wow...that's almost an admission of malpractice from my perspective.  I don't know what all you had at your disposal or what this lady would have tolerated risk-wise, but this is an example of something I see alot in local competitor-managed portfolios.  The entire focus is on current income, with no thoughts of inflation hedging, adequate diversification or staggered maturies to protect against interest rate risk.  Edd, why on earth would Jones tell a story like this?  It's certainly not a very flattering picture if you're in the position of recommending such a portfolio.  It sounds almost like the old Boones & Claussens story that American Funds tells to sell being in the market.

Malpractice?  You are lucky that you have the benefit of history so that you would not make the same mistake.  Those of us who were offering advice in the late '60s and early '70s did not have the benefit of realizing that interest rates could soar into the double digits.


The industry today is filled with smart ass punks who think they're golden because they have ridden the biggest bull market in history.


Get back with me when you're a real veteran instead of simply older.


Admittedly I wasn't running portfolios in 1970, and such a portfolio probably seems inappropriate to me at least partially because of lessons learned and taught to me when I started investing institutional portfolios in the late 80's, but it's hard to imagine not understanding the effects of even mild inflation and modestly fluctuating interest rates over a thirty-year time horizon.  I'll agree that the industry's brightest could not have foreseen the degree of what happened in the late 70's and early 80's, but again, even modest inflation and interest rate fluctuation would have made this a questionable strategy when you consider that it was set up to put on auto pilot for 30 years.  Sure, I have the benefit of 20/20 hindsight, but surely diversification wasn't invented after 1970?


...and I would hardly call riding out 2000-2002 the greatest bull market in history, but I survived it by having clients invested relatively conservatively (lots of value stocks and short/intermediate bonds).  I've never invested a client 100% in a single maturity year and I'd like to think I wouldn't have done that 35 years ago.  That being said, don't take my perspective so hard the next time...I was only reacting to how it looks in today's world.


and BL...yes, you are cranky...go hit a bucket of balls

Jul 7, 2006 5:53 pm
Indyone:

...and I would hardly call riding out 2000-2002 the greatest bull market in history,



That was a blip on the radar screen.  As I said if you were not registered before 1975 you have no idea what it's like to be a retail broker.


In the middle of the tech implosion September 11th happened.  The nation rallied around the cause and people took their financial setback in stride.


Check to see what the Dow did between 1968 and 1982---that's a fourteen year period where 50% of what you had in 1968 was gone by 1972, it started to come back and then was gone again.


Fourteen years--as in one, two, three, four, five, six, seven, eight, nine, ten, eleven, twelve, thirteen, fourteen--of nobody being happy.


I have talked with countless people who have no memory of those days who talk about how good they are at managing money.  Hell, a monkey with a pencil could do since 1982--the industry has started to hire functionally illiterate types because it's been so easy for so long.


There are "veterans" with more than twenty years who have never experienced a protracted bear market accompanied by investor who were not willing to excuse the failures because the nation was attacked.


Most of them are jokes.

Jul 7, 2006 6:07 pm

OK, NASD...putting up my sword...have a good weekend...

Jul 7, 2006 7:48 pm

Selling 30-year bonds isn't the problem. The problem, unless I missed its previous mention, is selling 30-year bonds without informing the client of potential interest and credit risk. 

Jul 7, 2006 8:16 pm
NASD Newbie:
Indyone:

...and I would hardly call riding out 2000-2002 the greatest bull market in history,



That was a blip on the radar screen.  As I said if you were not registered before 1975 you have no idea what it's like to be a retail broker.


In the middle of the tech implosion September 11th happened.  The nation rallied around the cause and people took their financial setback in stride.


Check to see what the Dow did between 1968 and 1982---that's a fourteen year period where 50% of what you had in 1968 was gone by 1972, it started to come back and then was gone again.


Fourteen years--as in one, two, three, four, five, six, seven, eight, nine, ten, eleven, twelve, thirteen, fourteen--of nobody being happy.


I have talked with countless people who have no memory of those days who talk about how good they are at managing money.  Hell, a monkey with a pencil could do since 1982--the industry has started to hire functionally illiterate types because it's been so easy for so long.


There are "veterans" with more than twenty years who have never experienced a protracted bear market accompanied by investor who were not willing to excuse the failures because the nation was attacked.


Most of them are jokes.



That's a specious argument, at best.


First of all, by you're logic, if one wasn't a soldier during the period from 1941-1945, he or she isn't a real soldier.  Ridiculous on the face of it.


Secondly, by your own admission, you were a broker for only 6 years, and at two different firms at that.  That hardly qualifies as experienced by anyone's standard, except by yours.


Last but not least, if the bond story is typical of that remarkable prowess of yours, small wonder you were relegated to middle management.  Quite frankly, I'm amazed that they kept you around at all.  Most probably, you knew where some of the corporate bodies were buried.


Ah well.  Makes no difference to me.  Have a great weekend, all!

Jul 7, 2006 9:27 pm

NASD Newbie- Actually, I really enjoy most of your posts.  I want to ask you if your real name is Leroy Gross, as your work histry "somewhat" resembles his.


These days, I stick with floaters.  Currently over 4% tax-free and 5.25& taxable wit no additional costs' to clients'.

Jul 7, 2006 9:44 pm

BTW- As an 11 year vet I remember hearing the comparisons- I would say that a 80% Nasdaq correction and a 50% S&P correction qualifies as a tough time.  To say the least.


Jul 8, 2006 8:41 am
The Judge:

NASD Newbie- Actually, I really enjoy most of your posts.  I want to ask you if your real name is Leroy Gross, as your work histry "somewhat" resembles his.


These days, I stick with floaters.  Currently over 4% tax-free and 5.25& taxable wit no additional costs' to clients'.



I think LeRoy is dead--don't know where I heard that, but I did hear it somewhere along the way.  So, no I am not LeRoy Gross although he is, or was, a hero of mine.


He had an acolyte named Alan Snyder--I'm not him either.


The reference to LeRoy conjures up an image.


In the 1970s he was a superstar broker at the firm Reynolds Securities--which was to become the Reynolds in Dean Witter Reynolds.


He used to be a featured guest in training classes.  They'd trot him in to show the rookies how to sell intangibles.  Part of his routine went like this.


He would ask somebody to grab a Manhattan phone book, then choose a name at random and call out the phone number, which he would write on the blackboard.


Then he would ask somebody to name one of the Dow thirty.  He would write that symbol on the board.


Then he would pick up a phone and call the number and sell 200 shares of that stock on the first call--on a speaker phone so everybody in the room could hear the call.


It would leave the trainees mezmerized and in awe.


Sometimes they, the trainees, would figure out that there was no way to know for sure if he called the number on the board or some prearranged shill.


Regardless, it was great showmanship.


Later he became a national spokesman for the firm's options department. He used to ask the audience, "Sir, what's your name?"


Bob Jones


"Well OK, Bob let me ask you.  If you buy a stock and it does not go up do you lose any money?"


Bob would generally indicate that you don't.  LeRoy would boom out


"That's wrong Bob, you lose commissions and you lose opportunity. What you do not want to do is buy a stock that does not move."


I won't go through the entire routine but the bottom line was always, "....you make money if the stock goes up, you make money if the stock stays the same, and you make money if the stock goes down as long as it doesn't go down too much."


The logic behind call writing that became the standard for a generation.  It was not until the market rally in 1983 and beyond that covered call writing lost its luster.  Not because it was not profitable but because it was too conservative in the roaring bull market.


++++++


While I'm telling stories indulge me for another.


There was--I think still is--a guy named Joe Granville.  He was a technician, and a good one at that.  He was also the consumate showman.


He wrote one of those $1,000 per year newsletters and to promote it he would show up in your hometown to do a seminar.  He was a cult type figure circa 1980 because his theme was that you can make money going up and down.  He is known for the phrase "Bulls make money, Bears make money, but Pigs get slaughtered."


He also used to draw the up and down chart pattern and tell the seminar, "If you take that line and stretch it out it there is a lot of profit to be made."


He also did this--if the logistics allowed.  Lots of hotel meeting rooms are situated so that there is a wall of windows overlooking the swimming pool.


If that was possible he would get a bellhop to help him measure the width of the pool then go to a lumber yard and buy a 4X4 and have it cut to fit.  He installed it in the drain gutters of the pool so that it formed a bridge across the pool, but just below the water surface.


Yep, he walked on water as he made his way into the seminar to whoops and cheers of his showmanship.


No doubt there were people who were whispering to each other about how sacreligous it was--but he was a good Jewish kid who wasn't much worried about that.

Jul 8, 2006 10:06 am
NASD Newbie:
Indyone:

...and I would hardly call riding out 2000-2002 the greatest bull market in history,



That was a blip on the radar screen.  As I said if you were not registered before 1975 you have no idea what it's like to be a retail broker.


In the middle of the tech implosion September 11th happened.  The nation rallied around the cause and people took their financial setback in stride.


Check to see what the Dow did between 1968 and 1982---that's a fourteen year period where 50% of what you had in 1968 was gone by 1972, it started to come back and then was gone again.


Fourteen years--as in one, two, three, four, five, six, seven, eight, nine, ten, eleven, twelve, thirteen, fourteen--of nobody being happy.


I have talked with countless people who have no memory of those days who talk about how good they are at managing money.  Hell, a monkey with a pencil could do since 1982--the industry has started to hire functionally illiterate types because it's been so easy for so long.


There are "veterans" with more than twenty years who have never experienced a protracted bear market accompanied by investor who were not willing to excuse the failures because the nation was attacked.


Most of them are jokes.



Sounds like a great argument for the use of a VA with someone's nestegg (IRA), using a GWB rider