A Quick Course on Convertible Bonds

Course on Convertible Bonds


No Many savvy investors look to convertible bonds as an attractive alternative to common stock. Convertibles can be exchanged for common shares in lieu of repayment of the note signified by the bonds. They generally yield more than the underlying common and provide nearly as much upside potential as the common with less risk.
One drawback: Convertibles usually sell at a premium over the conversion value (the value of the common shares into which they may be converted) because of the higher yields.
What to look for: Situations do occur where the common provides the higher yield and/or where the bond is selling so far above par value that its yield has become relatively insignificant. As a result, convertible bonds may be selling close to or even below their actual conversion value.
Investors familiar with convertible opportunities may be able to take advantage of such situations by following this procedure:
Before purchasing common stock, check to see if convertibles either at conversion value or below happen to be available. Please read this also: Buying Treasury Bills: An Advice
If you purchase convertibles at conversion value, you will save on commissions. And if you buy below conversion value (rare, but sometimes possible), you will have purchased the underlying common at an effective discount: The differential between the bond’s conversion value and actual price.
If the common provides a higher yield than the convertible bonds, have your broker submit the bonds for conversion (which usually takes two to three weeks). You will then be holding the higher-yielding common, purchased at a discount. Warning: Don’t submit the bonds for conversion until immediately after the next interest payout, unless the payout has just passed. Bondholders lose accrued interest upon conversion. Most bonds pay interest semiannually.
Buying advice: Don’t place “market orders” for convertibles. Bond markets are thinner than stock markets, and you can be hurt by a wide spread between the bid and asked prices. Place definite limit orders.

Profiting from Junk Bonds

Institutional investors generally ignore junk bonds, which is why prices are low. 
(1) Pension-fund managers stay out because they’re investing conservatively for people’s retirement. 
(2) The volume of junk bonds is limited, and institutional investors with massive cash inflows to invest find that they distort the market and ruin profitability by making large purchases. (Small purchases aren’t worth their effort.) 
(3) Institutional investors often abandon lower-paying junk bonds during periods of rising interest rates to take advantage of higher yields on more recent issues.
When to buy: The best time is when interest rates are peaking. As interest rates drop, low-yielding junk bonds become relatively more attractive and prices tend to rise quickly.
Who benefits from buying junk bonds: People with as little as $25,000 to invest as speculative capital. Risks: Junk bonds derive their name from their poor rating, and the specter of default scares many people. Should the recession become severe, the dangers are multiplied, But junk bonds are safer than appear.

The evidence

(1) In the past 20 years, less than 3% of all junk bonds have defaulted.
(2) When default is imminent, senior creditors (banks, insurance companies, etc) usually defer their claims or settle for much less to keep the company out of bankruptcy Junior bondholders, in practice, almost always come out with full payment
(3) Many junk bonds are issued by America’s top corporations, which may experience hard times but aren’t likely to go bankrupt Strategy for investing in junk bonds
Diversify Spread a $25,000 investment over five to ten issues Pick bonds where the discount is due to
lower yield and not the risk of insolvency. Look for bonds trading at the lowest prices (Note: Junk bonds are traded on the New York and American Bond exchanges. Remember to add a zero to quotes when figuring the price.)
Avoid issues where the government might intervene, (Example Railroads, airlines, and municipalities Stay away from the real estate investment trusts EITs) because they are liquid and hard to figure out.
Rule of thumb If the junk bond has a ten-year maturity, assume the price ought to rise by 10% a year. Sell the bond if the price rises by 20% in one year and reinvest in something che-unless attractive interest rates make the bond worth holding longer. Buy more bonds if the price falls, because the return on investment at maturity will be that much greater.
Important: Junk bonds are discounted because the company’s rating isn’t very good Don’t expect to hear good news about the Company Don’t get cold feet and sell out if the price begins to fall. 
Bond-Buying Strategy
The classic bond buying opportunity when interest rates drop Investors can lock in high yields and defer interest income, too. One study calculates that 20-year, AAA-rated industrial bonds rose an average of 15.6% during five interest rate swings. These swings, from peak to trough, usually lasted for about one-year Conservative strategy: AAA-rated corporate
or Treasury issues. Aggressive strategy: Lower-rated issues that swing more in price, providing greater tax deferral (and greater risk). However, even speculators avoid bonds rated lower than A when the depth of the recession is not completely clear.

When to Avoid Bond Mutual Funds

Bond mutual funds, either corporate or municipal bond funds, are probably not a good deal unless the management fee charged by the fund is very low (2 % or less). They do provide diversification, but for most investors buying the bonds directly through a broker is cheaper.
The one-time sales commission on a purchase of $25,000 worth of bonds is about $125. Fund annual management fees can be as much as $250/year on same-sized purchases. Exception: Money market funds provide more services and are worth the fees.
Don’t forget to learn: How to Use the Daily Stock Charts
Source: The Only Investment Guide You’ll Ever Need by Andrew Tobias, Harcourt Brace Jovanovich, New York


Things You Should Know About Trading Commodities


Trading Commodities

The fundamental fact about commodities that all players must reckon with: Incredible volatility. The fluctuation per day averages about 1%. Multiplied by a leverage factor of 20, the trader can anticipate at least a 20% profit or loss per day. It’s hard to have the stomach to cope with these losses or gains in a businesslike fashion. But anyone who actively trades tangibles (gold, diamonds, paintings, or antiques) is probably a good candidate for commodities
Comparison to the stock market: The aggregate value in commodities is much larger than the stock market. And the dynamics are much greater. Result: Money is made and lost faster And there are many more pitfalls.
In the stock market, you can lose money in bits and pieces. You don’t realize a loss until you sell out your position. Capital invested in the commodities market is all at risk. You don’t have to place a buy or sell order to win or lose. Money is credited to your account if your position is right. If it’s wrong, the broker tells you how much you owe.
An old saying in the commodities market You never make money from the market; the market only lends you money until it takes it back from you. It’s probably true. And so is the estimate that 95% of the investors in commodities lose money. Although the commodity exchanges have arbitrary limits governing how much prices can rise and fall daily, investors can lose much more than they initially put up. We previously wrote: Buying Treasury Bills: An Advice.
For beginners: Brokerage houses will let you put up as little as $50,000 for an individual commodities trading account. There are also managed group accounts for people who are ready to put at risk only $10,000-$20,000 Caution: A few of these groups have good records, but most are only a couple of years old. Results are not sufficient to evaluate them.
Making an emotional move is the most common speculators hurt. market is so volatile and moves so fast that an investor is, in effect, constantly making a buy or sell decision. And the leverage is so great that a move of a few cents means a few thousand dollars.
Investors must: Expect to make wrong decisions that could cost a great deal of money. Set a time horizon once a decision is made, and stick to it.
General rule: With leverage so high, you may expect to win or lose 25% of capital on any day. Problem: When you are making and losing such large sums you forget one of the basic principles of running a business: Recognize the real costs.
The average holding in commodities is only four or five days. A $60 commission every time you make a move can mean thousands of dollars in commissions a year that wipes out a good part of your gain.
The difference between the bid and asked prices for a commodity can run three times the commission cost. Result: When you get in to a commodity you are frequently already down 20%.
Human frailties are likely to emerge in commodities trading. Reason: People get excited about making a lot of money, due to the volatility Professionals recognize that the chief effect of volatility is to relieve the public of the maximum amount of money in the minimum amount of time.
The Psychology of Trading:
Movements during the day play on the emotions. If you are wrong, you have to adopt a very unemotional attitude toward the loss The worst thing to do: Keep calling your broker all day.
Have the moral fiber to stay with your conviction. The average trader must increase the time horizon for holding a contract 15-fold before getting the chance to make a profit. Example: Instead of trading every three or four days, hold on to the contract for 50 days. That gives you a saving on commissions and the bid/asked penalties.
Worst mistake of all: 
Doubling up after a gain or loss. When you do this just a small loss will wipe you out.
Looking for bargains is a mistake in the commodities market. When prices drop. don’t buy. It is better to short when things start to look cheap.
Strategy for outsiders: 
Don’t convince yourself that you can read the daily financial pages and get sufficient insight into commodities. You are trading against experts who know the number of freight-car loading in Peru and the hourly temperatures in Russia. Whatever insight you have probably won’t be superior to theirs.
If you are in a business where you are sensitive to certain trends (like the im pact of a fall in sugar prices on the candy business), your understanding may be of value in a long-term time frame.
Personal knowledge gives you a realistic outlook that helps you invest in commodities. If this is the case: Consider at least a six-month horizon in which you want to move. Don’t put up a minimum margin. Put up 15% in stead of the required 5%. Plan on maintaining your position.
Fundamental impact of interest rates on commodities: When rates are high, everything else goes down. Investors lose sight of this, be cause when rates are high everything is usually booming. They forget that a disaster could just be around the corner. If you are long when interest rates are high, you will get wiped out. Go against short-term trends and with long-term trends. Example: If soybeans have gone down 15% in a month and up 3% the last week, don’t buy. Sell short!
Source: Victor Niederhoffer, chairman, Niederhoffer, Cross & Zeckhauser, Inc., a merger and  aquisitions firm that specializes in selling companies in the $2 million to $25 million range, 49 W. 57 St, New York 10019.


Buying Treasury Bills: An Advice

Buying Treasury Bills


People buying Treasury bills (T-bills) through their banks or brokerage houses pay a fee of $30 or more. It’s possible to bypass the fee, however, and place the order yourself by submitting what’s known as a noncompetitive tender. That means you are willing to pay the prevailing price set at the weekly government auction of T-bills every Monday.
To understand the bidding process, you need to know how T-bills are priced. That is, they are sold at less than face value, and at maturity they are redeemed at full face value. So while interest is being earned, there is no inter est payment as such.
The interest rate earned by the purchaser usually is expressed in terms of the commonly used discount rate. This rate is based on the face value of the bill. It understates the investor’s real return To make a valid comparison with coupon bearing securities, such as corporate bonds. investors need to know the coupon-equivalent yield of the bill
This is the yield on the amount they actually invest Interest from T-bills, unlike the interest on bank savings certificates pegged to them, is exempt from state and local income taxes Investors who wish to bid on T-bills should submit their bids to one of the 12 regional Federal Reserve Banks around the country. The Banks have similar but not identical operating policies. Those described below apply to the Federal Reserve Bank of New York, so check with the Bank in your area to see if there are any differences
To be on the safe side, investors should mail their bids early enough to arrive at least one business day before the Monday auction. But people submitting bids in person can do so up until 1:30 p.m. on the day of the auction.
You must either fill out a tender form (provided by the Fed) or send a letter that indicates, among other things, whether you wish to reinvest your money when the T-bill matures.
Even though T-bills are sold at discount, you must pay the full $10,000 face value of the bill at the time you submit your bid. You may pay in cash, with a personal certified check, or with an official bank check drawn on a bank in the New York Federal Reserve District.
Any check must be made out payable to the “Federal Reserve Bank of New York.” A check from a third party, payable to you and then endorsed by you over to the Bank, will not be accepted. Nor will a check drawn on a money market mutual fund.
A few days after the auction, the New York Fed will mail you a discount check, representing the difference between the purchase price and the face value of the bill.
What you will receive: An ordinary receipt that links up to a book entry in a government ledger, attesting to ownership of a T-bill.
Treasury Bills as Leverage in Stock Trading
Margin-account investors can take a beating in a volatile market when interest rates are high. A better strategy: Invest in Treasury bills (T-bills) or bonds. Then borrow against the bills (brokerage firms will lend up to 90 cents on the dollar of face value) for money to trade in the stock market.
Several advantages:
• Assured income on the T-bill, no matter what happens to the stocks. Thus, a hedge.
• T-bill income is not taxable on state and local returns.
• T-bills offer instant liquidity. • No margin calls. Timing of trades is totally your own decision.
• Like a passbook loan, it makes credit easier to get as money becomes tighter.
Think in terms of buying and selling securities on a short-term price basis. Use the guaranteed income from the T-bill to neutralize the effects of market volatility.
If you elect to hold a stock, the numbers be gin to go against you if interest rates continue to climb during the holding period. This is because interest on the T-bill is fixed. To avoid this danger, establish an annual rate-of-return goal for every invested dollar. Whenever that goal is reached, take the profit. This gives you the option of sitting out the rest of the year if you don’t like market conditions.
Bookkeeping bonus
Collateralize a mar gin account with T-bills is not only the best but also the most convenient and economical way of taking advantage of high interest rates and, at the same time, keeping trading money available. Accounting is easy, since the ac count is debited with interest on a running basis. You see your margin charge every month and know what you can expect in interest at the end of every holding period.

 Please learn How a Professional Investor Handles His Own Money.

How a Professional Investor Handles His Own Money


While no professional investor ever wants to admit to investing in anything other than what he recommends to clients, there is one outstanding difference between investing personally and professionally. Patience. Although many investors claim they are buying for the long term, if the recommended stock doesn’t move up within a few months, they want to know what’s wrong and how long before it makes its move.
You check up on the meaning of professional investors here.
I use exactly the same technique of determining trends to make my own investments that I use for my clients’ investments. Unlike most investors, however, I am not disappointed when a stock takes several years to show major strength.
The principle that should govern stock investing: Determine areas where there is substantial growth capability. Invest only in the companies having a good chance to benefit from those trends.
Example: In the 19th century, British investors realized that railroads were a key investment in the U.S. They knew little about each line and there was little in the way of balance sheet information. However, if they invested in several, at least one was bound to be an outstanding winner, and possibly every one of them held the prospect of sharing in that advance
Don’t buy cyclical stocks: I never buy a stock at the bottom of its cycle. If you buy stocks during down periods, you are a speculator, not an investor. You are speculating that you know the bottom of the business cycle for the company. Few people know that.
Avoid companies that can’t grow. For example, General Motors was a good buy when it sold only two million cars a year and there was still a large market to penetrate. As it stands now, there is no growth ahead of it.
Don’t try to spread risk. Once you have chosen your areas and stocks, don’t bother trying to spread the risk with other stocks It just dilutes effort.
Outside of the stock market: My primary feeling is that non-liquid investments are not very beneficial to my portfolio. Reason: it doesn’t matter that a Rembrandt painting I may own is worth $3 million if it takes a long time to find a buyer
Real estate: I hold no property except my own home. Naturally, it has appreciated, but I bought it to live in, not for investment. How to Evaluate High Technology Stocks.
Collectibles: I have a baseball memorabilia collection that has been appreciated quite a bit, but that’s due to luck. I collected baseball cards and programs when I was a preadolescent sports fan. I also have an art collection, but I have no idea whether my selections are worth more or less than the price at which I bought them. I buy art for pleasure, not for investment.

Adding Foreign Stocks To Your Portfolio

Advantages of foreign stocks: Spreading the risk. Some economic pressures depress stocks in the US. boost them abroad.
Specific investment opportunities. Examples South Africa is the only place to invest in certain minerals, as France is for wines and Japan for cameras Drawbacks:
Currency fluctuations are an additional risk and complicate already tricky buy-sell decisions Investors usually pay taxes to the country where the stock is traded (the average rate on dividends is 15% ) and to the U.S. Foreign taxes can be recaptured at least in part (by filing IRS Form 1116) to claim a foreign tax credit. But the time lag in doing this delays an investor’s realizing his profit for some time
No other country regulates equities as tightly as the Securities and Exchange Commission (SEC) does here. Result Deals considered fraudulent at home are common abroad. Ac counting standards are lax in many countries too Dividends often fluctuate for no apparent reason
Small investors only should consider foreign companies with growth and earnings potential in stable countries. Investors able to allocate a minimum of $250,000 to overseas stocks can hedge with blue chips in several Countries
How to invest Some companies (Britain’s Burmah Oil Co. Ltd., Japan’s Canon, Inc.) are traded over the counter in the US. Others (Canada’s Dome Petroleum Ltd.. Japan’s Sony Corp) are on the New York or American stock exchanges Larger brokers in the US. can handle transactions on most foreign exchanges.
Cost Standard commission for better-known issues, minimal extra charges for others (Customers with large portfolios should have to pay little or nothing extra for the service)
Research on foreign equities is difficult because governments rarely require companies to publish the kind of data that the SEC mandates However, annual reports are readable and informative in countries such as Japan, France, and Canada.

How to Invest in Utilities

Utility stocks, more than most issues, are purchased for reliable income by conservative investors who may require current income from investment holdings. Here are some guidelines that may help avoid unpleasant surprises.
Is the utility located in a state with a favorable regulatory climate? Some states make it very difficult for utilities to pass along rising costs to consumers, and some states are more permissive. The typical state will generally grant the utility approximately two-thirds of the rate increase requested. It will require approximately one year following such requests to provide the necessary authorization.
The utility should have ample earnings from which to pay interest on any bonds outstanding Utility companies are generally heavy borrowers of capital for expansion Should a cash flow bind develop, dividend payouts may have to be suspended since bondholders hold the first call on company assets. Earnings for the company should amount to at least 2.5 times the interest payments due on corporate notes; preferably more. In considering any stock for its dividends, make certain that earnings are ample to cover projected dividend payouts.
The price of the shares should be no lower than book value if the company has plans to issue more shares. Otherwise, shareholder equity will be diluted by such distribution.
Did you know? Bank Credit Cards Are Not All Alike please read.
The company shouldn’t pay out too high a percentage of earnings in dividends. Approximately 65-70% is an average payout. The lower the percentage of earnings in dividend payout, the more protected the dividend will be. Check the balance sheet for excessive debt and for favorable asset-to-liability ratios.
Your broker should be able to provide the above information either by means of in-house research or through access to Standard & Poor’s ratings of corporations and corporate debt.