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  1. #11
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    Quote Originally Posted by Alan3285 View Post
    Also, if a company does go bust, bond holders are more likely to get something back than equity holders, although how much more likely is another matter.
    Bond holders will get money back after the banks have been paid back and after outstanding wages have been paid to workers out of a job.

    The idea that bondholders will be paid out ahead of shareholders if things go pear shaped has long been touted as a reason for going into bonds if you as an investor are less tolerant for risk. However, as you hint Alan - in practice - I can't think of a single example in the history of the New Zealand market where shareholders lost everything and bondholders *did not* lose huge amounts of capital. Those same hapless bondholders then spent years getting drip fed only a fraction of the original capital they invested, while writing off all of the interest they thought they were due while waiting.

    In New Zealand, unlike in the United States, we have lots of high yielding shares to invest in. Many of these pay annual dividends at a gross yield similar to the corporate bond rates. In fact some of these shares are the same companies that also market their own corporate bonds, the very same bonds we are talking about. The associated shares are of course volatile. But that volatility includes upside risk as well as downside risk. By contrast the drawdown downside potential on a bond (through company failure) is much higher than any capital upside risk. Indeed if you buy a bond in a new issue and hold until maturity, there is almost always no upside risk at all.

    For this reason I no longer hold any company bonds in New Zealand listed companies or indeed finance companies. Instead I buy high yielding shares to fulfill the 'income' part of my investment portfolio. And if I want a genuine fixed interest product I am quite happy to put my money safely in a term deposit in the bank.

    SNOOPY
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  2. #12
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    Hi Snoopy,

    Quote Originally Posted by Snoopy View Post

    Bond holders will get money back after the banks have been paid back and after outstanding wages have been paid to workers out of a job.

    The idea that bondholders will be paid out ahead of shareholders if things go pear shaped has long been touted as a reason for going into bonds if you as an investor are less tolerant for risk. However, as you hint Alan - in practice - I can't think of a single example in the history of the New Zealand market where shareholders lost everything and bondholders *did not* lose huge amounts of capital. Those same hapless bondholders then spent years getting drip fed only a fraction of the original capital they invested, while writing off all of the interest they thought they were due while waiting.

    In New Zealand, unlike in the United States, we have lots of high yielding shares to invest in. Many of these pay annual dividends at a gross yield similar to the corporate bond rates. In fact some of these shares are the same companies that also market their own corporate bonds, the very same bonds we are talking about. The associated shares are of course volatile. But that volatility includes upside risk as well as downside risk. By contrast the drawdown downside potential on a bond (through company failure) is much higher than any capital upside risk. Indeed if you buy a bond in a new issue and hold until maturity, there is almost always no upside risk at all.

    For this reason I no longer hold any company bonds in New Zealand listed companies or indeed finance companies. Instead I buy high yielding shares to fulfill the 'income' part of my investment portfolio. And if I want a genuine fixed interest product I am quite happy to put my money safely in a term deposit in the bank.

    SNOOPY

    Whilst I agree with pretty much all of that - it is after all, what I hinted at above above - the only thing I think bears emphasis is that volatility is a factor in BOTH capital value and income.

    Whilst volatility and risk should be related, and as you say, higher volatility on share prices should lead to greater capital returns, the volatility of dividends / interest is also a factor.

    For an investor that needs income to live on, they might be well advised to have a reasonable portion of their investments in bonds wherein the annual interest payments are likely to be very stable, whereas dividends, even on solid long term corporate performers, can be cut in difficult times.

    One way to do that, if you don't want to hold corporate bonds, might be to invest in government (local or central) bonds where the risk of default is generally lower, and there are very few examples (at least in the developed world) of interest payments failing to be made.

    If you do invest in overseas bonds, you will also introduce currency risk of course - unless you fully hedge which will often eliminate a subtantial portion of the returns unless you are already exposed elsewhere and purchasing the overseas bonds IS your hedge.

    Having said that, I would be very cautious about investment in US or UK government bonds right now, due to the volume of money they have been creating recently. At the very least there must be a medium term inflation risk (and hence a downside currency risk) for those jurisdictions. Also, many commentators have pointed out recently that the US is already well outside the accepted norm for governement debt profiles - specifically the proportion of short term debt - to the extent that they are now regarded as an almost certain default (using the common analytical tools).

    Now, clearly the US government, indebted in USD, cannot go bust if it doesn't want to ... it can just print more money to pay the bond holders off.

    However, that just increases the probability of medium term inflation substantially reducing the value of the USD.


    Anyway, now I am way OT since this is the NZDX forum, not the 'fixed interest' forum!

    Alan.

  3. #13
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    just a quick point. the 'capital' gain/loss is taxable under the financial arrangement rules.
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  4. #14
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    Quote Originally Posted by Alan3285 View Post
    The only thing I think bears emphasis is that volatility is a factor in BOTH capital value and income.

    Whilst volatility and risk should be related, and as you say, higher volatility on share prices should lead to greater capital returns, the volatility of dividends / interest is also a factor.

    For an investor that needs income to live on, they might be well advised to have a reasonable portion of their investments in bonds wherein the annual interest payments are likely to be very stable, whereas dividends, even on solid long term corporate performers, can be cut in difficult times.
    Yes dividends *can* be cut in bad times Alan. But I have found that even in bad times directors are reluctant to cut dividends. Often they will keep paying dividends, even at a rate above current profits, to keep faith with shareholders in anticipation of better times. That means company dividend volatility is much less than company earnings volatility.

    Dividend volatility can be further reduced by having a a spread of high dividend paying investments. Earnings do go up and down but generally not at the same time for all companies. You could for example buy shares in both a high yielding exporter and a high yielding importer. I never try to predict which way the dollar will move. But such a strategy means that one of your two companies will be helped whichever way the dollar moves!

    I do like utility type companies too because generally their earnings volatility is much less than the market in general. Food companies, while not strictly utilities, do show similar characteristics because people need to eat and drink in both good and bad times.

    The problem with a strategy like this is that if you suddenly need to call on your capital you might have to sell your shares when the market is down. For this reason I do run a fixed interest portfolio, which is materially smaller than my equities exposure, as well. This portfolio is made entirely of bank term deposits. I have six of these all of which are invested for a six month term, but with staggered maturity dates. That means that every month I know that one of my term deposits will be maturing. This way I preserve monthly access to cash , should something come up, while retaining the benefits of the higher interest rates available on medium term fixed interest investments. It all works for me, sans bonds. YMMV.

    SNOOPY
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  5. #15
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    Hi CJ,

    Quote Originally Posted by CJ View Post

    just a quick point. the 'capital' gain/loss is taxable under the financial arrangement rules.

    Please can you elaborate.

    Which capital gain / loss are you referring to?

    Thanks,

    Alan.

  6. #16
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    Quote Originally Posted by Snoopy View Post
    Yes dividends *can* be cut in bad times Alan. But I have found that even in bad times directors are reluctant to cut dividends. Often they will keep paying dividends, even at a rate above current profits, to keep faith with shareholders in anticipation of better times. That means company dividend volatility is much less than company earnings volatility.

    Dividend volatility can be further reduced by having a a spread of high dividend paying investments. Earnings do go up and down but generally not at the same time for all companies. You could for example buy shares in both a high yielding exporter and a high yielding importer. I never try to predict which way the dollar will move. But such a strategy means that one of your two companies will be helped whichever way the dollar moves!

    I do like utility type companies too because generally their earnings volatility is much less than the market in general. Food companies, while not strictly utilities, do show similar characteristics because people need to eat and drink in both good and bad times.

    The problem with a strategy like this is that if you suddenly need to call on your capital you might have to sell your shares when the market is down. For this reason I do run a fixed interest portfolio, which is materially smaller than my equities exposure, as well. This portfolio is made entirely of bank term deposits. I have six of these all of which are invested for a six month term, but with staggered maturity dates. That means that every month I know that one of my term deposits will be maturing. This way I preserve monthly access to cash , should something come up, while retaining the benefits of the higher interest rates available on medium term fixed interest investments. It all works for me, sans bonds. YMMV.

    SNOOPY
    Just a small word to say thanks helps for your input into this forum snoppy. Some time ago i was looking at putting a % of my investment into the DX as a regular income base but also I thought I was minimising my risks. I just couldnt get my head around yeilds, %'s etc. In the end I flagged it. Reading through this forum however tells me that I didnt miss much.

    I do however have a much better understanding how dept bonds works after reading this forum.

    Snoppy, you are really a quality poster and thanx heaps

  7. #17
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    Quote Originally Posted by Alan3285
    What is an 'exotic'?
    Alan.
    Things like the MCB010 - value is linked to the value of base and precious metal commodities

    CEI - a "collar" around global dividend stocks with a bit of leverage thrown in.
    Do not consider my postings as investment advice. I am here to share research and to speculate on what might be. The boundary between fact and conjecture might not always be clear - best to treat all comments as speculation.

  8. #18
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    Quote Originally Posted by dragonz View Post
    Just a small word to say thanks helps for your input into this forum snoopy. Some time ago i was looking at putting a % of my investment into the DX as a regular income base but also I thought I was minimising my risks. I just couldnt get my head around yields, %'s etc. In the end I flagged it. Reading through this forum however tells me that I didn't miss much.
    I think part of the problem is that many theories of investment equate risk with volatility. For most people it isn't a problem if their portfolio suddenly jumps up in value. In fact the risk that most investors should be concerned about is 'drawdown risk' ( the collapse of your capital base). And that is *not* the same as volatility.

    I last put serious time into checking out the DX market back in the days when there were Brierley Investment's Bonds listed. At that stage I don't think the BIL ordinary shares were paying any dividends. But the bonds were looking quite attractive paying 13% or thereabouts on the secondary market. And that wasn't just one set of bonds. IIRC there were a whole series of BIL bonds/notes to the extent that you could pick the year you wanted your investment to mature and buy notes with that maturity date!

    I tried to reconcile the price I would have to pay with the quoted yield and it didn't add up. Then I was told that although the bonds only paid their interest once (or twice?) per year, the price that I paid on the market would reflect that by discounting the value of the bond depending on how far away that interest payment was. My broker was helpful. But I have to say I don't think even he had a full appreciation of exactly how the price I was meant to pay tied in with those quoted market yields. In the end I think I gave up and bought some more Restaurant Brands ordinary shares instead. They were paying much the same yield at the time and the paperwork was easier! Of course up until earlier this year, with the benefit of hindsight, you might have said that this was a foolish decision...

    Probably one decision that is still looking foolish is my decision to hold Telecom shares and not Telecom bonds. However, I never said to hold Telecom shares at the expense of all else. I said hold Telecom shares as part of a focussed share portfolio of around 10-12 shares. Put in that context the losses on my Telecom shares have been balanced out by gains in other income shares. So taking the portfolio view, my high yielding share 'income investment startegy' is still intact.

    I do however have a much better understanding how debt bonds works after reading this forum. Snoopy, you are really a quality poster and thanx heaps
    I just call things as I see them out of my own experience dragonz. I don't claim to be an Oracle. But if some of the stuff that I post is useful to you, and others, I guess that is good.

    SNOOPY
    Last edited by Snoopy; 04-12-2009 at 10:49 PM.
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  9. #19
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    Quote Originally Posted by Snoopy View Post
    I think part of the problem is that many theories of investment equate risk with volatility. For most people it isn't a problem if their portfolio suddenly jumps up in value. In fact the risk that most investors should be concerned about is 'drawdown risk' ( the collapse of your capital base). And that is *not* the same as volatility.

    I last put serious time into checking out the DX market back in the days when there were Brierley Investment's Bonds listed. At that stage I don't think the BIL ordinary shares were paying any dividends. But the bonds were looking quite attractive paying 13% or thereabouts on the secondary market. And that wasn't just one set of bonds. IIRC there were a whole series of BIL bonds/notes to the extent that you could pick the year you wanted your investment to mature and buy notes with that maturity date!

    I tried to reconcile the price I would have to pay with the quoted yield and it didn't add up. Then I was told that although the bonds only paid their interest once (or twice?) per year, the price that I paid on the market would reflect that by discounting the value of the bond depending on how far away that interest payment was. My broker was helpful. But I have to say I don't think even he had a full appreciation of exactly how the price I was meant to pay tied in with those quoted market yields. In the end I think I gave up and bought some more Restaurant Brands ordinary shares instead. They were paying much the same yield at the time and the paperwork was easier! Of course up until earlier this year, with the benefit of hindsight, you might have said that this was a foolish decision...

    Probably one decision that is still looking foolish is my decision to hold Telecom shares and not Telecom bonds. However, I never said to hold Telecom shares at the expense of all else. I said hold Telecom shares as part of a focussed share portfolio of around 10-12 shares. Put in that context the losses on my Telecom shares have been balanced out by gains in other income shares. So taking the portfolio view, my high yielding share 'income investment startegy' is still intact.



    I just call things as I see them out of my own experience dragonz. I don't claim to be an Oracle. But if some of the stuff that I post is useful to you, and others, I guess that is good.

    SNOOPY
    Well at least you got the Restaurant Brands scenerio right as well. I remember you got some flax for this but it looks like this is on the up and up.

  10. #20
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    Hi Enumerate,

    Quote Originally Posted by Enumerate View Post

    Quote Originally Posted by Alan

    What is an 'exotic'?
    Things like the MCB010 - value is linked to the value of base and precious metal commodities

    CEI - a "collar" around global dividend stocks with a bit of leverage thrown in.
    Yeah - that's definitely an 'interesting' one!

    Thanks,

    Alan.

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