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“Let’s say high yield bonds yield 8% and a Treasury note of the same maturity offers 5%, for a yield spread of 3%, or 300 basis points. Which is the better deal? It all depends on the likelihood of default. “
Yes and No. It’s not as simple as Marks’ equation. It also depends on the role of credit inside your broader portfolio. That assumes you have a diversified portfolio with a reasonable sense of how it will behave under different market conditions. In ‘08 AAA bonds actually gained, helping offset losses across most risk assets. Had you held junk bonds in place of AAA they would only added to the pain. While they didn’t perform as badly as equities, they’d have offered little relief in offsetting portfolio losses.
When things are going well as they have been (pretty much since 2009, baring a few hiccups), it’s easy to get carried away with returns. To wit - Buffett’s warning: ”When the tide goes out …”
There is no free lunch in high yield bonds. They fall much more in drawdown than that of treasury, for example. 2008 and 2020 drawdowns are good reminder.
On our fixed income bucket, we have 1/3 high yield, 1/3 IG bonds, and 1/3 cash. In recent weeks my bonds held up well. We trimmed back some bank loans and added to cash.
just a reminder that Marks outsized performance came from crisis periods where basically no new money was coming in voluntarily. he was using untapped but contractually committed funds. outside of these periods, he has mediocre results.
both marks and buffett were slow to deploy during covid, claiming easing and bailouts came too fast. it is also possible they may be too early or too late in the next crisis.
In a sense that tactic of buying when others are fearful has worked for me as well. Dumpster fires and bathwater floods are great places to look for hidden gems rather than racing up the roads to the current sparkles in the eyes of the masses.
I am no where near the abilities of Buffett, Marks or a host of others but my best returns have come from selections made during those times.
In a sense that tactic of buying when others are fearful has worked for me as well. Dumpster fires and bathwater floods are great places to look for hidden gems rather than racing up the roads to the current sparkles in the eyes of the masses.
I am no where near the abilities of Buffett, Marks or a host of others but my best returns have come from selections made during those times.
+1
I’ve spent hours listening to Howard Marks drone on about his philosophy of buying low and waiting (often for years) for those distressed assets to recover. A favorite of mine. I’d be much richer if I’d followed his advice and not let go of some bargain priced stocks, bonds or funds too early. It’s a tough act to follow. Requires the Biblical patience of Job. (I’m the dummy who let go of DKNG a couple years ago at around $12.50 after a two-year dalliance with the struggling stock.)
Marks’ earned his reputation buying distressed debt (lower tier junk bonds), including debt of companies in bankruptcy. So the comments in the linked piece are with reference to that asset class. To his way of thinking this kind of dumpster-diving entails less risk than buying many other market-priced assets. But it only works if you are confident enough in your picks that you can hold for the long run. My point earlier: If you are a more diversified investor, don’t think buying some BB and lower credits is going to smooth out your ride or prove an easy path. Understand the risk you’re adding to your portfolio.
"Understand the risk you’re adding to your portfolio." +1 @hank
I don't mean to imply that this is what you meant with that comment but other than the MM positions in my account I generally think of my whole portfolio as being 'at risk'. Yes, all of it, albeit some more risky than others.
When one owns let's say NVDA as a market darling and it can be blown out of the sky by mention of a DeepSeek or Six or whatever that's a risky mofo. It can happen to any holding at any time. (FWIW, no I don't own NVDA outright but a lot of my ETF holdings do.) Your comment re: diversification holds true. I'd rather jump off a ladder than fall from one.
High yield credits are a rewarding area for investment. What people need to remember is they behave more like equities than traditional bonds during periods of market stress. So, considering a “whole” portfolio, high quality bonds (especially AAA rated) can rise in value and add stability during rough times, while high yield bonds are more likely to sink along with your equities exacerbating your losses.
* 2022 was an exception & may have taught “the wrong lesson”. Due to the extremely rapid series of rate increases implemented by the Fed, high quality bonds suffered steep losses right along with equities. Actually, the funds I’ve looked at that had some lower rated corporate bonds seem to have held up better than those having higher quality bonds. A really unusual year.
Don’t know anything about NVDA. TSLA has fallen about 25% this year. Breaks my heart.
Surprised myself, after a quick check of the chart, YTD. My Junk is holding its own, but my core-plus fund is doing better so far, this year, amid all the turmoil. TUHYX 1.46%. Yield is 7.32 PRCPX 1.56 Yield is 7.03 WCPNX 2.25. Yield is 5.06
(Morningstar.)
Despite this, I've been noticing WCPNX is more volatile, though not by much. If my Junk were to behave like a stable value MM fund which offers a 7 percent+ yield, I'd be gleeful. Lately, it's ALMOST behaving that way.
Comments
Yes and No. It’s not as simple as Marks’ equation. It also depends on the role of credit inside your broader portfolio. That assumes you have a diversified portfolio with a reasonable sense of how it will behave under different market conditions. In ‘08 AAA bonds actually gained, helping offset losses across most risk assets. Had you held junk bonds in place of AAA they would only added to the pain. While they didn’t perform as badly as equities, they’d have offered little relief in offsetting portfolio losses.
When things are going well as they have been (pretty much since 2009, baring a few hiccups), it’s easy to get carried away with returns. To wit - Buffett’s warning: ”When the tide goes out …”
From Yahoo Finance - 2008 Returns
PRHYX -24.46%
Category Average -26.41%
On our fixed income bucket, we have 1/3 high yield, 1/3 IG bonds, and 1/3 cash. In recent weeks my bonds held up well. We trimmed back some bank loans and added to cash.
outside of these periods, he has mediocre results.
both marks and buffett were slow to deploy during covid, claiming easing and bailouts came too fast. it is also possible they may be too early or too late in the next crisis.
I am no where near the abilities of Buffett, Marks or a host of others but my best returns have come from selections made during those times.
+1
I’ve spent hours listening to Howard Marks drone on about his philosophy of buying low and waiting (often for years) for those distressed assets to recover. A favorite of mine. I’d be much richer if I’d followed his advice and not let go of some bargain priced stocks, bonds or funds too early. It’s a tough act to follow. Requires the Biblical patience of Job. (I’m the dummy who let go of DKNG a couple years ago at around $12.50 after a two-year dalliance with the struggling stock.)
Marks’ earned his reputation buying distressed debt (lower tier junk bonds), including debt of companies in bankruptcy. So the comments in the linked piece are with reference to that asset class. To his way of thinking this kind of dumpster-diving entails less risk than buying many other market-priced assets. But it only works if you are confident enough in your picks that you can hold for the long run. My point earlier: If you are a more diversified investor, don’t think buying some BB and lower credits is going to smooth out your ride or prove an easy path. Understand the risk you’re adding to your portfolio.
I don't mean to imply that this is what you meant with that comment but other than the MM positions in my account I generally think of my whole portfolio as being 'at risk'. Yes, all of it, albeit some more risky than others.
When one owns let's say NVDA as a market darling and it can be blown out of the sky by mention of a DeepSeek or Six or whatever that's a risky mofo. It can happen to any holding at any time. (FWIW, no I don't own NVDA outright but a lot of my ETF holdings do.) Your comment re: diversification holds true. I'd rather jump off a ladder than fall from one.
High yield credits are a rewarding area for investment. What people need to remember is they behave more like equities than traditional bonds during periods of market stress. So, considering a “whole” portfolio, high quality bonds (especially AAA rated) can rise in value and add stability during rough times, while high yield bonds are more likely to sink along with your equities exacerbating your losses.
* 2022 was an exception & may have taught “the wrong lesson”. Due to the extremely rapid series of rate increases implemented by the Fed, high quality bonds suffered steep losses right along with equities. Actually, the funds I’ve looked at that had some lower rated corporate bonds seem to have held up better than those having higher quality bonds. A really unusual year.
Don’t know anything about NVDA. TSLA has fallen about 25% this year. Breaks my heart.
TUHYX 1.46%. Yield is 7.32
PRCPX 1.56 Yield is 7.03
WCPNX 2.25. Yield is 5.06
(Morningstar.)
Despite this, I've been noticing WCPNX is more volatile, though not by much. If my Junk were to behave like a stable value MM fund which offers a 7 percent+ yield, I'd be gleeful. Lately, it's ALMOST behaving that way.