Search the Community

Good Morning All; Many traders who study our methods learn in a fairly quick time how to trade properly. Most are taken aback by the ease and beauty of the method. If problems arise, it usually is due to not following some rules, and often the top rule to be broken is an improper entry. This entry is often due to not having patience, or not having a well-laid plan to remind you what to do. Here are a few basic reminders. The Best Time to Enter There are a few concepts that seem very basic, but often get lost in the day-to-day noise that can often cloud your judgment. Just taking a few minutes every day and a few seconds before planning every trade can often help keep you out of trouble. If you are core trading or swing trading, you need to ask if it is the best time to enter trades. Are you entering swing trades during the first 5 minutes, when the market really has no direction on the daily charts? The majority of stocks will get most of their move from the market in general, and the sector they are in. Are you fighting the main move of the market or the sector when you are entering? There are many times that longer-term trades should wait until the market is in the proper trend. When the market is in a major uptrend or downtrend most money can be made by taking stocks for the big moves with a long-term account; sideways or trendless times in the market are better for playing the range provided. If you are entering intraday trades, are you accounting for reversal times? Are you following your trading plan in terms of what strategies to play at what times of the day? Your trading plan should do everything possible to keep you out of trades. Are you trying to enter late day break outs during lunch? Are you going long at the 10:30 A.M. reversal time after a strong rally because you are afraid to miss the longs? Closing Comments Set realistic targets for the market you are in and make sure your stops make sense for the target projected, or pass the trade. Do not worry about missing plays. Worry about playing quality and preserving capital on days and times when the market is not in the same mode you want to be in. Paul Lange Vice President of Services Pristine Capital Holdings, Inc.

Secured Investment Contracts are a unique type of bond - but for most people, these bonds are like nothing you've ever invested in before. Like stocks, these bonds allow you to invest in some of the best companies in America. But unlike stocks, you'll always know exactly when and how much you'll be paid. The bonds I'm going to tell you about are as profitable (or more so) than stocks... come with less risk... and have an exact date on which you'll be paid. As you'll learn, it's the company's bondholders, who hold the legal, first claim to a company's income stream. Stockholders come in around eighth in line. It's possible to double our money in these safe and stable bonds… often in a few short years. Most common-stock investors are lucky to make a fraction of that return consistently. What To Do We look for two major things in a good investment: safety and a high return. We use bonds to find them. When a corporation needs money to pay bills, expand, or upgrade equipment, it can fund these activities with the cash coming in the door, by issuing stock (also called "equity"), or by borrowing the money by issuing debt. This is also called "issuing bonds." As an owner of a company's common stock, you share in the company's future profits. If a company you own stock in grows its profits by a factor of 10 over a few years, chances are good your stock will be worth a lot more than your original purchase price. As a bondholder, you have no claim on the company's profits. You are simply loaning money at a set rate for a predetermined period of time. You are entitled to get your money back plus interest payments according to a federal statute that governs bond agreements. In other words, your gains are bound by U.S. federal law. Most people find it incredibly difficult to consistently select stocks that grow their profits (and stockholder's equity) over a long period of time. For every huge success like Starbucks or Home Depot, there are scores of bankrupt dreams. And when a company goes bankrupt, the stockholders can lose every cent they have in the company. This is why I love being a bondholder. In the event the company gets into trouble, the bondholders are at the head of the line when it comes to paying bills and creditors. And in the event of an all–out bankruptcy, the assets of the company are sold, and the proceeds are paid to the secured creditors and bondholders. This legal right to be paid is the bedrock of this investment philosophy. As bondholders, we don't have to guess who has the best widget or which style of clothing people will like from year to year. We just loan money. We simply have to tear through a company's books and determine if it can pay us off in the time period our bonds are "in play." Why It's Possible To Do This Economic theory says we have to take on greater risk to earn greater returns. I disagree. The stock and bond markets make temporary mistakes. Even the smartest investors can get carried away with their fear and greed… which leads to the "mispricing" of risk. If risk were always properly priced, there would be no investment opportunities for me to tell you about. Investors like Warren Buffett wouldn't be able to buy cheap assets and earn huge returns. In fact, the high returns we can earn are possible because of a significant mispricing of risk. And the market is littered with bonds mispriced by the majority of investors, both professional and amateurs. Two factors create this mispricing. First, most big bond-market participants – like insurance companies and pension funds – can't buy the types of bonds we want to buy. These institutional investors are prohibited from investing in the part of the bond market where we operate. This market is commonly known as the high-yield, or "junk," bond market. A high-yield bond is considered riskier than bonds called "investment grade." Don't worry though… as I'll show you in a moment, we'll use this perception of increased risk to make a lot of money. This lack of "big competition" in the high-yield bond market lets us find great deals without much competition. Think of it like this… if you're one of the few mortgage lenders in a town, you could be very picky about the loans you extend to borrowers. You don't have much competition, so you could demand high rates of interest and plenty of collateral to back your loans. Second, the high-yield market is relatively small and carries a stigma of low quality, which is not always deserved. The quality of a loan is determined by analyzing each individual borrower. As I mentioned, Moody's and S&P often make errors in rating bonds, leading to mispricing in the bond market. Wall Street simply bypasses the forest and leaves a lot of strong trees for us to investigate without much competition. The bonds we want to buy could be called "contrarian bonds." Much like a share of stock, a bond can be sold by investors who are afraid of holding the asset. For instance, in 2008, we bought a bond issued by the Goodyear Tire and Rubber Co., America's largest replacement tire maker. At the time, most investors heard "tires" and ran screaming... assuming if the U.S. auto industry was in desperate straits so must the tire business... But they were wrong and this created our opportunity. Since investors were worried about the outlook for tire makers, you could have bought a contract that entitled you to a payment of $1,000 from Goodyear for just $740. That's right. You paid $740 to get $1,000. Here's how this is possible... How to Make the Biggest Gains in Bonds Just like stocks, bonds trade in a public market that is heavily affected by emotions. And just like stocks, emotions can cause bonds to trade for less than their true value. Professionals call this true value the "intrinsic value." When investors become concerned about a business or industry, they're willing to pay less for the debt obligation of that business… just like they're willing to pay less for a dollar's worth of earnings of that business. Let's say company ABC borrowed $5 million three years ago by issuing 5,000 bonds worth $1,000 each. (Most bonds are issued at $1,000 per bond. This original issue price is called the "face value.") The company agreed to pay its creditors 8% interest for five years. That's an interest payment of $80 per bond each year. The amount borrowed, the interest rate, and the life of the bond can vary greatly. But we're keeping it super simple for our example. Now… let's say ABC is struggling due to new competition or an industry downturn. The bonds ABC issued that originally had a value of $1,000 will fall. Investors aren't as rosy about the company's prospects… so they're only willing to pay $800 per bond. Here's where it gets profitable for you and me… We do a thorough analysis of ABC. We know the company will generate enough cash to pay the interest it owes to its creditors. (Remember, the creditors are first in line to get paid. Shareholders could see their cash dividend disappear). We buy ABC's bonds for $800 per bond. That 8% interest on the original value must be paid. Since we bought the bonds for $800, our $80 in annual interest payments gives us a nice yield of 10% per year. Now come the capital gains… ABC has to pay off all of the $5 million it borrowed in two years (remember, the bonds were issued three years ago). It is contractually obligated to pay $1,000 to the holder of each bond. Since we took advantage of the pessimism toward ABC and did a thorough analysis of its ability to pay its debt, we are rewarded with a 20% gain on our original purchase price. We paid $800 for the bond, earned $80 in interest each year for two years ($160 total interest), and we make a capital gain of $200! Here's how the math works out: Bought ABC bond for $800. Collected $160 in interest payments. Received $1,000 when ABC paid off the total debt. We make $360 off our investment of $800 (a 45% gain) in two years. How We Know It's Safe The biggest key to making these big, certain, on-time gains is my ability to perform a solid credit analysis of each and every position. Our bonds must be safe. With all our recommendations, we know the bonds are safe because my analysis says the borrower has adequate resources to pay us. I ensure the company has sufficient assets to pay off our bonds even if it should fall into bankruptcy and be liquidated. That's my job. You see, bonds become deeply discounted because of credit downgrades. A credit agency like Moody's or Standard & Poor's has analyzed the borrower and lowered its opinion of the company's credit quality. Downgraded bonds decline in price because the risk of a borrower default is higher. However, I will not buy a bond unless I am satisfied the borrower has enough resources to pay the interest on the bond and redeem it at maturity. And frankly, most of these bonds are now safe because they have already declined in price. The only reason for a significant further price decline is a default. And, as I said, the value of the borrower's assets in liquidation is enough to pay us. I look for complete coverage of the face value of the bond. This means we have an excellent possibility of not only recovering our investment but of receiving the full value of the bond. Safe, high-yield bonds… that's the core of our strategy. Why would you ever buy stocks...

Bond Definitions Bond A bond is a long-term loan to the government, a municipality, a corporation, or even an individual. The terms of the loan are contained in an agreement between the borrower and the bond trustee, who represents the interests of the bondholders. Bond Trustee An independent third party selected by the borrower to handle bookkeeping on a bond. The trustee represents the interests of the bondholders. Note A note is a medium-term loan to the government, a municipality, or a corporation. The terms of the loan are contained in an agreement between the borrower and the note trustee, who represents the interests of the noteholders. (Also called a bond.) Debt Instrument Debt instrument is the general term used to describe both a note and a bond. Fixed-Income Bonds and notes pay a specified amount of interest. The dollar amount of the interest payments is fixed and does not change for the life of the loan. Bonds and notes are therefore called fixed-income investments. Issuer The issuer is the name of the borrower. Principal Principal is the amount of each bond or note. It is the amount of the loan. Principal, par value, and face value are interchangeable terms. Par Value Par value is the denomination of the note or bond. It is the original amount of the loan. Generally, it is $1,000. Face Value Face value is the same as par value. It is the denomination amount of the note or bond. Generally, it is $1,000. Coupon Coupon is the specified amount of interest on the bond. It is fixed for the term of the loan. Maturity Date Maturity date is the date the bond will be repaid in full. Accrued Interest Accrued interest is the amount of interest that has been earned on the bond since the last payment date. Interest is earned every day, but only paid twice a year. So the accrued interest amount increases every day until it is paid. Interest Rate Interest rate is the cost of the loan to the borrower. The coupon and interest rate are the same. It does not change for the term of the loan. Yield Yield is the relationship between the coupon of the bond and its current price. The coupon does not change, but the price of the bond does. The yield changes as the price of the bond changes. If the bond price declines, the yield increases, and vice versa. Yield to Maturity Yield to maturity is the amount we earn on a bond every year until it is paid. This takes into account the interest paid and the discount or premium of the bond price to its par value. Municipal Bonds Municipal bonds are loans to a municipality. The loan is usually to establish or improve facilities or services that benefit residents. The bondholder does not have to pay tax on the interest payments. Therefore, the interest rates on municipal bonds are generally lower than on corporate bonds. Corporate Bonds Corporate bonds are loans made to corporations. Unless the bonds are held in a tax-exempt account (like an IRA), bondholders pay taxes on the interest. Credit Rating A credit rating is a report issued by a credit rating agency – like Moody's or Standard and Poor's. It estimates the chances of default. Credit ratings are important because they determine the interest rate the borrower has to pay. The higher the chance of default, the higher the interest rate. High-Yield Bonds High-yield bonds are a part of the corporate bond markets. Issuers in this market are more likely to default and therefore, pay more to borrow. Junk Bonds Junk bonds is a nickname for high-yield bonds. Call Call is a prepayment right given to the borrower by the bondholders. The borrower may "call" the bond for early repayment at a specified date, the call date, and for a specified amount, usually at a premium to the par value. Basis Point Basis point is one hundredth of one percent. There are 100 basis points in each 1%. The differences in bonds are often quoted in basis points. For example, an investment-grade bond pays 60 basis points (0.6%) less than a non-investment grade bond. Default Default occurs when the borrower cannot make either principal or interest payments as agreed. The borrower is in violation of the loan agreement and may be forced into bankruptcy.

What is a bond? A bond is a loan. There are three kinds: short, medium, and long term. A short-term loan of less than two years is called a "bill." A loan for two to five years is called a "note." All loans for a longer term are called bonds. Despite these technical distinctions, people often use these terms interchangeably. We will not be investing in bills. So for convenience, I will use the term bond for both notes and bonds. In addition, three different types of borrowers use bonds: governments, municipalities, and corporations. We will be making loans to corporations. A key difference between stocks and bonds is that stocks make no promises about dividends or returns. The company is under no obligation to pay you. However, when a company issues a bond, it guarantees it will pay back your principal (the face value) plus interest. If you buy the bond and hold it to maturity (when the loan expires), you know exactly how much you're going to get back. Bonds are traded in $1,000 increments. So for each bond you buy, you'll receive $1,000 at maturity. When we make a loan we want to know four things: 1) What is the amount of the loan? 2) Who is the borrower? 3) How much interest do we earn? 4) When do we get paid? Let's use the Goodyear Tire and Rubber 7.86% bond due 8/15/2011 to illustrate how this works. You decide the answer to the first question. You decide how much money you want to loan. The "face value" of each bond is $1,000. But that's generally not what you pay for our bonds. For example, if the Goodyear bond was selling for $740, and you wanted to invest $10,000, you would buy 13 bonds ($10,000/$740). The next three are answered in the description of the bond. Goodyear (borrower) 7.86% (coupon) Note due 8/15/2011 (repayment date): Goodyear Tire and Rubber Company is the borrower. That's easy. The next question – how much interest do we earn – is a little tougher. The "coupon" is 7.86%. This is the interest the borrower pays on the loan... But it's not necessarily the interest you earn. The borrower calculates the interest payment by multiplying the coupon (7.86%) times the par value ($1,000)... So 7.86% times $1,000 equals $78.60. This is the annual interest amount paid in two equal installments of $39.20 on February 15 and August 15. The coupon will not change. Bondholders are guaranteed payments equaling $78.60 a year per bond. But the price of the bond can change. Here's what it looks like for the Goodyear bond: Current price of the bond $740.00 Annual interest payments $78.60 Yield (7.86%/$740) 10.6% So if you held $740 for this bond, you would receive an 10.6% yield – much higher than the original coupon. The last part of the bond description is the maturity date. This is the date the loan will be repaid. The borrower borrowed $1,000 and will repay $1,000. So you will receive a $1,000 for each bond you hold. What is my return? When you buy a bond, you will get the interest payments, plus you'll be repaid the full amount of the bond at the end of the loan. Your return is the combination of the interest payments plus the capital gain amount. Ideally, you want to be buying bonds at a discount to par value. So when the bond matures, you will have a capital gain equal to the amount of the discount. In the case of the Goodyear bond, the purchase price was $740 and the amount repaid is $1,000. Your capital gain would be $260, or 35.1%. And your interest would be $78.60, or 10.6%, a year until the bond matures. When will I get paid? Most corporate bonds pay interest twice a year. The borrower pays interest to the bond trustee, who sends the interest payments to you. The bond trustee will be an independent company – selected by the borrower – that takes care of bookkeeping. Do I have to pay taxes on the interest? Yes. Unlike municipal bonds, which are exempt from federal (and sometimes state) taxes, corporate bonds pay taxable interest to bondholders. You can get around this by holding the bonds in a tax-exempt retirement account (like an IRA). What are the risks? A bond manager faces many risks: Interest-rate risk, event risk, default risk, credit risk, downgrade risk, prepayment risk, duration risk, and more. We don't have to worry about most of these if we buy debt that's already been downgraded. And if we hold these bonds until they mature, we eliminate interest-rate risk, duration risk, and prepayment risk. In fact, we face only two risks (and they are related)... credit risk and default risk. If the borrower's credit deteriorates, we face the prospect of a default. If the borrower defaults, we may lose all or part of our capital. How do I buy a bond? There is no central place or exchange for bond trading, as there is for publicly traded stocks. Bonds are traded through bond dealers, more specifically, the bond trading desks of major investment dealers, like Goldman Sachs. These dealers buy and sell huge volumes of bonds. They know all about a particular bond and are prepared to quote a price to buy or to sell. When you want to buy a bond, you call your broker, and he calls one of the dealers to arrange the trade. You need to give your broker this information about the bond you want to buy: • How many bonds • The name of the borrower, the coupon, and the maturity date • The CUSIP number A CUSIP is a unique nine-digit code assigned by Standard and Poor's to every traded security. Your broker will arrange the trade, and credit the bonds to your account. Bonds are "book traded," which means your ownership is accounted for and maintained by the bond trustee, an independent company – selected by the borrower – that takes care of bookkeeping. A certificate is not issued.