JR Snell Capital Management, LLC

A couple of words about bonds here… and a little bit of a warning as the media-hype machine touts the past success of bonds.

(Hint: Although the monkey thought it was all in good sport, we all know what happened to the weasel next.)

My long-running pseudo-battle with Bill Gross and the Bond Sellers came to an end this fall when we exited our long-term Treasury positions. I still do not like long-term bonds as an investment vehicle right now. The simple reason is that the price is too high.

The price of the long bond (20+ year Treasury) ETF (TLT) is being held up at weirdly astronomical levels by investors who can’t think of any safer place to put their money. The troubles in Europe have driven investors around the globe out of the Euro and European country’s sovereign debt and into the dollar and US debt.

Remember this: People are not buying US debt because it’s “all that”… it’s not, and it’s providing a lousy rate of return… but, hey… we can print our own money and the Europeans can’t, so Treasuries seem to make a pretty decent “mattress” for global investors to stuff their cash into at the moment.

I have my ears to the track and I’m hearing that money has been coming out of stock mutual funds at another record pace here recently. And where is that money going?

U.S. stock mutual funds that invest in domestic equities had their second-biggest redemptions last year as record market swings sent investors to the perceived safety of bond funds.

And why do we suppose it’s going in to bond funds?

Despite a reputation for being a slow-growing alternative to stocks for the risk-averse, bonds just passed stocks’ long-term performance over the past 30 years.

Many investors chase last year’s winners, perennially dooming them to under-performance… not to mention it makes you feel like you’re always in the wrong place at the wrong time… very hard on the ego. It’s kind of like charging into real estate in 2006: It seemed like a good idea at the time.

In fact, you are actually witnessing an historical event: A bond bubble that offers the most expensive bond market in your lifetime. Don’t bite… The minute Europe straightens out their situation, the bond market bubble will pop.

Here is a very wise investment technique (good for all fields at all times): Take the time to figure out precisely what everybody else is doing… and then do the opposite.

ACTION ITEM: If you have bond investments, reduce or eliminate your allocation to them.

Bill Gross, Bond fund, Bond market, Exchange-traded fund, interest rates, investing strategies, Investor, Mutual fund, treasuries, treasury, United States, United States public debt, United States Treasury security, William H. Gross

The Standard & Poor’s 500 Index first passed the mid-600 mark with the index breaking above that level in September of 1996, only to return to nearly the same level (666.72) in February of 2009, 13 years later.  The index has also zoomed as high as 1553 in February of 2000 and then returned again to similar highs (1527) during October of 2007.

Today, almost 15 years to the day later, with the S&P 500 at 1120 (give or take) we find ourselves firmly in the middle of the range of the past 15 years (1121.44). To think of it another way, any stock market investments made over the last 15 years and held to date had about the same odds of being profitable as walking into a casino and putting everything on red: 50-50.

The number of months in the past 15 years that we’ve closed above 1120 is 107 and the number of months that we’ve closed below the 1120 level is 73.  Since we’ve spent 2 out of every 3 months in the past 15 years ABOVE where we closed today (1120), we can deduce that not even the foolproof (as-advertised) strategy of dollar cost averaging has enabled most investors to make money.

Additionally, behavioral finance studies have demonstrated that investors are more biased to buy when the market has been performing well, so we might make the fair assumption that most investors made most of their stock investments during those periods where the index was in the upper half of its range (above 1120 in our example). This puts the percentage of losing investors most likely higher than the 50% suggested by the numerical odds alone as well as the 60% suggested by the number of months spent above the halfway level. This easily leaves more than half and probably nearly two-thirds of investors fairly bummed out by the performance of their 401-ks and IRAs.

But within the numbers has been tremendous opportunity. The moves between each low and the following high have been unprecedented. The percentage gain of the index for the 1996 to 2000 run was 238% and the run from the low in 2003 to the high in 2007 was 205% and the latest run from the lows of February of 2009 to the recent May 2011 high was 206%.

If an investor can muster up the courage to buy stocks even occasionally when he finds it the most uncomfortable to do so, it is obvious that there has been plenty of opportunity to profit on a long term basis. And there’s even more opportunity to be had if that same investor could face the risk of maybe being wrong (or early) and to sensibly lighten up on his stock positions when everything seems to be going well.

Gang, it’s time to stop subjecting your financial future to the dogma and tired phraseology of investment hindsight. It’s a new world, different from the past and as investors we must think and make decisions based upon our expectations for the future rather than the statistically aberrated past.

Business, Dow Jones Industrial Average, Equities, investing, Investor, Standard & Poor's, stock market, Stocks and Bonds