Sunday, June 15, 2008

Bonds or equities?

“For no fee at all I am prepared to offer to any wealthy person an investment program which will last a lifetime and will not only preserve the estate but greatly increase it. Like other great ideas, this one is simple:

When there is a stock-market boom, and everyone is scrambling for common stocks, take all your common stocks and sell them. Take the proceeds and buy conservative bonds. No doubt that the stocks you sold will go higher. Pay no attention to this - just wait for the depression, which will come sooner or later. When the depression - or panic - becomes a national catastrophe, sell out the bonds (perhaps at a loss) and buy back the stocks. No doubt the stocks will go still lower. Again pay no attention. Wait for the next boom. Continue to repeat this process as long as you live, and you have the pleasure of dying rich.
A glance at financial history will show that there never was a generation for whom this advice would not have worked splendidly. But it distresses me to report that I have never enjoyed the social acquaintance of anyone who managed to do it… The chief difficulties, of course, are psychological. It requires buying bonds when bonds are generally unpopular; and buying stocks when stocks are universally detested.”

~Fred Schwed Jr

Sgbluechip says: Currently the bond markets are experiencing high interest and subscription due to poor equity returns. However, it is precisely that one should long equities and short bonds to be able to profit from the next cycle. Anybody can be rich but not EVERYBODY will be rich. Going with the herd will not yield you anything more than mediocre gains. Investing in equities during a bear market takes courage. But do not forget, after every bear market will be an even longer phase of a bull market. Bonds will lose value then. Look further than what is on the table now to profit from the next cycle.

It is harder to meet a bear market than a bull market as traditionally, bull market phases last longer than bear market phases. Hence, count yourself lucky to meet a bear market (like now) as it allows you to buy great businesses at wonderful prices!

PS: Sgbluechip on 3 days leave from work!

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