Ben Graham would be against investing in bonds now, at least for the long term.
Q1 hedge fund letters, conference, scoops etc, Also read Lear Capital: Financial Products You Should Avoid?
The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel by Benjamin Graham
The Intelligent Investor - Bond Analysis - Chapter 11
Transcript
British investors we continue with our summary about Ben Graham's The Intelligent Investor and we are now at Chapter 11 security analysis for delay investor. The chapter is separated in two parts. First I'll discuss balance in this video and in the next video I will discuss stocks how to analyze stocks. So let's start with bonds and how to analyze them. The key with bonds is to see OK can the company the government pay the interest on their debt and can date refinance that that in the future if they can constantly refinance the interest payment is the key. And what Grant focus on is the poorest here. So you look I don't know seven 10 years in the past and look at the poorest year the company has had in relation to earnings and then compared it poorest year with the interest costs. So that's perhaps the most conservative way to approach bonds but you avoid nasty surprises. The poorest year today was 2008 2009 when interest rates spiked and a lot of companies had trouble refinancing. Other checks are the size of the enterprise. Smaller companies have more trouble paying back that refinancing because those business model are less tested and might change in the next recession. Stuck to equity ratio where he discusses market Breay price the total amount of debt also that market price could change and property value. Of course as gram value investor focus on the value of the assets and their earning power a big part of the chapter is about applying common sense. Simple common sense as Graham has been teaching us for the last 100 years or most.
Let me show you what common sense means today. This is non-financial corporate business debt and you can see that in 2007 it was three point two trillion. Now it is above 6 trillion. So in ten 11 years the corporate debt doubled doubled in the United States. So companies really went on a borrowing spree. Now the problem is if I apply common sense I see that a lot of companies are stretched and they see interest rates rising. This means that more and more companies will find themselves with refinancing issues at some point in time especially those who are already stretched and Graham compares that with the 1960s 1969 and 50s were great due to lower interest rates. This led to over expansion in debt and then in the late part of the 1960s. Higher interest rates led directly into a recession stock market crash and negative returns for the next 10 or 40 years. I think so. Interest payments on corporate that went from 10 billion in 1963 to twenty six billion in 1970 1971. Interest payments taken 29 percent of corporate profits just 16 in 1960. Where we are now back of the napkin calculation corporate interest payments should be around two hundred eighty billion SFP 500 earnings one trillion. So we are at 40 percent. If interest rates double earnings go down and interest payments go up then we can sue Essene corporation U.S. corporation paying 100 percent of their profits into their debt repayments. So Graham says in the 1970s as he said in the 1960s we are not quite ready to suggest that the investor may count on an indefinite continuance of this favorable situation.
Low interest rates and hence relax standards of Bond selection in the industrial or any Onder group. The same holds today. So higher interest rates stay away from all yielding assets because if we see inflation if we see higher interest rates those banks will do terribly. And bonds are usually not a good investment when you look at the risk reward over the long term. They were a great investment over the last four to five years because interest rates went from 15 percent to zero. Lower interest rates are good for bonds. Higher interest rates are bad for bonds. So look at the situation. If you are a bond trader then Okay look. Where are interest rates going. We probably might see higher interest rates which means that bonds will go lower for another 6 months year two years at some point in time when the end is interesting you might want to look at the bonds. For now it's very very risky. Thank you for watching. Looking forward to your comments and I'll see you in the next video.
