My Greedy Friend’s First Quarter 2012

The above portfolio did very well from January 2009 to January 2010. Then the bankruptcies kicked in from January 2010 to December 2011. The increase value of the portfolio slowed. From January 2012 to April 2012 -- the portfolio value increase accelerated. The projections from May 2012 to April 2013 -- the portfolio value will increase with greater accelerating speed.

It is the end of the first quarter of 2012. That means it is time to talk about my greedy friends. No, I did not say my needy friends. They are truly greedy. To give you a little history about their investments, my friends had a 401K with their employer from 2001 to 2009. In December 2008 they lost their job. In that time, their mutual funds in their 401K lost 5% overall. They came to me for help because they thought that they can do better and they knew that I have done better with my IRA.

They wanted to transfer their 401k money to their new employer getting back into the same type of funds. I told them no, get into junk bonds. They told me that junk bonds have a bad reputation and they did not want to lose any more money. Besides everything that they read in the media told them that it was a bad idea. I showed them what I was doing with junk bonds. I asked them what they see me doing compared to what they heard about such investments, does it make any sense? So they decided to turn their investments over to me in January 2009.

Things went fine with their junk bond investments until three companies filed for bankruptcy in 2010 and 2011 causing their investments to stop rising as fast. Now I did not say my friends took a loss. I said that my friend’s portfolio did not rise as fast. They had a fit and called me all kinds of names. But given the choice of taking back control of their portfolio or letting me continue, the question never came up. Here is the reason why I call them my greedy friends. Their portfolio does not suggest that they are needy at all.

So far in 2012, they are making big gains. I gave a projection of what I expect their portfolio to do in the next 10 months to the end of January 2013. I expect bigger gains.

However, this will only happen if they have no large bankruptcies, no large bond tender offers by the companies in their portfolio, or they do not decide to withdraw money from their IRA. Keep in mind that their bond portfolio is riding on Oil Company bonds so if oil prices fall, their bond prices will fall about 10% until maturity. Bankruptcies and deflation are the only dangers to any bond portfolio. Hyperinflation will hurt the price of long term bonds and may give you, the investor an opportunity loss. In other words, it they were in the right investments you would make more money. If you take that position then you are like my greedy friends.

The Secret to Income Investing

I am not the brightest crayon in the box. My friends and relatives can tell you that. So I can’t do that complicated so call investing that you see on the cable TV channels. All I know how to do is make money. I invest for income and only income. I leave safety to the rating agencies, such as Standard & Poor’s or Moody’s. I try to buy corporate bonds that are as near “BBB” as I can get giving me the highest interest that I can get. My bonds give interest mostly on a semi-annual bases. When they give enough interest to buy a bond(s) I buy more bond(s). In my IRA, I make my annual contribution and buy more bonds. The more bonds I buy, the more interest flows into the portfolio, the more bonds I buy. This works very much like compound interest in a savings account.

An IRA allows me to accumulate interest and appreciation of the bonds tax deferred. Plus I get a tax deduction for my yearly IRA contribution. This is the secret to what you see in my greedy friend’s bond portfolio chart.