05-12-2012, 12:15 AM
arthur Wrote:I think main issue for bondholders like us is the credibility of the issuing companies.
We just want some yield and things erupted all the sudden.
Heard alot of rich retirees bought Olam bonds and got trapped now.
There is a quote in the financial markets that "more money has been lost reaching for yield than at the point of a gun."
Sadly, most individual investors (whether accredited or retail) do not have the knowledge to properly evaluate a company's financial situation. That means that if they wish to invest into stocks or bonds they should either stick to recognized blue chips or find a professional to invest on their behalf.
Olam was clearly not a blue chip, and neither its shares nor its debt would have been suitable for know-nothing investors. Its debt was (and still is) unrated i.e. junk. Real blue chip companies have investment-grade debt i.e. rated at least B. And frankly I would not consider "B" acceptable for a know-nothing investor - probably something rated AA or better would be more appropriate, or maybe only buy AAA-rated government bonds.
For those who say that "safe" bonds pay too little interest, I say: now you understand the meaning of financial repression. Your hard-earned interest has been taken away from you and used to subsidize the undeserving: the multinational banks, Chinese state-owned enterprises, and even entire nations like Greece.
What can you do? You can live with it, or take more risk. But is the increase in risk commensurate with the increase in yield? For those who bought Olam debt, clearly the answer is no. In fact, in today's environment it makes no sense to own bonds at all - anything safe pays too little, and anything paying a decent yield is too risky.
Of course, there are professionals out there buying Greek government debt at 50 cents on the dollar. But that is their job and they do so with their eyes open. Don't try this at home.
As usual, YMMV.