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Quote: ... A poll of investment experts asked in late 2007 to forecast long-term common stock-market returns likely would have seen them guess, on average, clos
by fspeech 9y ago
Quote: ... A poll of investment experts asked in late 2007 to forecast long-term common stock-market returns likely would have seen them guess, on average, close to the 8.5% actually delivered by the S&P 500,” he said
I fear people may misinterpret what Buffett said esp. for those who don't have memory far back enough. In 2007 I recall one could buy long term CDs at 7%. These were basically relatively riskless guaranteed returns for small investors. Nowadays the comparable returns are a little above 3%.
During the financial crisis many credits of financial companies were selling for a fraction of their face value. For example AIG bonds, or Bank of America subordinated debt. You could buy them for a whopping nominal interest rate north of 15%.
Even as late as 2011, during the muni market scare, one could buy California state taxable bonds and and California school bonds (federal and state tax-exempt) at about 8% interest rate. If one were a little more adventurous (and read up on the laws a little) one could have bought California muni bonds backed by redevelopment tax increments at close to 10% (and insured as well).
All these were safer than stocks at the time and delivered comparable returns. They were not meaningful if you have a portfolio the size of Buffett's, but they were good opportunities for small investors.
- kgwgk 9y agoActually Buffett did a very profitable deal with Bank of America in 2011: https://www.bloomberg.com/news/articles/2017-06-30/buffett-to-swap-5-billion-bofa-shares-for-17-billion-of-stock https://www.bloomberg.com/news/articles/2017-06-30/buffett-t...
- fspeech 9y agoRight. There are opportunities in equities not available to small investors and there are opportunities in bonds not available to whale-sized investors.
- toomuchtodo 9y agoWhere would you screen for the bonds you mentioned in this thread?
- fspeech 9y agoE*Trade offers access to BondDesk. Vanguard has online bond buying access as well.
- toomuchtodo 9y agoThanks, will check out if Fidelity has something similar.
- fspeech 9y agoI remember Fidelity had online bonds buying as well. As Buffett said, today's bonds are fairly expensive, offering little upside. I just think people should also consider the implication for equities.
- deleted 9y ago[deleted]
- Spooky23 9y agoThat’s why it’s always good to have cash. I still have some NY GO and PIT bonds paying a little over 6% tax free from that era. Making money on AIG and Bank of America bonds really required intelligence to understand why AIG of BoA wasn’t going to be another Lehman.
- icelancer 9y agoIntelligence yes, but the risk was also commensurate with the returns - or more specifically, the volatility of what the end result would be.
- pishpash 9y agoIt's not at all clear what the risk-reward were, without in-depth information. After all everybody except Warren Buffet had backed away at that point.
- icelancer 9y agoRight, I agree. Hence, the volatility.
- fspeech 9y agoThe bonds were significantly more certain than the commons, since owners were generally not subject to dilution risk. I was not referring to the height of immediate post Lehman uncertainty. Even after the Treasury Department bought preferred shares from the financial companies, thus subordinating the US Government to the bond holders, some of the bonds were still trading at very significant discounts (> 50%) to face value. I am not advising anyone to take risks in such investments. However if one can't deal with credit risk/reward at such advantageous terms one also shouldn't fancy that one can deal with the stomach-churning volatility of equities at such trying times.
- pishpash 9y agoIf you're comparing the bond and the equity tranches of the same single company then I agree. Most people's alternative opportunity however is in, say, the total market on the equities side. It's arguably easier to reason about the long-term future value of the entire US equities market vs. whether a certain haircut on a single company's bond is sufficient compensation for the credit risk, especially when it depends so much on arbitrary and unprecedented political decisions. This is why information is money. Warren Buffet may have known or understood the implicit political assurances of which banks were "too big to fail." Under such circumstances any idiot can pull the trigger.
- icelancer 9y ago>> Nowadays the comparable returns are a little above 3%. Well below this for smaller investors. Yield curves are getting hammered. Generally about 2.5%, and that's through smaller banks.