Why I did well in the Junk Bond Market

The bond market from 1997 to 2013.

In 1976, I took a class on Stocks and Bonds at Allegheny Community College in Pittsburgh, Pa. I bought the recommended book for the class but we never used it. I read the book anyway. In that book was a Junk bond Investment study. Over the years, this became the bases of my Junk bond strategy. I estimate that this $15 book allowed me to generate over $500,000 over a 38 year period.

I learned several things about Junk bonds;

1. About 75% of bonds that go into junk bond status go back up into investment grade.

2. Junk Bonds give high returns.

3. Junk Bonds that have Standard and Poor's ratings of BBB to B- give a relative safe return compared to speculative stocks.

4. Junk bonds that have a Standard and Poor's rating of BBB to B- with a maturity of 1 to 4 years are ideal income investments.  

5.  Many junk bonds sell for below par or $1,000 when the bond issue has been on the market for several years and has several year to run.

6. Look for junk bonds on the secondary market before looking at them on the primary market.

7. Use an online broker to buy junk bonds. Full brokerage service brokers and banks have a conflict of interest when dealing with junk bonds on the secondary market.  

My college book outlined the history of the Great Depression of the 1930s (started in 1929) and how the bond market reacted. When the Great Depression returned in 2008, I knew what to expect. I bought many bonds at a deep discount with yields as high as 36% return. When my bonds started maturing in 2013, yields fell for buyers to 5% to 7%. When yields fall, prices of bonds increase. So the bonds in my portfolio that did not mature was selling on the bond market far above par or $1,000 per bond.  

Most newspaper and TV people never studied the bond market so they could only go by what the big brokerage firms were telling them. They said that bonds were very risky. In fact, the brokerage firms did not want customers in bonds. If they were in bonds, what incentive would the customer have to sell the bonds getting from 10% to 36% return in interest? Most bonds could have been bought for a 20% to 40% discount from par ($1,000). So why sell? If the broker has no sellers, they do not get a return commission. No commission, no paycheck.

I think you are seeing where I am going here. The brokerage firms have a conflict of interest. To stay in business, they must protect their interest first and the customers interest second. So keep that in mind when using a full service broker or your banks brokerage services.