February 21, 2008
Dear Sir,
The article that you published by John Heinzl in the winter 2008 edition of Globe Investor, recommending shares over bonds, can at best be described as disingenuous. I felt I had to reply.
To begin with, Mr. Heinzl, like most purveyors of equity products, is either unaware of, or ignores, the very large part of the bond market that has provided portfolio performance similar to the equity markets with much less risk. Mr. Heinzl mentions the government bond market, which has very limited investment growth. He completely ignores the corporate bond market.
When discussing corporate equity, the comparison should be to corporate debt. To begin with, Mr. Heinzl does not mention that the best measure of performance of the best equity market in the world (the U.S.) was 6.2 per cent (ex-inflation) from 1900 to 2003 (Dimson, Marsh and Staunton).
There is a study quoted in the Chartered Financial Analyst readings of the 1970s that showed that the return of the ‘B’ grade bond market from 1924 to 1964 was in excess of 5.5 per cent. That was a period that included the Great Depression, during which the failure rate was 4 per cent.
Had you bought United States Steel’s equity prior to 1929, but after 1924, you would have had to wait 27 years until 1956 to get your money back in nominal dollars. U.S. Steel was a dividend paying stock. Although dividends were reduced and skipped, the U.S. Steel bondholders had all their interest paid and their money back within 10 years of 1929 as the debt issues matured.
If corporate equity is the road to prosperity, then where are 29 of the original companies in the Dow Jones 30 of the 1890s? All gone. Only General Electric. survives. These were the crème de la crème of dividend paying corporate heroes of the best performing stock market in the world.
To give you an example, Merrill Lynch recently published a buy report on Level 3 Communications showing a very reasoned argument why the shares should go from $3 (U.S.) to $5. As a bond investor I wouldn’t touch that with a barge pole. However, I did buy Level 3’s 9.25 per cent debenture, callable in 2014 at a price of $830 to yield 13.64 per cent. When the bond is redeemed in 2014 I will have doubled my money irrespective of whether the markets are in a bull or bear phase. (The major determinate of share price movement is the state of markets, not the corporate performance).
Oh, yes, I am sure that Mr. Heinzl will argue that is just one security. That’s not portfolio performance. I can show a Locked In Retirement Account (LIRA) portfolio that started in 1990 with $35,000 and at the end of 2007 had a value of $294,000. That is a 13.3 per cent compound annual return, or in mutual fund parlance 44 per cent average annual return (($294/$35)-1)/17years).
In that period the account has not owned a share of common stock. It did own Hexcel Industries debentures at $550 redeemed at over $1,000. It purchased Chrysler Credit Finance debentures at a deep discount and prayed for a bankruptcy of the parent, which never occurred, thus not achieving early redemption. The account bought Canada Northwest Land bonds at $800 and received shares in Sherritt as a result of the bankruptcy. The shares were sold for double the cost of the bond.
The proof is irrespective of the individual trades. It is in the performance, 13.3 per cent compounded annually. Remember that the LIRA account over that period could not accept contributions or pay out funds. I’d love to see Mr. Heinzl’s equity portfolio that has come anywhere near that over 17 years.
Show me your champion and I’ll show you mine.
I don’t think you should allow Mr. Heinzl’s slanted column to remain unanswered.
Yours truly,
Alex Doulis,
Author “The Bond’s Revenge”
Read John Heinzl’s column Why Bonds Are a Bad Deal »
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