Bonds - The Other Market

Introduction

When I first started my career as a professional securities broker I wondered why anybody would buy bonds when there is a perfectly good stock market out there.  Now I wonder why would anybody buy stocks when they could buy bonds instead.  Intuitively, I know the answer – most folks just don’t know anything about bonds.  They don’t know what they are, how they work, where to get them or even where to get information about them.  On the other hand, if you watch the financial channels on television, information about stocks seems to be everywhere.  Even the commercials they run are about stocks and stock trading.  Watch your favorite national newscast this evening and you are almost guaranteed to hear a report on where the Dow Jones Industrial Average and NASDAQ closed today – it’s all about stocks.

Not only does the media constantly present analysts whose emphasis is heavily weighted toward stocks but these same analysts also appear to be heavily biased toward “always being in the market” almost to the point of defying logic.  When was the last time you heard a market analyst say “this is a lousy time to buy into the market – you’d be better off staying in cash or shifting to bonds”?  Probably, never.  Instead, we hear about a few specific stock picks and the rationale as to why we should buy them today.  What we do not hear about are the stocks that people were encouraged to buy last week or last month or last year that failed to perform.  These analysts seem to ignore the two great market cycles: the “Bull” market where stock prices rise, and the “Bear” market where stock prices fall.  If, in a bull market, a rising tide lifts all boats, then it makes sense that in a bear market a tsunami sinks all ships.  But that is far too pessimistic a view for a stock trader.  So prone to optimism is the stock trading community that in the financial district of New York City you will find a full sized bronze statue of a bull – but, alas, no bear. 

What makes a market bullish or bearish?  Stability, or the lack thereof.  When the economy is strong, everyone has a job, there is no threat of inflation on the horizon, there is no foreseeable threat of war or terrorism and there is a high degree of confidence in the relative certainty of the future, the bulls run; the stock markets advance; prices go higher.  But, with uncertainty the bears awaken from hibernation.  Uncertainty about the near term prospects for the economy becomes the wind that transforms a tranquil sea into a tsunami.  And, as a wave crashes upon the beach, so too do the stock markets.  That is when an investor needs to know about bonds.

This book is written for those individual investors and others (particularly those who sit on the boards of directors of depository institutions – banks, credit unions and savings & loans - CEOs, CFOs and Investment Officers) who intuitively know that there must be alternatives to stocks but don’t know what those alternatives are.  There are commodities markets, futures markets, foreign exchange rates markets, money markets, mutual funds and many other alternatives where you can plunk down your hard earned cash and hope that you’ve made the right guess and hope that you get at least some portion of that cash back.  Better yet, a profit!  This book does not cover those “speculative” markets that are based on hope or best guess.  This book is about the market that is based on the premise that you will get your cash back – with interest.  This book is about the bond market.