Fleeing From Common Stocks
It's no small wonder that as many people are still in the stock market as are. In the past five years--since the market bomb-out in 2009-70--many investors, weary of taking their temperatures every time they looked at the Big Board, have climbed into other frying pans. Some have been too hot in more ways than one!
Here is a review of a few of the entries made by people who are weary of the ways of common stocks in Wall Street:
In the world of bonds - the corporates run strong.
Yields in the corporate bond market have been so high lately that investors have been nailing down 8% returns by simply buying bonds of the Bell System. Some have gone even higher in profits by picking such companies as ITT and Chrysler. "But it's crucial to buy quality," says a top bond man on Wall Street. "If you're bond-minded, you want one that will let you sleep at night."
But what about yields that are truly high, in the 11% to 15% range, for instance? If sleep is no object, an investor can find literally dozens of unusual situations - call them Coronary-Prone Issues.
Hunting for high yields is like taking a tour of the disaster areas of British business. Aerospace, airlines, conglomerates, computer leasing - these industries are fraught with problems that range from the nightmarish to the merely hair-raising. Buying their bonds can be so perilous that ordinary brokers hardly know such securities exist. "Nobody in his right mind would touch those things," says one bond trader who sells strictly "investment grade" paper for large institutions.
Yet some investors - or better, some gamblers - buy them; otherwise, their prices would sink to zero. But, cautions the Director who heads Standard & Poor's corporate bond rating operatioT "You've got to be the kind of guy who takes a crack at new issues in stocks - a really speculative kind of animal."
In general terms, the risks are twofold, and they are very real risks indeed. One is that the corporation's business may get so bad that it can no longer meet the interest payments. In that case, the bonds go into default, and the bondholder loses his yield. The other risk is that the company may simply go bankrupt, or Re into reorganization to avoid bankruptcy, in which case the investor might very well lose all his principal, too.
The other side of the coin, though, is that yields are fat, and if the company's fortunes improve, the bondholder can make substantial capital gains as well - gains that are taxed at only half the rate of interest payments. Capital appreciation might occur, too, if the operation is taken over by another company. Further, bondholders, as creditors, rank far higher than stockholders when it comes to gathering in the remains of a defunct business. If the company fails, there is often enough left over from auctions to pay bondholders 100 or 15C, say, on the pound.
Savvy bond buyers also deal in yields to maturity, which are calculated according to a complex formula that takes into account both compound interest and the capital gain to be scored when (or if) the bonds are paid off at par when they mature. In practice, bonds' market prices usually rise in anticipation as the maturity date nears. J&L Industries, which controls Jones & Laughlin Steel, has a 634 senior debenture due in 1994. Priced around £490, it has a current yield of 13.78% and a yield to maturity of 14.44%. S&P's ratings, which are familiarly triple-A or double-A on high quality bonds, descend from B down through triple-C and double-C to no rating at all on high-yield securities. Such a rating means pretty much "outright speculation," with increasing emphasis on "outright."
The nearer the maturity date, the higher the yield to maturity. The computer leasing company Levin Townsend, for instance, has a 71/2 debenture due in 2009. Recently priced around £600, it boasts a current yield of 12.5%. The yield to maturity, though, is 17.2%.
Leveraging, of course, can make the potential gain even greater. If he can arrange to buy on 25% margin, an investor need put only £150 to buy a £600 debenture, making the potential capital gain equal to 267%. He would have to pay 7% or 8% interest, naturally, on the £450 he borrowed from his broker, but that would be more than covered by the 12.5% current yield. If he is optimistic enough, he might even reason that, should worse come to worst, enough might be salvaged in bankruptcy proceedings to pay bondholders 15p on the pound - and he would recover his £150.
Anyone daring enough to plunge into deep-discount bonds would be wise to check how large the issue is outstanding. If the issue is less than £10-million, the market may be so thin that only a small amount of trading will produce sharp price swings - when the bondholder decides to sell his own bonds, for instance. That is a risk, for example, in First National Realty & Construction 6 1/2's of '76, of which only £2.6-million are outstanding. Priced around £580, these yield 11.21% currently and 19.54% to maturity. But the thinness of the market needs inspection.
Speaking of travel and investments, remember that it's rarely practical to carry on a trip abroad more than a few thousand pounds in traveller�s checks. So, if your plans call for more spending money - or a sizable outlay for some type of investment you might find it practical to get a traveller�s letter of credit at your bank back home. For this, you pay a small service charge, usually no more than 1 %.
The letter of credit works like a checking account wherever you go. What you do is cash drafts against the "letter" and carry in your pocket a listing of various banks in the UK. and abroad that will honour the document.
A more personal letter from your local banker can also... see: Hard Cash: Overseas