Yesterday I encountered a bit of the dark side of the investing world (I know, there are many dark sides).I had been planning to add a little, I do mean a little, corporate bond exposure for most clients and yesterday turned out to be the day. After a bit of you're done, no you're not, yes you are with Schwab I was able to get the order done and it was paper I wanted but I spent some time looking for what to buy and this reminded me of a few things.
I had a particular focus in terms of what sectors I was open to and the ones I was not, rating, cash flow of the company, debt to equity and a couple of other things as I perceive the position as a chicken's way in which I think is right for now.
There were a few, just a few, issues in Schwab's inventory that fit the bill but I had trouble finding enough size, I really did not buy that much, to get the order done. So liquidity was an issue, which reminded me that if you come in to but $10,000 or $20,000 worth it is likely that you will get a lousy offer (or bid if you are a seller). It is pretty much the same story (too big difficult to find quantity, too small maybe a bad price) in the muni market when that market is functioning normally.
Access issues also pertain to foreign stocks. I have mentioned a couple of times that I have been following a particular Chinese stock as a potential second name to own and have enquired with Schwab about how easy, or not, it would be to buy and they set a very low expectation and keep in mind it is an ADR, it trades on the pinks but still it is an ADR.
It would be easy for an individual to buy the stock, much easier than for a portfolio manager buying for clients (unless Schwab is truly awful at executing orders), but it would be more difficult for an individual to get bond business done. This is a dark side. It is important to understand these obstacles, any type of product will have some drawbacks and we all need to get over this fact.
A while back I wrote about Norwegian fishery stocks. On some level the notion is interesting but I have no plans to buy any of the names. But any US based investor so motivated would have a tough time buying any of them. A couple of them don't have five letter designators (ie ticker symbols) for US trading and the one that appears to trade the most dollar volume (actually krone volume), Cermaq (CEQ in Oslo and CRMQF on the pinks), has not traded in the US since October 6, according to both Yahoo Finance and PinkSheets.com.
This would be a tough one to get done but if someone really was motivated to own the name they would figure it out, realize they might have to give something up (like a few cents on the price) and it could get done. Same thing with difficult to trade bonds. Of course the other thing that could be given up on is the entire idea in which case a US listed fishery (if there is one) or a bond fund could be purchased instead. There would be a give up here too. Whatever made Cermaq or Cumberland County, Vermont bonds attractive would not be accessed.
If portfolio construction and management will require more ingenuity and resourcefulness in the future, and I believe that it will, these issues might matter to you, they matter to me and while not every holding will require pulling teeth to get in to or out of some will and you may want to start to sort this dark side out now before circumstance forces you to.
14 comments:
Well, I certainly qualify as a small investor, so my personal experience hasn't been so dark. I do find that spreads widen and I have to pay up if I'm following a trend, especially in a fast market or with smaller, less liquid stocks. It's remarkable, though, how much money got wasted before we moved to decimals. Now a spread of more than a few cents seems criminal.
This is one example of how you take diversification to far for small investors IMO. I see no reason to invest in illiquid assets. If I wish to invest in these I buy ETFs that have some of their assets in illiquid assets that are part of the index, but where the ETF is liquid
anon 7:10, valid up to a point. if you read these posts regularly and closely you may have noticed that I write about many more of these than i ever buy. Actually I maybe have bought into one of them and even then not for too many clients.
The idea, and I believe in this, is to learn about as much as possible because in time one of them could make its way in. As I said in this post I can't imagine a scenario where I would buy a Norwegian fishery but something positive can come from learning a little about them. Granted this is all I do and so may have a little more time than most do it yourselfers but hardly anyone writes about these things (fisheries and hydro and farmland stocks and whatever else) and there is some utility even if you never buy any of them).
The idea of trading foreign stocks on their local exchanges has fascinated me for some time and, at least according to their ads, E-Trade and Interactive Brokers offer this capability to small US investors. Any experiences with this activity anyone is willing to share (cost, time required to execute, etc.)?
Thanks,
JCarr
My experience with Schwab on bonds has been poor.
I generally agree with buying ETFs if you want bond exposure. There are sufficient types of bond funds to suit your taste, and expenses for most are low.
Of course, tax consequences will be variable, and the bond fund performance may be diluted (or enhanced) by inflow and outflow at certain times, but the end result is liquidity, less aggravation and no bond desks to deal with (where I have been "shaken, not stirred" more than once).
T
the drawback to bond etfs is not being able to lock in an attractive yield when it comes along
JCarr: I've had no problems buying non-US stocks (UK and Belgium) through Interactive Brokers. There were one or two I was interested in though which weren't included in the stocks you could trade through IB as they traded on the wrong sections of the relevant exchanges. These were private equity closed end funds. Other private equity funds are tradable.
The little guy has disadvantages in this area but advantages in fixed income too. I keep my emergency fund in a rolling 6 and 12 month CD "package". As a CD rolls off each 6 months, a 12 month CD is bought so that there is always a 12 month CD being bought each 6 months. I recently had a roll off and got a 12 month CD at 4.01%. Big boys can't touch this type of rate.
I also have a high yield savings account yielding 3.25% (FDIC insured) whereas big boys are buying T-Bills for 0.01%! So yes, spreads are horrid for the little guy when buying individual corporates but we can beat the heck out of the big boys in other areas.
DE
Ameritrade has an online corporate bond page that may be searched by name, industry or amount.
that doesn't ensure that the pricing is fair.
Roger, do you use any exchange traded debt? I've found most issues to be fairly liquid, though pricing can be subject to the same panics as other asset classes.
mOOm. When you purchased the foreign stock via Interactive Brokers, what was the total cost of the trade (commission, currency exchange fee, other fees)? Also, do you have 1 account that hold all stocks, or are there separate accounts for US and foreign?
Thank you,
JCarr
JCarr the fees depend on the exchange you are buying on but are generally higher than for US stocks. All the fees are on IB's homepage. Everything is in one account. The way it works is when you buy anything in a currency other than your home currency they extend a margin loan to you in the currency in question. There is no fee for doing this but you start to pay interest on the loan. You can close the loan by buying the foreign currency in question. The typical fee for that is $2.50 (maybe more for bigger deals?) the exchange rates are very good. Total fees for a small purchase in Belgium or other Euro country probably won't be more than a stock trade in the US with Ameritrade (around $10). In the UK you need to pay the 0.5% stamp duty tax on any purchase (but not sale). One reason you might want to keep the loan open is currency hedging.
Roger/others: I just received Russel Napier's, Anatomy of a Bear Market. Really fascinating. I've made it through page 95 in one sitting.
I picked it up after reading about Tobin's Q-factor on Bloomberg. I also made the mistake of getting some of Tobin's works. I should remind myself that I'm not qualified or smart enough to make any sense out of Nobel Laureate's economic papers.....
I'm able to follow along a bit (hum, not sing) with the Napier book.
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