Bystanders & Collateral Damage

Investing is just and only the purchase of risk.

Drama. Investing is just and only the “purchase of risk” and the risk is that we might not get our money back or that we might not get it back with the same purchasing power that we have now. That is, in the absence of a default, inflation is the only enemy.

Bond investors think that they have it figured out. If they don’t get all their money back on time then at least they’ll get some of their money back and the plant or inventory that was supposed to pay for it all.

Equity investors, however, might not get anything back and the thought that they have an “ownership” interest in the plant or inventory that what was supposed to produce it all is largely a fiction for most investors, absent a controlling interest.

What do you mean you don’t want my money?

Nevertheless, there is a lot more “money” in the world than there are productive assets to put it in, that is, in “investments” that might earn a return above the rate of inflation and the competition to invest, that is, to buy risk, is fierce.

Bond holders have been slow to respond to that equation, possibly incredulous that neither government nor industry is anxious to take their money and pay premium rates for it.

The flagship bond fund, PTTRX PIMCO Total Return Institutional, has lost money this year and after redemptions has lost ground to the managed equity fund, VTSMX Vanguard Total Stock Market Index Investor, which now has over $280 billion to manage and buy into the equity markets at “high prices” or at least a lot higher than five years ago.

$1 in VTSMX over $1 in PTTRX

Good luck with that.

The fund, VTSMX, manages capital but not capital safety and although the returns have been acceptable to individual and institutional investors, the exposure to “surprise” is uncontrollable unless the assets are managed for capital safety.

And the fund is just now returning to par with early 2008.

There is about $40 trillion in US bonds of all sorts including government, corporate, municipal and mortgage-related, and nearly $1 trillion of that changes hands every day (Securities Industry and Financial Markets Association (SIFMA) and Bank for International Settlements (BIS)),

But the equity markets are currently valued at about $26 trillion, so we’re going to need a much bigger shoe. These two funds, VTSMX and PTTRX, are also among the first in their class and it’s evident from the returns multiple, 2:1 since 2009, that bond investors are used to paying a very high price for capital safety.

Exhibit 1: The US Equity Markets – November 2013

Working in America

For more information and additional references to the theory, please see our recent Post, The RiskWerk Company Glossary.

And for more on what risk averse investing has done for us this year, please see our recent Posts on The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class action, La Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100.

And for more on what’s Working in America, Big Oil, Shopping in America or Banking in America, to name just a few.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.