Many participants in the financial markets don’t remember the bubble and bust of the early 2000s. Almost 25 years ago the Nasdaq index reached a peak of about 4400 on March 31, 2000, and then plunged to a low of 925 on September 30, 2002. Total loss of almost 79% from top to bottom. On a split-adjusted basis Amazon
AMZN
.com stock went from $4.30 to about 30 cents! Both, however, recovered from the ashes to make new highs and Amazon went on to dominate the world as we know it, soaring to an all-time, pandemic-aided high of 186.57 in 2021 (all data in this article is from Bloomberg). The bond market has had its own crash over the last two years. And to some, including me, it was not a big surprise, because bonds can only be expected to return what they yield over long periods of time, and when yields fell to zero (even negative), the expected return on bonds should have been expected to be…negative …or zero, if one is lucky. No wonder that over the last three years the bond market has delivered a total return of minus 5%, and of essentially zero over the last five years (source: Bloomberg and LongTail Alpha calculations). Total return means return from both prices and yields, so the fact that the price fell more than the yield could make up just shows how low yields were. It was a historic and major distortion caused by central bank buying without attention to price, and now investors are faced with the task of cleaning up. But what comes next – are bonds a good buy?
Let’s start with the obvious fact that even good long-term investments can suffer major drawdowns if the entry price is wrong, and if an investor does not have a plan on how to deal with the consequences of a bad purchase price, the result is panic and exit at the bottom. There are, as they say, no good or bad securities, only good or bad prices. I still recall how Amazon.com fans changed their minds, overnight, as the stock lost over 90% of its value in the tech wreck, so once the price was right, the asset was worth holding. Some folks call this building a margin of safety. I like to call it waiting patiently until the price is right.
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