Introduction to Beating the Indexes: Investing in Convertible Bonds to Improve Performance and Reduce Risk
Introduction
If you’re accustomed to books that follow traditional categorizations, you’ll need to bend your expectations a little. I am taking a new approach with this book, one that I refer to as the “narrative textbook.”
If you like the markets, are reasonably comfortable with numbers, and enjoy solving problems, you not only can make good money in convertible bonds, but you can also have a lot of fun with them. I think they are the most fascinating of all investments because of their versatility. But, let’s face it—convertible bonds, as a subject matter, is probably not going to rival your basic Stephen King thriller. Most books about convertibles do a respectable job of delivering the material, but they do it in such a way as to lose the interest of all but the most devoted students. Let’s call it what it is—they are dry. For introducing new readers and new investors to a valuable investment option, then, they are essentially dead on arrival.
Although I think you will find convertibles intriguing, there are some basic concepts you need to learn. I’m trying to help the medicine go down with a spoonful of sugar. This book mixes the necessary details of understanding convertibles with a collection of stories from my career. I hope that you’ll find the narrative aspect of the book sufficiently engaging to inform you painlessly about what you need to know about convertibles. In fact, I suggest you think of the book as a story with plenty of teaching woven in, rather than the other way around. And if you approach the material with an open mind, I think you’ll be surprised how intriguing and enjoyable you’ll find it.
The book has two distinct but related parts. The first and shorter section, Part I, “Our Flawed Institutions,” addresses and expands upon the core of my first book, The Undoing of Cowardice. I lay out the argument that the professional investment world is largely designed for mediocrity and job preservation at the expense of the creative, forward-looking asset allocation it is supposed to provide. I think there are a lot of competent people out there who want to do a good job, but we are giving them all the wrong incentives. I explain why and how this actually creates more opportunities for you. I hope that as you come to understand the structure of markets, you will feel more confident about taking control of your investments, especially as an individual investor. If you do, you will find that the time invested in learning about convertible bonds—the second and larger part of the book—will repay you many times over.
Within Part II, “Convertibles, a Better Solution,” I begin by laying out the basic facts you need to understand convertibles. For investors focused largely on stocks—and this means most investors—you will find this part highly useful. You’ll come away with knowledge of traditional bonds and options that you knew you should have had, but probably never got around to. Then I’ll take you through the journey of my career so that you have immediate contexts for those facts. I hope that you’ll experience a bit of the thrills, pitfalls, and unintended humor that have all befallen me in my own convertible journey. After we finish the tour, we dig deeper into convertibles, learning how to compare them as investments with the stocks that underlie them. There’s a brief quiz midway through this section to make sure you’re learning to speak the language. By the end, although you might not quite be a convertible guru, you’ll have a pretty good comfort level with an investment a lot more people would use if they only knew about it.
I need you to keep a few things in mind. This book does not teach you how to pick stocks. I am not a stock picker. My skill, such as it is, involves starting with an idea about where a stock is heading, how long it might take to get there, and what might happen if the idea turns out to be wrong. For most people, the set of possible investments begins and ends with the stock itself. After you’ve finished this book, you’ll be way ahead of them. You’ll understand not only stocks, but also options, bonds, and, of course, convertibles. You’ll begin, as a matter of course, examining your own thought process and matching your investment to your opinion—because it’s not a one-size-fits-all world.
As such, this book is probably best for people—individual investors and professionals alike—who like to pick their own stocks but want help in finding the best way of structuring their investments. I know there are a lot of you out there.
After we’ve learned how convertibles work—including the actual nuts and bolts of the trading process—and how to identify attractive ones, we’ll look at the securities from the perspectives of different constituencies. Individual investors, financial advisors, institutions, corporate treasurers, and students will all find a subsection dedicated to their area of interest.
Before we finish, we’ll take a quick overview of the more advanced topics convertible professionals follow. Those of you eager to learn more about convertibles will find this last section a good starting point for further study.
Congratulations on taking your first steps toward making one of Wall Street’s best trades part of your portfolio!