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IFB139: Beginners Guide to Investing in Bonds

Announcer (00:00):

You’re tuned in to the Investing for Beginners podcast. Finally, step by step premium investment guidance for beginners led by Andrew Sather and Dave Ahern. To decode industry jargon, silence crippling confusion, and help you overcome emotions by looking at the numbers, your path to financial freedom starts now.

Dave (00:36):

All right folks, welcome to Investing for Beginners podcast. This is episode 139, tonight, Andrew and I are going to have a little discussion back and forth. We’re going to talk about bonds, so I’ve written three blog posts over the last week or so about bonds and the different aspects of them, the different kinds there are and kind of the ins and outs of them, and Andrew and I thought that too actually. Andrew thought that this would be an interesting conversation for us, and he thought he could maybe ask me some questions and see what I could do to help people learn more about this particular asset class. This is something that’s not talked about a lot. It’s certainly not taught in schools and most people are very unfamiliar with bonds and how they work. And as we know, if you’re unfamiliar with something, it can be a little bit scary or overwhelming. So we hope we can help illuminate this asset class a little bit more and give you some insights. And if this is something that you’re interested in learning more about, we’re here to help you. So without any further ado, I’m going to turn over my friend Andrew and he’s going to grow me with a lot of really hard questions. So fire away.

Andrew (01:42):

I’m not going to put you into the grill, not today. Maybe we’ll say that for another episode. Yeah, you wrote three great posts on the blog, and I think if people hear our conversation and they’re interested in getting down to the nitty-gritty, I suggest breeding those. You know, it’s spaced out in the publishing schedule. But really if you go on the website, investing for beginners.com you go to the search bar, you type in bonds and you’re going to talk about several different types of bonds. And I think that will be very helpful. So if you have like, let’s say you want and learn more about municipal bonds, you could type that into the search, the search bar, and you’ll see Dave’s masterpiece on there. These in-depth guides and those can be very, very helpful.

Andrew (02:30):

But first, before we get into all of that, let’s talk about maybe why bonds are, what kind of investor would find it attractive? I think not only, you know, I think when we think of bonds in general, but you also start to think of people who are in retirement or close to retirement. And there are good reasons for that because we’ve talked in the past how the stock market over the very, very longterm, it’s, it’s great for returns. But if talking about the one year, the market could drop 20, 30, 40%. Even in the five years, not always a guarantee. You’ll make money. So if you don’t have that 10 to 20 year time period, plus you might want to find something that’s not as volatile as stocks. So kind of break down for somebody who doesn’t know what a bond is, the basics of it why the way it’s structured makes it attractive for certain types of things.

Dave (03:30):

Oh, okay. Well, that’s I guess let’s, let’s start with the basics of what a bond is. The easiest way to think about what bonds are in their debt. To enter, and I rail about debt and we talk a lot about debt and this is a different aspect of debt. So when you think about a corporate bond or a municipal bond or a treasury bond, those are all going to be considered debt. What that means is we are loaning somebody money in the return of getting our principal back. So just for example, if you buy a $100 treasury bill or something like that, then you give them $100, they agree to pay you that $100 back at some point in the future, whatever that may be. The contract that maybe, plus they’re going to give you a coupon or a dividend. So they’re going to pay you an extra percentage to, you know, for us to loan that money to them.

Dave (04:31):

The same thing works with the corporate bonds as well as the municipal bonds. All those are air. Those are ways for these particular entities to generate revenue or money for them to do projects. You know, and in the case of municipal bonds, those are bonds that are issued by a state or a city or a municipality. And those are done to raise money to do things like building a school or to repair the roads or you know, fund a hospital or you know, a variety of different things. And so we fork over our money to these particular people, and then they will pay us back the money that we loan them as well as we would get an interest rate back. So that’s the basics of how this works. Treasuries, corporate bonds and municipals all work in the same kind of fashion.

Dave (05:27):

It’s money that we loan to somebody, and they pay it back. Whether it’s the government, whether it’s a corporation like Microsoft or whether it’s a city like Raleigh, it all kind of works the same. So that’s the general rule of how they work. So who would want to buy these? It comes down to three types of people who would want to do this. So the first one is the big institutions. So the big money managers, this where they would use some of their money to have some liquidity. In other words, they could turn around and sell these in certain cases fairly easily and get their money back to use it to do something else. And I’ll talk more about that here in a little bit, but the other people, the other larger portion of that would be people that are either defensive, I. E. they are not real aggressive investors or they’re really afraid of risk.

Dave (06:28):

They want to invest money, they want to earn something on their money, maybe more than savings account with pay, but they want to earn some money. And, but they’re really afraid of really diving into the stock market. And then also people that are either close to retirement, like Andrew was talking about, or people that are already in retirement would be wanting to buy bonds because a, they’re very safe and B, they pay you a dividend or a coupon and those, and that’s a fixed income. So bonds are considered a fixed income asset because the price that you pay for it generally is fairly stable. It is going to go up and down, but the coupon that you pay will not change. So if you’re buying a bond that you know is going to pay you 3%, you’re going to get that 3% regardless of the price of going up or down, we get that 3% over the life of the bond, whether it’s a two-week bond or whether it’s a 20 year or 30-year bond.

Dave (07:29):

In some cases, in South America are up to a hundred dollars a hundred years. But so that’s kind of who would want to invest in those. So what about bonds makes the defensive type investor attracted to them? It would be a lack of risk. The fact that these kinds of investments, this fixed, fixed income investment is far less volatile than buying a stock. You and I have talked many times about when you buy stocks, you, one of the best things to do is not look at it because you could drive yourself crazy seeing the wild fluctuations in the stock market day to day, minute to minute, hour to hour. You can watch it, you know, rise 10% and drop 7%. You know, all in seconds. Sometimes, you know, we talked a lot last week about the, you know, the volatility that the Tesla was going through.

Dave (08:35):

So imagine having a portfolio of those, and you can’t stand that. Something like bonds is going to be far less risky., if you think about the evolution of risk as far as investments go, the safest thing to do is to put your money in a bank. You’re going to earn not a lot depending on where you bank and, but the risk is almost zero. And then you’re looking at bonds. Treasury bonds are going to be probably the most secure because that money is secured by, it’s guaranteed by the full faith of the United States government. So whether we like or, or hate the government at this point, the fact is that they’ve never defaulted on a loan. So if you invest your money in treasuries, you’re almost guaranteed. You can’t say anything’s ironclad guaranteed, but you’re almost guaranteed you’re going to get your money back.

Dave (09:30):

Then you have corporate bonds, or actually, you have municipal bonds, and then you have corporate bonds. And then, after that, you move into stocks. So when you are investing, those kinds of assets, like a bond, are going to be something that’s far more secure. You’re more guaranteed, depending on which bond you’re going to get. You’re more guaranteed that you’re going to get your money back, but you’re still going to be earning some interest on the on, on the bonds. Now bond portfolios right now are struggling because the interest rates are so low that they’ve driven the yields down on bonds quite a bit. And so that’s scaring some people into investing these. But you know, our, our hero, Ben Graham in his great books, the intelligent investor as well as security analysis, spends a lot of time talking about bonds. And that’s one of the portfolios mixes that he strongly encouraged for defensive investors was to have 50% in bonds and 50% in stocks because that helps, you know, take some of the risks out of your portfolio. And that’s really what it comes down to.

Andrew (10:39):

What’s nice about a mix like that is when you have, I know bonds and stocks are loosely correlated, which is simpler terms means they kind of move similarly. So if stocks generally are going up, bonds will generally go up too and vice versa. But sometimes that relationship disconnects. So what’s nice about having a mix of one of the two is that when one is down, you can, and one is high, you can sell the high to buy more of the low. And allocate in that fashion to try for better returns before, I guess getting down to the nitty-gritty of that. Can you explain and thank you for the great breakdown of the simplicity of a blind. I think that helps a lot. Can you talk about in the most general sense, the relationship between interest rates and bond prices and bond yields?

Dave (11:37):

Oh yeah. I’ll try it. So interest rates will I guess the easiest way to think about it is like, a Teeter totter. So when interest rates go up, then bond prices are going to go down. So when I talk about bond prices, what I’m referring to is when a bond is sold on a market, it is sold at what they call par value. And depending on what the band is, that’s generally $1,000. Now, treasuries, you can buy online through the treasury.gov website for $100 a pop, if you will. Corporate bonds and municipal bonds are quite a bit more than that. And, but they’re all sold at what they call par. So that means $1,000 so it’s just even so if the interest rates go down, then the bond prices are going to go up. So that thousand dollars now maybe you know, to buy that same corporate bond a year from now, it may cost you $1,008 as opposed to $1,000 now the inverse of that is true as is correct as well.

Dave (12:51):

So we’ll say that interest rates rise. Then what happens is, is the yield or the, I’m sorry, the par on that is still $1,000, but now instead of buying that bond for $1,000 or a hundred thousand eight for example, you may be buying it for $992 because the interest rates have risen, and so now the price on the particular bond will move. Now the coupon that you originally purchased that bond for will stay the same. So the 3000 or the, I’m sorry, the thousand dollar par that you pay for that the coupon that they sell you, let’s say it’s a 3% bond, that 3% is still going to be that you’re still going to get that. But what will happen is, is that when the prices on the bond move up or down, your quote-unquote yield is going to change because the relationship between the price that you pay and the coupon that you are going to receive is going to change.

Dave (13:50):

The dollar amount won’t change as far as the 3% part of it. That won’t change. But what will change is the yield or the percentage that they, that they calculate that on. Does that make sense? Yeah. So each time you’re looking to buy a new bond, the yield is changing depending on what interest rates are doing. That’s correct. Yeah. And that the bond market is very highly correlated to the interest rates. And so they will watch the interest rate fluctuations far more avidly than the stock market does. The stock market does too, but the bond market moves in correlation with that. Okay. And so the general logic behind why the prices will move with interest rates. And you can correct me if I’m wrong with this, this just like me trying to break it down into simple terms. Second, understand when interest rates are high, there’s a lot of options to put your money somewhere. So that changes the demand of a bond. Yes. It also, I guess the easiest way to think about it too is when the interest rates are high because that’s a debt that means that the money is now more expensive

Dave (15:07):

Because the, so you’re talking about interest rates of the, let’s say what the fed says ten years? That’s correct. Yes. So, but that’s more expensive. Yeah. So the thousand dollars that I just loaned to Microsoft now is costing Microsoft more money. So now the, now the interest payments that they’re paying back now become more expensive. Okay. And so if you think of, I guess you can relate it to like regular like even like a mortgage or something. And you would have some that are fixed rates on another variable, and then you can think of even the ones that are fixed, while if that’s not causing somebody more pain, it’s driving that demand, the future loans. And so that’s going to adjust all the prices of all the new bonds that are being sold. Yup. Exactly. Yup. Yup. Okay.

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Dave (16:17):

So what I like A lot about the concept of bonds. I haven’t bought a bond myself. I liked the idea that You could for, from what I see, and I would like to have you, I think you’re going to explain a lot better than I can, but essentially the idea that you won’t lose money unless the company goes bankrupt. So like we’re, we’re talking about how the prices can move with interest rates, but you don’t have to be affected by that necessarily. Whereas with the stock, yeah, the, it could be the best stock in the world, but if the market never recognizes it forever, then you’ll never get the full realization of that value with a bond. You can. So can you talk about that difference? Yeah. So the stock market is very much correlated to the price of the company. So what you pay is going to fluctuate wildly and it can vary quite a bit. Wherewith the bonds, once you buy that amount, you know, the prices will fluctuate.

Dave (17:29):

And the longer the bond is, the more risk you have that the price will change. But as it gets closer to the maturation of the bond, you’ll; your risk will start to diminish because there will be because there are fewer fluctuations. So, and that’s another reason why in retirees like bonds because if you buy a, you know, a, a five-year treasury bond, the closer it gets to those five years, the less time it has to fluctuate. And you don’t have as great of variance in treasuries or municipals particular, so you’ll have less chance of losing your money. And when I say losing your money, I’m talking about, you know, pennies on the dollar as opposed to something like a stock, you know, going from, you know, like what happened to me with GameStop, you know, going from, you know, low twenties to $5, you know, that kind of fluctuation in the bond market is unheard of.

Dave (18:39):

And so the risk that’s involved with those kinds of things is, is far less. And so when you’re investing in bonds versus stocks you, you’re pretty much guaranteed that you’re going to get your money back. Plus, you’re also making an interest payment. The, I guess the two risks that are involved with bonds are number one, when you, when you invest in a bond, let’s say it’s a long year, let’s say it’s a 20-year bond you’re, you’re taking the chance that a, that the bond may drop in price. So you may lose some value on the initial investment over the life of 20 years, wherever it may fall in that price gap in the 20 years. But you’re also potentially losing some of the potentials that you could have had to invest in the stock market. And that’s something, so if you buy, you know, if you’re buying stocks in the stock market and they go up 10% over 20 years, you know, compound that over 20 years where the stock, where the bond is only going to go up and you know, maybe three to 5% over that period, then that’s money you could lose.

Dave (19:52):

But the flip side of that is that you have a lot more stability with the bonds than you do with the stocks and you’re not guaranteed that that stock that you buy, you’re going to hold it for 20 years and that it’s going to go up that much over 20 years. So there are a lot more variables involved with it, with buying a stock as opposed to buying a bond. What would be the differences then? I would like for you to explain the logistics of buying a bond, but first like let’s, let’s these corporate bonds because I think those are, those are quite interesting. What would be the differences between the research process between, ah, I’m thinking about buying the stock versus I’m thinking about buying this bond? Honestly, there are not huge differences which may surprise a lot of people.

Dave (20:45):

So a lot of same thought processes that you go through buying a stock, you’re going to do a lot of the same things when you’re thinking about buying the bond. So I’m going to pick on Microsoft for a second. So when I’m looking at investing in Microsoft as a stock, I’m going to look at, you know, I’m going to look at there, obviously what it’s priced. I’m going to look at there, you know, price to earnings. I’m going to look at their debt to equity. I’m going to look at their price to book their price of sales, all of those kinds of things. So I’m going to look at their whole overall financial picture in particular that I’m going to look at their balance sheet because I want to make sure that they have enough free cash flow to pay all their debts. You know, that their current and their quick ratios are in good ranges, which indicate, you know, their ability to liquidate and pay their debts.

Dave (21:35):

All those kinds of things. That’s all the same stuff that you want to look at for bonds. Because when you invest in a corporate bond, you want to make sure as, as, as accurately as you can, that you’re investing in a good company because a good company is not going to default on its loan. Because again, if I buy a Microsoft’s bond as opposed to investing in the stock, the bond is a debt. I’ve given them my money, and you know, hopefully, in 10, 20, 30 years, they’re going to pay it back to me with interest. Now, if I’m investing in a company that’s a lot higher risk, let’s say Tesla, you know that’s a much higher risk company because of the fluctuations of everything that we’ve talked about that’s far riskier to invest in. I’m not guaranteed that I’m going to get their money back, my money back in 10, 20, 30 years.

Dave (22:28):

So that’s all that a lot of, that’s the same process. One of the big differences is that there are credit agencies out there that rate bonds for us. So they do a lot of this wig work that we’re talking about to help us, and they have different scales. I’m not going to go through all three of them, but there are three rating agencies. There’s Moody’s the S and P, and then there are fitches, and all three of these companies rate corporate bonds, municipal bonds, treasury, not treasuries, I’m sorry, corporate bonds and municipal bonds, and they give them ratings. So Microsoft, for example, is one of the two companies right now that have a triple a rating, which is as high as you can get. So what Moody’s is saying to us, to me is if I buy Microsoft’s corporate bond, as of right now, they think they’re S they’re in their estimation and their analysis that this is a lock guarantee that I will get my money back 10 2030 years from now with interest.

Dave (23:34):

The flipside of that is if I buy Tesla, Tesla has what they call, depending on how you want to refer to it; either they call it a high yield or junk bond. So what that means is, is that the bond pays a higher coupon for the same thousand dollars that I would invest in a Tesla bond. I’m going to get a higher return on that. But the flip side of that is that the debt is far riskier there. So they’re rating them as maybe a single B or even a C, which is bad. And I, I honestly don’t know what Tesla is, is I’ve just read that they’re considered in the junk realm. So in corporate bonds, just to kind of back up real quick there, when we’re talking about credit ratings, that’s what these three companies that are referred to do. There’s what they call investment grade, and then there’s what they call high yield or junk.

Dave (24:31):

So the high yields are anything that Moody’s fitches, S and P think are really strong companies with strong balance sheets. You know, the outlook is really good for the companies, and they strongly believe that if you invest in these companies that you will get your money back plus your interest. The ones that are considered the high yield or junk, those are far riskier. Now, does that mean that they’re going to default? No, they do not, but the risk is much higher there. And so that’s when you start playing with some of those high yield or junk type bonds where the volatility can be correlated very closely with stocks. But the yield or the return that you could get on those is not as great as investing in a stock. So there’s a give and take, if you will from there. So long story short, you do the same research you would do for a stock and then you also would look at these bond rating agencies to get a, a review from them of what their rating these companies credit rating.

Dave (25:43):

And the higher on the scale it is, the more secure it is. But the flip side is the higher the security, the lower they’re going to pay as a yield because you do not, you’re not paying for that risk if that makes sense. It does. It does. Yeah. So let’s say some of them have picked a company, they like what the company is doing. They like the balance sheet. They want to either see what the bond, you know, what’s the coupon on their bond, or maybe they are, they know they want to buy the bond. How would they go about doing that? There are two ways to do it. The first way is not accessible to us. And that’s where they buy on an initiative they call it an issue. It’s an IPO if you will, of a bond.

Dave (26:34):

And those are only open to the large institutions or somebody you have to know somebody of thing like, Hey, I know where he down the street, and he can help me get in, buy this stock. It’s kind of like an IPO there. They’re not open to the public in general. And so those are kind of not an option for us peasants like me. The other option is through secondary marketing. You could do these through your online brokers. So like I use Charles Schwab for example. I can go online through Charles Schwab and I can buy a corporate bond on the secondary market from those that can be traded over the counter. But there’s also and an agency called trace that they could, you can use them as an in essence, a better business Bureau of bond brokers when you buy a bond through the secondary market.

Dave (27:29):

The trick is, is that they will put their commission for that sale in the price of the bond. And so you don’t necessarily know what you’re paying for that without going through this agency to make sure that you can get a verification, that this is a legit company that’s selling you the bond and that they’re not. They will also give you the waitlist price that it was sold for so that you can compare what the broker you’re buying it from and what was just sold. It’s not a guarantee that you’ll be able to see for sure what the commission is, but you can always get a general ballpark and so I’ll use easy numbers. Let’s say that the last sold the last time that this, you know, corporate bond was sold, what it was selling for $1,010 and then you go to buy it five days later and now you see that as selling for $1,100 well, that 90 bucks that the broker is marketing and up for, it could be an increase in the price part of it, but it’s also all their commission.

Dave (28:36):

It’s completely different than when we used to buy stocks on Ally, for example. We already knew what the commission was like $4 and 95 cents. It was upfront; it was very transparent. There was no guesswork involved. But when you’re buying with bonds, they’re still a little bit of quote-unquote shadiness that can call on. And so this agency trace that I was talking about, they’re an agency that helps, you know, review the people that sell the bond. So you’re making sure you’re buying a legitimate bond from a legitimate company. And they also help protect you a little bit from the price gouging that could happen. It’s kind of like buying a car from somebody who, you know, it’s down on the corner. You don’t know the guy; you don’t know where you’re, what they’re doing, and you know, you’re buying his car and there, you know, Jack and the up 27% on the interest rate or something like that.

Dave (29:22):

So it’s, that’s kind of how it works. So TRACE, that’s a website anybody could go on. Yep and yep. Yep. It’s due, it’s, it’s some, it’s someplace you any, but we can all log in and you can go on there. And then you type in the name of the broker and then they’ll spit out a whole of information about them so that you can do your due diligence about it. It’s also an agency that can help you if there’s ever a problem. They can help try to work as a go-between for you versus the company you bought the bond from. And with the backing up to the credit agencies that I was speaking about a few minutes ago, they also can show you what the prices are on, on the bonds and all three of those different sites are all free.

Dave (30:12):

So you can register with Moody’s, for example, and you can type in Microsoft and it’ll spit out a whole bunch of information about by Microsoft. So it’s kind of cool.

Andrew (30:23):

That is cool. So now looking at the rest of the picture for somebody interested in bonds, you’ve walked him nicely through the process and maybe they want to think about how this is going to fit with their overall portfolio. Can you give us some thoughts about how you see that playing out as far as buying corporates, municipals and anything like that?

Dave (30:51):

Yeah, I think the easiest way I guess to think about it is to think about what your goals are with investing. So obviously that’s number one. Number two is what kind of risk profile do you have? So if you’re like, you know, I’m, I’m 25 years old and I wanna, you know, I want to shoot for the moon, then playing with the bond market or the bonds is probably not a place you’d want to be.

Dave (31:22):

Because you can earn over the long term. You could; you have far more opportunity to earn more money with, with stocks than you do with bonds. Well, let’s say you’re somebody like me, you know, I’m 53 years old and you know, retirement is not immediately in view, but it’s starting to peek over the horizon kind of thing. So I want to start having some security in my portfolio as we get closer to retirement. And I don’t want to throw all my money at risk in the stock market. So using bonds could be a great way for me to kind of help manage some of that risk. So in that portfolio, let’s say 70 30, 60, 40, the 30 or 40%, I wanted to use bonds, for example, 60 40 is kind of the classic quote-unquote classic allocation that a lot of people you have in the past recommended and sometimes still do have like 60% stocks and 40% bonds.

Dave (32:29):

And as you get closer to retirement, kind of flipping that like 40, 40% stocks and 60% bonds. But that’s kind of a conversation for another day. But if you wanted to start looking at investing in bonds as some way of having a more secure way of, you know, still making money but feeling like a little bit less pressure about what’s going on with the stock market you can look at, you know, taking that 40% for example, and splitting it up into the different buckets depending on a, how much you want to try to, you know, generate income from those and B, how much effort and work you want to put into it. You can create ladders and basically what that means is that you buy, you buy different time length bonds and when that one expires, so let’s say that you buy a 10, you know, let’s say you buy for ten-year bonds, but you stagger them by a month or six months or something.

Dave (33:34):

When that one first one matures, you have a choice of either rolling in into another bond, or you can take that money and invest in something else or you can use it to as income, you know, depending on where you are in your, your evolution of retirement for example. So that could be money that you could use for your pay for yourself or you could roll it into something else and keep the, keep the ladder going. So every, every six months or every year a bond would mature and then you choose what you want to do with it. So you can do that with treasuries. You can do that where corporate bonds and you can do that with municipal bonds. As far as the yields that you would get from each of these sections, generally, treasuries because of the safest or also the lowest municipal bonds are going to be the second tier of money you can make from an investment with them.

Dave (34:26):

They’re not as safe as treasuries, but they’re probably safer or more secure than corporate bonds. And corporate bonds are going to be the riskiest if you will, a quote-unquote riskiest of the bunch, but they’re also going to pay you the most as well. So, you know, having a mix of those is, is probably the best way of going. Let’s say, you know, you have 10% of treasuries, maybe you have 10% of municipals and then you have 20% of corporate bonds kind of thing. And that seems to be from everything I’ve read that seems to be kind of a, a very common breakdown of how people would use that kind of money. That’s a great breakdown. I think. I like the way you summarize it there at the end. And do you have like any other parting words or anything else people should know about bonds?

Dave (35:17):

Yeah, I think that this is some something that everybody should be at least aware of and educate themselves a little bit about it so that they have a great way of you know, having some safety and in their portfolio and also feeling like they could still make money off of it because I don’t know about you, but you know, whenever I look at a bank, and I think, Hey, I should put some money in there and I see the interest rates that they want to give me. And I’m like, I laughed. Like, really? That’s it. Oh, okay. He doesn’t like me very much. Yeah. So, you know, I think that you know, these could be a great opportunity for people to try to help, you know, make a few bucks but also feel secure. Like they could sleep at night knowing that, Hey, you know, if the stock market goes to poop tomorrow, then I still, I got something that’s going to be making me money.

Andrew (36:10):

Yeah. And I think we glossed over it, but that laddering strategy can be huge because to your point like you said, when it comes to investing in the stock market, if the stock market crashes, you’re locked in, right? Either you’re going to sell it a huge loss or you have to wait it out until it recovers. When you have something like a bond ladder, not only has that bond been making you money the whole time, but every time it matures, it’s like you have your investment back and now it’s like you got dry powder and you can put that to work and so many different ways. And if you structure the ladder correctly, you’re regularly going to be having fresh capital. It’s almost like a double income stream if you structure it right.

Dave (36:52):

Yeah, exactly. And you know, I wasn’t, something really interesting, just never dawned on me until I started researching these.

Dave (36:59):

But do you know who one of the top investors in treasuries is? Go ahead. I have no idea. It’s Warren buffet. [inaudible] It makes sense, right? He’s got all that cash sitting there like waiting to make an acquisition. Yeah, exactly. And it just never really put two and two. I, you know, I look at his balance sheet all the time, and you see, you don’t have to talk the balance sheet, cash and cash equivalence while the cash equivalents are treasuries and he buys billions of them and he’ll, he, he doesn’t, he never says it. And I didn’t find any information that says this is just my theory, so take that for what it’s worth. But I’m positive he’s laddering those to have like you said, fresh powder so that if something comes along and he wants to pull the trigger and buy it, he’s got the cash to do it, but he’s also still making some money off of these treasuries as opposed to just having to sit in a bank somewhere.

Andrew (37:56):

I think we glossed over that part too. And that might’ve been like the most exciting part. I know not the only Buffet but a lot of portfolio managers hedge fund managers, you know, value investing type fund managers, mutual fund managers, when they have their cash allocations, it’s not like you said, sitting in the brokerage account. They usually have T-bills with it. So real quick, I know you mentioned at the beginning, but if somebody wants to, let’s say they have there, let’s say, you know, they have a five to 10% cash allocation for their portfolio. So they want to have money to pile into stocks and to the right stock when they see their opportunity. But they’re not at that part right now and they need it to sit rather than putting into their brokerage account. They could get treasury bonds or T-bills as they’re also called. So how would the average investor get into that?

Dave (38:54):

The, well, the easiest way is to go to treasury.gov, and you can create an account on there, and they can, you can deposit money into the account@treasury.gov and you can buy like you said, T-bills. T-Bills are the shortest duration of bonds that the government sells. And they’re as short as a, I want to say seven days and as long as a year. And one of the things that I’ve started doing is I’ve started a savings account in essence with treasury.gov and I put money in there regularly, but I, I ladder it so that every bought every two weeks it turns over and you could set it so that automatically does it for you. And then it can only do it up to 20 times. So it’s not, you know, a forever thing. But what you can do is you can do it like that and so that you, you’re, you’re always getting money back and you’re, you’re earning interest on it.

Dave (39:57):

You’re going to earn a, at this point, you’re going to earn about as much as you could with an online bank. But if you bank at a brick and mortar bank, let’s say, you know, my old, my old stomping grounds, Wells Fargo or US Bank, you know, those are paying 0.0 1.03% on their savings accounts. It’s just putrid. But with a treasury, they’re paying 1.5 to 1.6, depending on the length the, of the T bill. So one of the things that I do with that is I ladder it so that I’m still making some money on it, but it turns over quick enough that if I need to use it to do something, pay for repair a car or you know, buy a house or whatever it maybe I have the money there to do it, but I’m still earning interest on it.

Dave (40:41):

So you can stagger the ladders however you want. If you want to do, if you want to buy five ladders for 13-week intervals, you can do that. It’s super easy and you can have the money transferred automatically from your paycheck to the treasury.gov website if you want. So, I mean, there’s, it’s a, and the best part is it’s, it’s a commission-free now. Now that’s not as big a deal, but it is, it is commissioned free. So that’s quite cool. And the other thing that I like about it is you can buy it in smaller increments. The corporate bonds and you mean municipals that we’re, that we’ve been talking about, those are a minimum, $1,000 a pop and a lot of cases, it’s five, $10,000 to buy one bond. So you get ten bonds for that $10,000. But, you know, I don’t know about you, but I don’t have $10,000 lying around to start throwing corporate bonds right away. So, you know, that’s just kind of something that I’ve noticed and it makes it easy to use.

Andrew (41:41):

Yeah, that’s super cool. I think a great way to, to make your cash, make some money rather than sit there. And a lot of grant investment professionals do it and it’s the on the say no risk. But I mean, yeah.

Dave (41:59):

Yup. I read a; I read a blog about this. It sparked my idea. A gentleman who was an entrepreneur, so he was working for himself. Instead of paying the money, the government their taxes or recorder what he did was his accountant told him to pay annually. So what he did was he calculated how much he was going to have to pay over the year. He set up a bond wire through treasury.gov and he made one and a half to 2% off of the money that he was going to have to pay the government at the end of the year. So he had them all mature around the beginning of March and then he had all of the money that he was going to owe for the year for his taxes, but he was able to earn some money on it. So I thought that was a fascinating idea.

Andrew (42:47):

Well, I think we just found the two people that the IRS is going to audit. Yeah. Thanks for that.

Dave (42:55):

Well, you’re not doing it, but I am what do they call it? A crime by an accomplice or something guilty by association area. That’s what it is. Well, that’s cool. I love the different applications for that. And I think a lot of people can find value. So if they’re interested, I think your blog posts on, especially the treasury one, I liked that one. I liked all of them. So what can I say? But those are good places to look and find all of the different investment aspects of bonds and the ways they can be beneficial and learn about it and do it.

Dave (43:36):

And all right folks, we’ll that is going to wrap up our discussion for this evening. I hope you enjoyed our conversation about bonds and hope you think a learn to finger two. If you have any questions about this, please let me know. I’m here to help. So without any further ado, I’m going to go ahead and sign this off. You guys go out there and invest with a margin of safety emphasis on safety. Have a great weekend. We’ll talk to y’all next week.

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