Strategic Fixed Income Investing: An Insider's Perspective on Bond Markets, Analysis, and Portfolio Management

CHAPTER 2

Navigating through Troubled Water

I've learned that mistakes can often be as good a teacher as success.

—Jack Welch

Today's market is not yesterday's market. It is a simple statement, but it holds many implications. It cannot be stressed or said enough. Current markets hold a plethora of new and unique securities that are constantly evolving. Many of today's securities were not even available to market participants at the turn of the millennium. Adding to the complexity is the recent government intervention that has shaped the markets with regulation. Increased regulation creates a market environment that is in continuous flux, transforming and molding investor decisions as well as handcuffing them at times.

If, one morning, as you were scrolling through the early headlines you had read a prediction, made with one hundred percent certainty, that the U.S. government and its sovereign debt—such as Treasury securities—would lose its triple-A rating, would you have believed that it could happen? These are the Treasury securities that are 100 percent guaranteed by the government and categorized by every textbook and model as risk free.

What type of probability do you think most investors might have placed on the likelihood? Would you have placed a 5 percent probability on the occurrence? How about 10 percent, 50 percent, or maybe even more? Some might even have said that there is a better chance of winning the lottery. Realistically, most individuals, unless cynical in nature, ...