Tag Archives: debt

The Unwritten Laws of Finance & Investment

The Unwritten Laws of Finance and Investment, by Robert Cole.

I believe I have already mentioned at some point in the blog the ritual I have almost every time I get into an airport of going to one of the book shops to check whether I can find something to take with me.

I found “The Unwritten Laws of Finance & Investment”, by Robert Cole, at Frankfurt’s airport some months ago during a scale from Amsterdam to Toulouse.

The book is a collection of investment and finance maxims, advice, quotations, etc. It can be read in one shot (159 light pages).

If you are to read this book probably nothing of what you may find in it will be completely new to you, but the compilation and the witty style in which the “laws” are written make it an entertaining read and serve as repository where to find well established ideas.

Let me finish by quoting some passages from the laws that I enjoyed the most:

  • “I don’t want a lot of good investments; I want a few outstanding ones”, Philip Fisher.
  • It is impossible for investors to get their timing precisely right always. [I will come back to this in the future].
  • “In this business, if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten”, Peter Lynch.
  • Before you go in, look for the way out. – This one is beautifully explained with a story from Winnie-the-Pooh. [I will come back to this in the future].
  • “Bull markets are born on pessimism, grow on scepticism, mature on optimism and die one euphoria”, Sir John Templeton. – This one reminds us to that of Warren Buffett “Be fearful when others are greedy and greedy when others are fearful”.
  • “There are huge mathematical advantages to doing nothing”, Warren Buffett (on compounding interest).
  • “The rich rules over the poor, and the borrower becomes the lender’s slave”, the Book of Proverbs 22:7, The Bible.
  • “The practice of contracting debt will almost infallibly be abused in every government. It would scarcely be more imprudent to give a prodigal son a credit in every banker’s shop in London, than to empower a statesman to draw bills, in this manner, upon posterity”, David Hume.
  • “The four most expensive words in English language are ‘This time is different'”, Sir John Templeton. [I will come to this in the future].
  • “Investment is most intelligent when it is most businesslike”, Warren Buffett.

 

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What actually happens when there is a default?

A couple of friends of mine used to point to me some months ago, jokingly or seriously, who knows,  whether it was a good time to buy Greek bonds due to the hight yield they had.

My response was always the same, I prefer not to meddle with state bonds, a lesson learnt from various sources and which I wrote about some weeks ago (“Inflation and assets” and “Hyperinflation and defaults in Europe”).

I guess that with all the recent turmoil in the markets and the news, one would feel less appetite for such bonds, but I still had a question: What actually happens when there is a debt default? Is the state not giving you a monthly coupon but re-starts paying the next month? Is the payment along a year postponed and re-started the coming year? Is the principal recovered?

Last week, while flying to Amsterdam I read an insightful article from The Economist about last Argentina’s debt default. The article is an eye-opener. It gives detailed account of the different difficulties and steps that creditors are going through to recover part of their money.

But as a point of reference, take the following passage:

“Argentina’s default, after a severe economic crisis, sparked social unrest and runs on banks. It subsequently presented creditors with a take-it-or-leave-it offer of 35 cents on the dollar. They considered this derisory: previously, delinquent countries had typically paid 50-60 cents. But the government stood firm and roughly three-quarters of the bondholders took part in a debt exchange in 2005. More joined in 2010, bringing the total to 93%.”

Then, what typically happens is that monthly coupon payments are stopped and creditors are presented with a take-it-or-leave-it offer of paying them back about 50-60% of what they had invested…

The 7% who didn’t join that deal are still going through legal battles. For you and I, that most probably are not going to enter into any legal dispute with a country, we are much better off far away from state debt bonds.

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