Beating the Indexes: Investing in Convertible Bonds
to Improve Performance and Reduce Risk
By Bill Feingold
Pearson Education, Inc.,
Publishing as FT Press, 2012
$44.99, 296 pages.
In “Beating the Indexes” experienced convertibles trader and Minyanville columnist Bill Feingold makes a solid case for convertibles as a more profitable alternative to trading indexes. Convertibles are part bond and part stock instruments. Feingold uses his expertise to explain the attributes of convertibles to a sophisticated audience; but he also outlines the basics of these instruments and offers trading strategies learned during his many years in that market.
This book is written primarily for individual investors and professionals who pick their own stocks, but want help to find the best way to structure their investments. Feingold explains how convertibles work and then looks at the securities from the perspectives of different constituencies.
Part I of the book, “Our Flawed Institutions,” lays out the hypothesis that the professional investment world is largely designed for mediocrity and job preservation at the expense of the forward-looking asset allocation it is supposed to provide. Feingold says that the intent and workability of index funds have been subverted by closet indexers who cut corners on original research. He contends more and more people charged with analyzing securities are instead taking someone else’s word for it. “The decisions on where society’s capital goes are falling to fewer and fewer active participants.”
Feingold’s solution? The markets should charge closet indexers a fee — just as, say, toll roads charge users. True indexers would not have to pay because they are providing a legitimate service by keeping costs at a minimum.
In Part II, “Convertibles, a Better Solution,” Feingold makes the case for adding convertibles to one’s investing portfolio. The best reason, he says, comes from the crowding and herding that emanate from a market dominated by indexers and closet indexers. “…when you invest in convertibles, as long as you buy them properly, the selling largely takes care of itself.”
Feingold offers a valuable lesson from his own experience as a convertibles trader. Early on he learned the value of an “01,” also known as a basis point or one hundredth of a percentage point. “To the bond trader this is everything.” He also became fascinated by options and their numerology, just as in his youth he was enthralled by baseball and its plethora of statistics.
Feingold says there are three basic ways to make money in convertibles: Protected stock picking, prospering by surviving and arbitrage. “Beyond that you make money buying convertibles from motivated sellers.”
Chapter 7 offers a series of reviews and quizzes to test the reader’s understanding of the concepts needed to make convertibles a part of an investment portfolio. Another section tracks the performance of biotech companies. Few companies have made better use of the convertible market than Human Genome Sciences (HGSI), notes Feingold.
Chapter 9 examines what to look for in a convertible, saying a strategy of avoidance works best: Avoid companies with significant debt, financial companies with low equity market capitalization, airlines, companies with low equity market capitalizations relative to the size of the convertible and convertibles trading below 65¢on the dollar unless the market is in 2008-style chaos.
Finally, Feingold wraps up his book with a glimpse into how people who trade convertibles every day think.
Patrick Kelly is a freelance writer with a background in commodity market reporting.