Although my advice to most investors is to steer clear of so- called junk bonds or mutual funds which invest in them, not all junk bonds are created equal. In fact, analytically minded investors, and those who have both the expertise and the time to devote to analysis, can find good values in low-quality bonds, those of highly leveraged companies, and those of relatively small companies which are not rated. And, from time to time, bondholders of bankrupt companies can experience windfalls as a result of reorganization plans.
Many investors buy junk bonds just because their interest rates are high or their prices low. This is a good way to lose money, both income and capital. But fortunes have been made by those who can analyze statements, observe legal quirks in a bond indenture, or anticipate legal decisions made by bankruptcy judges. This is not my area of expertise, but I commend those for whom it is.
For many reasons, investors sometimes say that the stock market is rigged, that the insiders control it, that only the “big boys” can make money on Wall Street, and that, therefore, the average investor loses out. It is certainly true that in recent years there has been rash of illegal activities in the marketplace, ranging from insider trading and illegal “parking of securities,” to public misinformation and alleged manipulation of U.S. Treasury Bond prices. Names like Boesky, Milkin, and others have hit the headlines with unprecedented regularity.
There is little question that large buyers and sellers of securities can and do influence prices; there is also little doubt that there have been many abuses in the marketplace, both legal and illegal. But the Securities and Exchange Commission (SEC) and the investment banking industry have done a magnificent job of regulating the investment markets and pursuing and punishing illegal activities.
The rigging of markets today takes place with less frequency and impact than used to be the case during the heydays of the so-called “Robber Barons.” Laws are stronger and regulations are stricter. As a matter of fact, when people point to market abuses, they often overlook the mainstream of the securities markets. The mainstream is a market where literally millions of transactions—both large and small—take place every day, and the great majority of them as a result of verbal contracts. By and large, the securities industry maintains a high level of integrity, with the occasional exceptions hitting the headlines and clouding the perception.
Speaking of insider activity, some believe that observation of “insider trading activity” can give clues as to whether or not to buy or sell a given stock or stocks. The SEC mandates that corporate executives report purchases and sales of the stocks of their companies. The names of these executives and their trading activities are published in leading business journals. In fact, insider trading is rarely a good gauge of whether to buy or sell. Insiders trade for many reasons. They may be exercising options, they may be selling to raise liquid funds for whatever reason or, of course, they may be buying or selling because they surmise their stocks are either undervalued or overvalued. But insiders are not necessarily experts on what their stocks may do in the market. Of course, investors should hope and expect that directors and officers of a company own stock in that company, but just the fact that a few executives buy or sell is not a sufficient reason for investment decision- making on the part of an individual investor.