The bottom-line goal when buying
a stock for appreciation is for it to double
its value in three to five years. Even if this
objective is not realized, the goal itself tends
to focus thinking on long-term potential rather
than on short-term trading. Such focus is especially
helpful in situations where long-term capital
gains taxes are desired.
In investing for both current income and appreciation,
Barnett & Company deploys a more modest
goal for price changes, since a material portion
of return comes from cash flow.
We use the same balance sheet analysis in bond
investing that we use in stock screening, although
the criteria are different since bondholders
do not usually participate in a firm’s
earnings appreciation as stockholders do. In
bond investing, our analysis centers around
the issuer’s ability to meet its coupon
payments, repay its principal and, should the
bond become impaired, return its investment
in reorganization.
The types of bonds we use again depend on our
client’s needs: income desired, risk tolerance,
and the amount of funds available for investment.
We recommend bonds of medium grade for the client
who needs relatively high amounts of income
from his or her investments, if the investor
is willing to accept the associated risk of
default that comes with such investments. Clients
who need lower amounts of income or who have
a lower tolerance for risk are directed to investment-grade
or government bonds.
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