In other words, we are trying to get the most for the money in terms of reward per risk taken and we do it by constantly focusing on the upside potential and downside protection of each individual investment. This general approach can be applied across most investment categories and results in superior long term performance. These investments exist for several reasons but the primary reason is that they are too small for the large investment houses to worry about. Because the majority of the bonds exchange for new bonds or cash, few bonds of the original issue remain outstanding and they end up dropping through the cracks of the financial markets. Brokers will not research them or write analysis reports on them because they will not be able to get their hands on enough bonds to make any money.
Most municipal bonds are tax-free.
But sometimes, municipalities use up their capacity to issue tax-free bonds and must issue some taxable municipal bonds. Avoid Positions That Cannot Make It Through A Business Cycle - A more defensive strategy that we use is to avoid those categories that dramatically outperform during one period and dramatically underperform in the next period. An example is bonds of companies with cyclical business profiles that are highly leveraged with debt. If there is any type of liquidity problem, you will have to take an extra hit if you want to liquidate such an investment when everyone else does - which will happen when the cycle turns downward. . Accordingly, when we purchase riskier bonds, we avoid those backed by companies whose operations are overly cyclical and could have a tough time making it through and entire business cycle.