Why You Should Buy When Share Prices Are Low

A Lesson From History:

'The Buffett Buy Signal' –
Why You Should Buy When Share Prices Are Low

Warren Buffett has made millions from going against the crowd and buying when share prices are low, not when they're heading up.

Here are some examples...

1968

During a high point in the markets, Buffett complained about how he was having trouble finding "first-class investment ideas". He held onto that view until 1974. From June 1968 to October 1974, the S&P 500 fell 37%. For the decade starting in June 1968, the S&P lost 2.6%.

1974

Buffett changed his tune as the market fell. In late 1974, he made his famous comment that he felt like "an oversexed man in a harem" – meaning simply that he was awash in investment opportunities. The S&P 500 rose 11% per year over the next five years and 10% per year over the next decade.

During that bear market, Buffett bought shares in the Washington Post Company because he believed they were a bargain. Since then the price has soared by more than 100 times – and that's before you factor in dividends.

1979

When the market slumped between 1977 and 1979, most investors got cold feet. Buffett toldForbes that stocks were still the way to go. The S&P 500 returned 9% over the next five years and 13% over the next 10.

Of course, that's Warren Buffett. He's a legendary and fabulously wealthy investor. How can the ordinary investor today tell the genuinely cheap shares from those that deserve their low price?

https://www.fool.co.uk/shop/secure/order-01.aspx?dc=ccd70129-62cb-417b-a440-99de3c029d1a&sf=0512_hb_plndr_L1&pd=07&source=u74spoeml0000189

Investor's Checklist: A Guided Tour of the Market

The list below covers just about every corner of the market.  It should help you wade through the different economics of each industry and understand how companies in each industry can create economic moats - which strategies work and how you can identify companies pursuing those strategies.

Over the long haul, a big part of successful investing is building a mental database of companies and industries on which you can draw as the need arises.  The list below should give you a jumpstart in compiling that mental database, and that will make you a better investor.

• Investor's Checklist: Health Care
• Investor's Checklist: Consumer Services
• Investor's Checklist: Business Services
• Investor's Checklist: Banks
• Investor's Checklist: Asset Management and Insurance
• Investor's Checklist: Technology Software
• Investor's Checklist: Technology Hardware
• Investor's Checklist: Media
• Investor's Checklist: Telecom
• Investor's Checklist: Consumer Goods
• Investor's Checklist: Industrial Materials
• Investor's Checklist: Energy
• Investor's Checklist: Utilities

It is easier for companies to make money in some industries than in others. Some industries lend themselves to the creation of economic moats more so than others, and these are the industries where you'll want to spend most of your time. The economics of some industries are superior to others. Hence, you should spend more time learning about attractive industries than unattractive ones. Every industry has its own unique dynamics and set of jargon - and some industries (such has financial services) even have financial statements that look very different.


Ref:  The Five Rules for Successful Stock Investing by Pat Dorsey

Investor's Checklist: Health Care

Developing drugs is time-consuming, costly, and there are no guarantees of success.  Look for companies with long patent lives and full pipelines to spread the development risk.

Drug companies whose products target large patient populations or significant unmet needs have a better chance of paying off.

Make sure you have a big margin of safety for pharmaceutical companies with mega blockbuster drugs that make up a large percentage of sales.  Any unexpected development can send cash flow, and the stock price, reeling.

Unless you have a deep understanding of the technology, don't invest in biotech startups.  Payoffs could be large, but the cash flows are so far out and uncertain that it's easier to lose your shirt than win big.

Don't overlook the medical device industry, which is full of firms with wide economic moats.

Cash is king for firms that rely on development (pharmaceuticals, biotechnology, and medical devices).  Make sure firms have enough cash or cash from operations to get through the next development cycle.

Keep an eye on the government.  Any drastic changes in Medicare/Medicaid spending or regulatory requirements can have a deep impact on pricing throughout the sector.

Managed care organizations that spread risk - whether through a high mix of fee-based business, product diversification, strong underwriting, or minimal government accounts - will provide more sustainable returns.  

Ref:  The Five Rules for Successful Stock Investing by Pat Dorsey


Read also:
Investor's Checklist: A Guided Tour of the Market...

Investor's Checklist: Consumer Services

Most consumer services concepts fail in the long run, so any investment in a company in the speculative or aggressive growth stage of the business life cycle needs to be monitored more closely than the average stock investment.

Beware of stocks that have already priced in lofty growth expectations.  You can make money if you get in early enough, but you can also lose your shirt on the stock's rapid downslide.

The sector is rife with low switching costs.  Companies that establish store loyalty or store dependence are very attractive.  Tiffany's is a good example; it faces limited competition in the retail jewelery market.

Make sure to compare inventory and payables turns to determine which retailers are superior operators.  Companies that know what their customers want and how to exploit their negotiating power are more likely to make solid bets in the sector.

Keep an eye on those off-balance sheet obligations.   Many retailers have little or no debt on the books, but their overall financial health might not be that good.

Look for a buying opportunity when a solid company releases poor monthly or quarterly sales numbers.  Many investors overreact to one month's worth of bad same-store sales results, and the reason might just be bad weather or an overly difficult comparison to the prior-year period.  Focus on the fundamentals of the business and not the emotion of the stock.

Companies also tend to move in tandem when news comes out about the economy.  Look for a chance to pick up shares of a great retailer when the entire sector falls - keep that watch list handy.  


Ref:  The Five Rules for Successful Stock Investing by Pat Dorsey


Read also:
Investor's Checklist: A Guided Tour of the Market...

Investor's Checklist: Business Services

Understand the business model.  Knowing if a company leverages technology, people, or hard assets will provide insight as to the kind of financial results the company may produce.

Look for scale and operating leverage.  These characteristics can provide significant barriers to entry and lead to impressive financial performance.

Look for recurring revenue.  Long-term customer contracts can guarantee certain levels of revenue for years into the future.  This can provide a degree of stability in financial results.


Focus on cash flow.  Investors ultimately earn returns based on a company's cash-generating ability.  Avoid investments that aren't expected to generate adequate cash flow.

Size the market opportunity.  Industries with big, untapped market opportunities provide an attractive environment for high growth.  In addition, companies chasing markets perceived to be big enough to accommodate growth for all industry participants are less likely to compete on price alone.

Examine growth expectations.  Understand what kind of growth rates are incorporated into the share price.  If the rates of growth are unrealistic, avoid the stock.  



Ref:  The Five Rules for Successful Stock Investing by Pat Dorsey



Read also:
Investor's Checklist: A Guided Tour of the Market...

Investor's Checklist: Banks

The business model of banks can be summed up as the management of three types of risk:  credit, liquidity, and interest rate.

Investors should focus on conservatively run institutions.  They should seek out firms that hold large equity bases relative to competitors and provision conservatively for future loan losses

Different components of banks' income statements can show volatile swings depending on a number of factors such as the interest rate and credit environment.  However, well-run banks should generally show steady net income growth through varying environments.  Investors are well served to seek out firms with a good track record.

Well-run banks focus heavily on matching the duration of assets with the duration of liabilities.  For instance, banks should fund long-term loans with liabilities such as long-term debt or deposits, not short-term funding. Avoid lenders that don't.

Banks have numerous competitive advantages.  They can borrow money at rates lower than even the federal government.  There are large economies of scale in this business derived from having an established distribution network.  the capital-intensive nature of banking deters new competitors.  Customer-switching costs are high, and there are limited barriers to exit money-losing endeavors.

Investors should seek out banks with a strong equity base, consistently solid ROEs and ROAs, and an ability to grow revenues at a steady pace.


Comparing similar banks on a price-to-book measure can be a good way to make sure you're not overpaying for a bank stock.


Ref:  The Five Rules to Successful Stock Investing by Pat Dorsey


Read also:
Investor's Checklist: A Guided Tour of the Market...

Investor's Checklist: Asset Management and Insurance

Look for diversity in asset management companies.  Firms that manage a number of asset classes - such as stocks, bonds, and hedge funds - are more stable during market gyrations.  One-hit wonders are much more volatile and are subject to wild swings.

Keep an eye on asset growth.  Make sure an asset manager is successful in consistently bringing in inflows greater than outflows.

Look for money managers with attractive niche markets, such as tax-managed funds or international investing.

Sticky assets add stability.  Look for firms with a high percentage of stable assets, such as institutional money managers or fund firms who specialize in retirement savings.

Bigger is often better.  Firms with more assets, longer track records, and multiple asset classes have much more to offer finicky customers.

Be wary of any insurance firm that grows faster than the industry average (unless the growth can be explained by acquisitions).

One of the best ways to protect against investment risk in the life insurance world is to consider companies with diversified revenue bases.  Some products, such as variable annuities, have exhibited a good degree of cyclicality.

Look for life insurers with high credit ratings (AA) and a consistent ability to realise ROEs above their cost of capital.

Seek out property/casualty insurers who consistently achieve ROEs above 15 percent.  This is a good indication of underwriting discipline and cost control.

Avoid insurers who take repeated reserving charges.  This often indicates pricing below cost or deteriorating cost inflation.

Look for management teams committed to building shareholder value.  These teams often have significant personal wealth invested in the businesses they run.



Ref:  The Five Rules for Successful Stock Investing by Pat Dorsey


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Investor's Checklist: A Guided Tour of the Market...

Investor's Checklist: Technology Software

The software industry has economics few industries can match.  Successful companies should have excellent growth prospects, expanding profit margins, and pristine financial health.

Companies with wide moats are more likely to produce above-average returns.  But superior technology is one of the least sustainable competitive advantages in the software industry.

Look for software companies that have maintained good economics throughout multiple business cycles.  We prefer companies that have been around at least several years.

License revenue is one of the best indicators of current demand because it represents how much new software was sold at a given time.  Watch for any license revenue trends.

Rising days sales outstanding (DSOs) may indicate a company has extended easier credit terms to customers to close deals.  This steals revenues from future quarters and may lead to revenue shortfalls.

If deferred revenue growth slows or the deferred revenue balance begins to decline, it may signal that the company's business has started to slow down.

The pace of change makes it tough to predict what software companies will look like in the future.  For this reason, it's best to look for a big discount to intrinsic value before buying.


Ref:  The Five Rules for Successful Stock Investing by Pat Dorsey



Read also:
Investor's Checklist: A Guided Tour of the Market...

Investor's Checklist: Technology Hardware

Information technology is an increasingly important source of productivity in advanced economies.  In 2002, IT accounted for nearly 50 percent of total U.S. investment in capital equipment, up from 20 percent three decades ago.

Technology innovation means that hardware firms can offer more computing power at an increasingly cheap price; thus, IT can be applied to more and more task.


Because of rapid innovation, technology hardware companies tend to generate rapid revenue and earnings growth.

At the same time, competitive rivalry is often strong in tech hardware.  Moreover, demand for technology hardware is very cyclical.

Technology, by itself, does not constitute a sustainable competitive advantage.  hardware companies that develop economic moats are more likely to succeed over the long term than companies that rely on a lead in technology.

Examples of moats among technology hardware firms include low-cost producer (Dell), intangible assets (Linear and Maxim), switching costs (Nortel and Lucent), and network effect (Cisco).

A company with a sustainable competitive advantage should be able to effectively fend off its rivals and maintain significant market share and/or sustain above-average margins over an extended period of time.


Ref:  The Five Rules for Successful Stock Investing by Pat Dorsey



Read also:
Investor's Checklist: A Guided Tour of the Market...

Investor's Checklist: Media

Look for media companies that consistently generate strong free cash flow.  We like to see free cash flow margins around 10 percent.

Seek out companies that have high market share in their primary markets - monopolies are often great for profits.  Licenses, especially in broadcasting, also serve to reduce competition and keep profit margins high.

Seek out companies with a history of well-executed acquisitions that have been followed by higher margins.

A strong balance sheet enables media companies to make selective acquisitions without increasing the risk for shareholders or diluting the shareholders' ownership stake.

Look for candid management teams, a history of sensible acquisitions, and either conservative reinvestment of shareholders' capital or the return of capital to shareholders through dividends and stock repurchases.


Don't chase hits.  Buying a stock because there's a lot of buzz about a hit movie or TV show rarely pays off.


Ref:  The Five Rules for Successful Stock Investing by Pat Dorsey



Read also:
Investor's Checklist: A Guided Tour of the Market...

Investor's Checklist: Telecom

Shifting regulations and new technologies have made the telecom industry far more competitive.  Though some areas are more stable than others, look for a wide margin of safety to any estimate of value before investing.

Telecom is a capital-intensive business.  Having the resources to maintain and improve the network is critical to success.

Telecom is high fixed-cost business.  Keeping an eye on margins is very important.

Watching debt is also important.  Firms can easily overextend themselves as they build networks.


The price of wireless airtime is plummeting.  Carriers continue to compete primarily on price.


Ref:  The Five Rules for Successful Stock Investing by Pat Dorsey



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Investor's Checklist: A Guided Tour of the Market...

Investor's Checklist: Consumer Goods

Find companies that enjoy the cost advantages of manufacturing on a larger scale than most other competitors.  One related issue is whether the firm holds dominant market share in its categories.

Look for the firms that consistently launch successful new products - all the better if the firm is first to market with these innovations.

Check to see if the company is supporting its brand with consistent advertising.  If the firm constantly promotes its products with sale prices, it's depleting brand equity and just milking the brand for shorter-term gain.

Examine how well the firm is handling operating costs.  Occasional restructuring can help squeeze out efficiency gains and lower costs, but if the firm is regularly incurring restructuring costs and relying solely on this cost-cutting tactic to boost its business, tread carefully.

Because these mature firms generate so much free cash flow, it's important to make sure management is using it wisely.  How much of the cash is turned over to shareholders in the form of dividends or share repurchase agreements?

Keep in mind that investors may bid up a consumer goods stock during economic downturns, making the shares pricey relative to its fair value.  Look for buying opportunities when shares trade with a 20 percent to 30 percent margin of safety.  

Ref:  The Five Rules for Successful Stock Investing by Pat Dorsey



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Investor's Checklist: A Guided Tour of the Market...

Investor's Checklist: Industrial Materials

This is a very traditional Old Economy sector, with many hard assets and high fixed costs.

Industrial materials are divided into commodity producers (steel, chemicals) and producers of noncommodity value-added goods and services (machinery, some specialty chemicals).

Buyers of commodities choose their produce on price - otherwise, commodities are the same product, regardless of who makes them.

The sales and profits of companies in this sector are very sensitive to the business cycle.

Very few industrial materials companies have any competitive advantages; the exceptions are those in concentrated industries (e.g., defense), those with a specialized niche product (e.g., Alcoa, some chemicals makers), and, above all, those that can produce their goods at the lowest cost (e.g., Nucor).

Only the most efficient producers will survive the downturn:  The best bet is to be the low-cost producer and owe little debt.

Asset turnover (total asset turnover [TATO] and fixed asset turnover [FATO] measure a manufacturing firm's efficiency.

Watch out for industrial firms with too much debt, large underfunded pension plans, and big acquisitions that distract management.


Ref:  The Five Rules for Successful Stock Investing by Pat Dorsey



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Investor's Checklist: A Guided Tour of the Market...

Investor's Checklist: Energy

The profitability of the energy sector is highly dependent on commodity prices.  Commodity prices are cyclical, as are the sector's profits.  It's better to buy when prices are at a cyclical low than when they're high and hitting the headlines.

Even though the sector is largely cyclical, many energy companies keep their bottom lines black during the troughs.  Look for this characteristic in your energy investments.

OPEC is a highly beneficial force in the energy sector because it keeps commodity prices above its costs.  It is worth keeping tabs on the cartel's strength.

Because of OPEC, we view exploration and production as a much more attractive area than refining and marketing.

Working in a commodity market, economies of scale are just about the only way to achieve a competitive advantage.  As such, bigger is generally better because firms with greater heft tend to be more profitable.

Keep an eye on reserves and reserve growth because these are the hard assets the company will mine for future revenue.

Companies with strong balance sheets will weather cyclical lows better than those burdened with debt.  Look for companies that don't need to take on additional debt to invest in new projects while also paying dividends or repurchasing shares.


Ref:  The Five Rules for Successful Stock Investing by Pat Dorsey



Read also:
Investor's Checklist: A Guided Tour of the Market...

Investor's Checklist: Utilities

Utilities are no longer the safe havens they once were.  Treat them with an appropriate amount of caution.

The competitive structure utilities must operate under is largely set at the state level.  Some states have gone far along the deregulation path; others have utilities that are fully regulated.  Keeping track of changing regulations in different states can be maddening, but it is necessary to understand the sector.

Regulated utilities tend to have wide economic moats because they operate as monopolies, but it is important to keep in mind regulation does not allow these firms to parlay this advantage into excess returns.  In addition, regulation can (and often does) change.

Another risk all utilities face - deregulated or not - is environmental risk.  Most power plants generate pollution of some kind.  Should environmental regulation tighten, costs could go up.

Utilities have a great deal of leverage, both operational and financial.  This is not so important for regulated firms, but it exponentially raises risk for companies facing increasing competition.

If you buy a utility for its dividend, make sure the firm has the financial wherewithal to keep paying it.

Utilities that operate in stable regulatory environments with relatively strong balance sheets while staying focused on their core businesses are the best bets in the sector.  

Ref:  The Five Rules for Successful Stock Investing by Pat Dorsey

Warren Buffett quotes

Is It Better To Be Book Smart Or Street Smart?

June 20, 2012

If you ask most people this question, you're likely to get answers that go down party lines. Those without advanced education will likely say that they've done just fine without spending a lot of time in the classroom, while people with a lot of formal academic knowledge would say that success is largely the result of education. This is more than a trivial debate. Recent statistics from the Federal Reverse show that the American middle class has seen its net income drop 40% from 2007-2010. What was an average net worth of $126,400 shrunk to $77,300 in 2010. Even worse, the Pew Charitable Trusts' Economic Mobility Project found that 42% of people whose father was in the bottom fifth of the earning curve remained in the same earning bracket for life. Only 30% of Britons and 25% of Danes and Swedes were destined to the same fate. This has led some people to believe that America isn't the land of opportunity it once was. Americans in the now-popular 99% are not only upset that the divide between rich and poor continues to widen, they want to know how they can assure a better life for themselves and their families. Is a
better paying job impossible without a formal education, or is there hope for the non-college educated?

Steve Jobs, co-founder of Apple, is widely regarded as one of the best business men of his day. He didn't have a college degree and neither did Steve Wozniak, the other founder of Apple. Other successful businessmen without college degrees include Dell Computer founder Michael Dell, Microsoft founder Bill Gates and Virgin Brands founder Richard Branson. People all over the world have found success without a college degree, but is that the rule or the exception? Unemployment data shows that more than 8% of the population looking for a job can't find one. However, for those with a bachelor's degree, the unemployment rate is only 3.9%. The unemployment rate is 13% for people without a high school diploma. A college degree doesn't guarantee success, but BLS unemployment statistics show book smarts more than double your chances of finding a job.


Who Works Harder?
One side believes that book smarts allows you to get a higher-earning job and work less, while poorer Americans remain poor because they are forced to work more hours for less money. A paper by Orazio Attanasio, Erik Hurst and Luigi Pistaferri found that higher-educated people work more hours than poorer income groups. Although income inequality is growing, leisure inequality is growing, too. While higher earners are earning more, they're losing more leisure time in order to do it. Lower-educated men had 35.2 hours of weekly leisure time (socializing, gaming, watching TV, etc.) compared to 35 hours when the study was last conducted. Higher-earning men had 33.2 hours compared to 34.4 hours previously. Less educated women saw their leisure time grow to 35.2 hours from 35 hours. Higher-educated women went down to 30.3 hours compared to the previously reported 32.2 hours. The study mentions that some of the increase in hours at the lower income levels comes from increased unemployment, but only half of the increase could be attributed to that.


The Bottom Line
Some consumer finance experts believe that becoming more financially prosperous is as much a function of cost control as it is advanced degrees and higher-paying jobs. Statistics seem to indicate that more education dramatically increases a person's chances of achieving financial prosperity, but one basic rule remains largely uncontested: a college degree may help to open doors to a better paying job, but hard work and responsible choices is the best path to career and financial success.

by Tim Parker

http://www.investopedia.com/financial-edge/0612/Is-It-Better-To-Be-Book-Smart-Or-Street-Smart.aspx#axzz1yNRqRlmR

Risk-Return Tradeoff

Definition of 'Risk-Return Tradeoff'

The principle that potential return rises with an increase in risk. 

• Low levels of uncertainty (low risk) are associated with low potential returns, whereas high levels of uncertainty (high risk) are associated with high potential returns. 
• According to the risk-return tradeoff, invested money can render higher profits only if it is subject to the possibility of being lost. 

Investopedia explains 'Risk-Return Tradeoff'

Because of the risk-return tradeoff, you must be aware of your personal risk tolerance when choosing investments for your portfolio. 

• Taking on some risk is the price of achieving returns; therefore, if you want to make money, you can't cut out all risk. 
• The goal instead is to find an appropriate balance - one that generates some profit, but still allows you to sleep at night.

Read more: http://www.investopedia.com/terms/r/riskreturntradeoff.asp#ixzz1yNTT4zyp

Reinvestment Risk

Definition of 'Reinvestment Risk'

The risk that future coupons from a bond will not be reinvested at the prevailing interest rate when the bond was initially purchased.

• Reinvestment risk is more likely when interest rates are declining.
• Reinvestment risk affects the yield-to-maturity of a bond, which is calculated on the premise that all future coupon payments will be reinvested at the interest rate in effect when the bond was first purchased. 
• Zero coupon bonds are the only fixed-income instruments to have no reinvestment risk, since they have no interim coupon payments.  

Investopedia explains 'Reinvestment Risk'

Two factors that have a bearing on the degree of reinvestment risk are:

• Maturity of the bond - The longer the maturity of the bond, the higher the likelihood that interest rates will be lower than they were at the time of the bond purchase.
• Interest rate on the bond - The higher the interest rate, the bigger the coupon payments that have to be reinvested, and consequently the reinvestment risk.

Read more: http://www.investopedia.com/terms/r/reinvestmentrisk.asp#ixzz1yNSI15fi

The Risks of Bond Investing: Understanding Dangers in Fixed-Income Investing

There's no such thing as a sure thing, even in the bond world

From Paul Conley, former About.com Guide

Bonds are among the safest investments in the world. But that hardly means that they’re risk free. Here’s a look at some of the dangers inherent in fixed-income investing.

• Inflation Risk: Because of their relative safety, bonds tend not to offer extraordinarily high returns. That makes them particularly vulnerable when inflation rises.
  Imagine, for example, that you buy a Treasury bond that pays interest of 3.32%. That’s about as safe an investment as you can find. As long as you hold the bond until maturity and the U.S. government doesn’t collapse, nothing can go wrong….unless inflation climbs. If the rate of inflation rises to, say, 4 percent, your investment is not “keeping up with inflation.” In fact, you’d be “losing” money because the value of the cash you invested in the bond is declining. You’ll get your principal back when the bond matures, but it will be worth less.
  Note: there are exceptions to this rule. For example, the Treasury Department also sells an investment vehicle called Treasury Inflation-Protected Securities.
• Interest rate risk: Bond prices have an inverse relationship to interest rates. When one rises, the other falls.
  If you have to sell a bond before it matures, the price you can fetch will be based on the interest rate environment at the time of the sale. In other words, if rates have risen since you “locked in” your return, the price of the security will fall.
  All bonds fluctuate with interest rates. Calculating the vulnerability of any individual bond to a rate shift involves an enormously complex concept called duration. But average investors need to know only two things about interest rate risk.
  First, if you hold a security until maturity, interest rate risk is not a factor. You’ll get back the entire principal upon maturity.
  Second, zero-coupon investments, which make all their interest payments when the bond matures, are the most vulnerable to interest rate swings.
• Default Risk: A bond is nothing more than a promise to repay the debt holder. And promises are made to be broken. Corporations go bankrupt. Cities and states default on muni bonds. Things happen...and default is the worst thing that can happen to a bondholder.
  There are two things to remember about default risk.
  First, you don’t need to weigh the risk yourself. Credit ratings agencies such as Moody’s do that. In fact, bond credit ratings are nothing more than a default scale. Junk bonds, which have the highest default risk, are at the bottom of the scale. Aaa rated corporate debt, where default is seen as extremely unlikely, is at the top.
  Second, if you’re buying U.S. government debt, your default risk is nonexistent. The debt issues sold by the Treasury Department are guaranteed by the full faith and credit of the federal government. It’s inconceivable that the folks who actually print the money will default on their debt.
• Downgrade Risk: Sometimes you buy a bond with a high rating, only to find that Wall Street later sours on the issue. That’s downgrade risk.
  If the credit rating agencies such as Standard & Poor’s and Moody’s lower their ratings on a bond, the price of those bonds will fall. That can hurt an investor who has to sell a bond before maturity. And downgrade risk is complicated by the next item on the list, liquidity risk.
• Liquidity risk: The market for bonds is considerable thinner than for stock. The simple truth is that when a bond is sold on the secondary market, there’s not always a buyer. Liquidity risk describes the danger that when you need to sell a bond, you won’t be able to.
  Liquidity risk is nonexistent for government debt. And shares in a bond fund can always be sold.
  But if you hold any other type of debt, you may find it difficult to sell.
• Reinvestment Risk: Many corporate bonds are callable. What that means is that the bond issuer reserves the right to “call” the bond before maturity and pay off the debt. That can lead to reinvestment risk.
  Issuers tend to call bonds when interest rates fall. That can be a disaster for an investor who thought he had locked in an interest rate and a level of safety.
  For example, suppose you had a nice, safe Aaa-rated corporate bond that paid you 4% a year. Then rates fall to $2%. Your bond gets called. You’ll get back your principal, but you won’t be able to find a new, comparable bond in which to invest that principal. If rates have fallen to 2%, you’re not going to get 4% with a nice, safe new Aaa-rated bond.
• Rip-off Risk: Finally, in the bond market there’s always the risk of getting ripped off. Unlike the stock market, where prices and transactions are transparent, most of the bond market remains a dark hole.
  There are exceptions. And average investors should stick to doing business in those areas. For example, the bond fund world is pretty transparent. It only takes a tiny bit of research to determine if there is a load (sales commission) on a fund. And it only takes another few seconds to determine if that load is something you’re willing to pay.
  Buying government debt is a low-risk activity as long as you deal with the government itself or some other reputable institution. Even buying new issues of corporate or muni debt isn’t all that bad.
  But the secondary market for individual bonds is no place for smaller investors. Things are better than they once were. The TRACE (Trade Reporting and Compliance Engine) system has done wonders to provide individual bond investors with the information they need to make informed investing decisions.
  But you’d be hard-pressed to find any scrupulous financial advisor who would recommend that your average investor venture in to the secondary market on his own.
  
  
  http://bonds.about.com/od/bonds101/a/bondrisk.htm