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Beating the Indexes
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Beating the Indexes
Investing in Convertible Bonds to
Improve Performance and Reduce Risk
Bill Feingold
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Vice President, Publisher: Tim Moore
Associate Publisher and Director of Marketing: Amy Neidlinger
Executive Editor: Jeanne Glasser
Editorial Assistant: Pamela Boland
Operations Manager: Jodi Kemper
Assistant Marketing Manager: Megan Graue
Cover Designer: Alan Clements
Managing Editor: Kristy Hart
Senior Project Editor: Lori Lyons
Copy Editor: Karen Annett
Proofreader: Debbie Williams
Indexer: Lisa Stumpf
Senior Compositor: Gloria Schurick
Manufacturing Buyer: Dan Uhrig
© 2012 by Bill Feingold
Pearson Education, Inc.
Publishing as FT Press
Upper Saddle River, New Jersey 07458
This book is sold with the understanding that neither the author nor the publisher is
engaged in rendering legal, accounting, or other professional services or advice by pub-

lishing this book. Each individual situation is unique. Thus, if legal or financial advice or
other expert assistance is required in a specific situation, the services of a competent pro-
fessional should be sought to ensure that the situation has been evaluated carefully and
appropriately. The author and the publisher disclaim any liability, loss, or risk resulting
directly or indirectly, from the use or application of any of the contents of this book.
Opinions expressed are those of the author and do not necessarily reflect those of BTIG LLC, its
parent, affiliates, partners, members, officers, or employees.
FT Press offers excellent discounts on this book when ordered in quantity for bulk purchases or
special sales. For more information, please contact U.S. Corporate and Government Sales,
1-800-382-3419, For sales outside the U.S., please contact
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Company and product names mentioned herein are the trademarks or registered trademarks of their
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All rights reserved. No part of this book may be reproduced, in any form or by any means, without
permission in writing from the publisher.
Printed in the United States of America
First Printing May 2012
ISBN-10: 0-13-288594-8
ISBN-13: 978-0-13-288594-2
Pearson Education LTD.
Pearson Education Australia PTY, Limited.
Pearson Education Singapore, Pte. Ltd.
Pearson Education Asia, Ltd.
Pearson Education Canada, Ltd.
Pearson Educación de Mexico, S.A. de C.V.
Pearson Education—Japan
Pearson Education Malaysia, Pte. Ltd.
Library of Congress Cataloging-in-Publication Data
Feingold, Bill.
Beating the indexes : investing in convertible bonds to improve performance and reduce risk / Bill

Feingold.
p. cm.
Includes bibliographical references and index.
ISBN 978-0-13-288594-2 (hardback : alk. paper) ISBN 0-13-288594-8
1. Convertible bonds. I. Title.
HG4651.F35 2013
332.63’23 dc23
2012004707
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For the three men I admire most:
Sky Lucas, Chris Sferruzzo, and Franklin Parlamis
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“Just because everybody’s doing it doesn’t make it right, and just
because nobody’s doing it doesn’t make it wrong.”
—Nicholas Arrigan
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Contents
Acknowledgments ix
About the Author xiii
Foreword xv
Preface xix
Introduction 1
Part I: Our Flawed Institutions
Chapter 1 Indexing and Its Discontents 7
Chapter 2 The Individual’s Edge 25
Chapter 3 Delusions and Illusions: Chasing
Performance in Our Lost Decade 43
Chapter 4 A Change Is Gonna Come 51
Part II: Convertibles, a Better Solution
Chapter 5 The Very Basics 61

Chapter 6 Reminiscences of a Convertible
Operator 69
Chapter 7 A Quick Review and Quiz 121
Chapter 8 Enough Already How Do Convertibles
Actually Work? 145
Chapter 9 What to Look for in a Convertible 177
Chapter 10 Convertibles For 201
I. Individual Investors 201
II. Financial Advisors 213
III. Nontraditional Institutional Investors 217
IV. Corporate Financial Advisors 231
V. S t u d e n t s 249
Chapter 11 Introduction to Advanced Topics 257
Suggestions for Further Reading 285
Glossary 287
Index 291
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Acknowledgments
I wouldn’t have been able to write this book without the support
of my family—especially my wife Jennifer, who understands how
I’m constantly wavering between the worlds of trader and writer and
puts up with it. My daughters Abigail and Elizabeth give me daily joy
beyond what I ever could have imagined. Any skill I have as a writer
comes mostly from what my father, a retired English professor, taught
me when I was growing up. His encouragement and praise are price-
less because he never hesitates to tell me when he thinks I could and
should have done better.
I wrote this book while sharing a Westchester office with my close

friend George Chuang, whom I first met at Lehman Brothers back in
the late nineties. George is one of the best friends and best business-
men I ever hope to know. He’s always graciously made a comfortable
desk, complete with a great Internet connection and all the trim-
mings, available to me during my sojourns away from Wall Street and
into writing. Thanks also go out to his team at USB Media Company,
especially Maggie Dobbins and Cristina Herrera.
Also in Westchester, my good friend Dan Riseman, the hardest
working man in education, has encouraged me by example and with
humor. Dan’s not only a uniquely capable teacher and businessman,
he’s also a fine writer, as his first novel, Dancing in Puddles, proves.
Don’t miss it.
To my horse-racing friends who have given me airtime on their
investing programs, Gary Greco, Ron Olinsky, and Derek Simon, I say
it’s always a pleasure to work with you. When it comes to friends I’ve
met through racing who also know a thing or two about the markets,
no one rivals Cary Fotias, the best handicapper I know, and a friend
of 25 years who’s always supported my writing efforts. I also thank
Mike Tolaney, another terrific handicapper and market student, for
his good words and encouragement.
I send out a special thanks to Tatyana Hube, who worked as a
convertible research analyst at Merrill Lynch for more than 12 years,
and graciously assisted with historical data. Other convertible pros
who have aided and encouraged me at various stages throughout
my career include Bart Baum, Brian Bentley, Sabina Bhatia, Frank
Bianco, Tom Birkett, Mike Brailov, Doug Burke, Kevin Cadden, Joe
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Castro, Mike Chizmar, Richard Cunningham, Scott DeCanio, Scott

Dillinger, Brian Donahue, Mark Edgar, Tom Felgner, Ron Fertig,
Doug Fincher, Eddie Finkelstein, Howard Fischer, Abby Flamholz,
Jeff Fox, Tony Frascella, Greg Freihofner, Richard Gatward, Salma
Gaya, Ryan Goldman, Eric Grant Jr., Darren Haines, Bob Hamecs,
David Harris, Rick Hochman, Steve Hodulik, John Idone, Alireza
Javaheri, Chris Keller, Jim Kenney, Asad Khan, Catharina Kusuma,
Rob Langer, J.P. Latrille, Bill Lee, Eric Lovelace, Steve McCormick,
Tom McCusker, Larry McDonald, Donough McDonough, Walt
McNulty, Greg Miller, David Muccia, Sri Nadesan, Howard Needle,
Charles Ng, Van Nguyen, Mike O’Brien, Scott Parrot, Curt Peters,
Jason Pinkernell, Adam Posnack, Pat Prendergast, Dave Puritz, Tim
Reilly, Sean Reynolds, Marc Rice, Mike Rinaldi, Pat Rossi, Jeff Saw-
yer, Bennett Schachter, Erich Shigley, Abe Shulman, Mark Steele,
Adam Stein, Mike Stewart, Scott Subeck, Ravi Suria, Mark Vanacore,
Tom van Buskirk, Joe Venn, Bob Wagner, Livia Wei, Dan White,
and last but certainly not least, Eric Xia, Rich Yakomin, and Pete
Yeranossian.
I thank Bernie Schaeffer, my fellow horseplayer and horse owner,
for giving me the chance to start writing about convertibles at his Web
site, Schaeffer’s Investment Research, back in 2006. I also give thanks
to Todd Harrison of Minyanville. You will not meet a better trader
or student of the market. But as good as he is in those areas, Todd’s
even better as a person. It’s a cliché, I know, but Todd is one of those
guys worthy of it. Todd gave me a forum at Minyanville, and his vision
of positive social change through financial education underlies this
book. Todd’s willingness to take risks other people wouldn’t touch led
to Minyanville’s alliance with Pearson and, by extension, this book.
At Pearson, I thank Jeanne Glasser, my wonderful editor, whose
encouragement and constructive, pointed criticism have made this
book far better than it would have been without her. We’ve had our

disagreements but her arguments have always been well reasoned.
For the book’s possible shortcomings, I take full responsibility.
Others to whom I owe gratitude include, but are not limited to,
Ravi Arcot, Robert Arnott, Joel Greenblatt, Mark Mitchell, Lasse
Pedersen, Antti Petajisto, Todd Pulvino, and John Succo. And thanks
to Scott Raab, my new friend and the author of the best sports book
I’ve ever read, The Whore of Akron. Scott has encouraged me to push
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acknowledgments
xi
for getting this book to the widest possible audience and to give myself
the benefit of the doubt, and then some, in taking on new challenges.
My lifelong buddies from Berkeley, Robert Sasaki and Serge Wilson,
have done the same.
My friendship with Emile Westergaard, an exceptionally talented
manager of health-care investments, a fine musician, and a remark-
able outside-the-box thinker, has helped both focus my thinking and
expand my horizons.
I thank John Seo, by a considerable margin the smartest person
I’ve met in the past 48 years, for his continued time and support and
his contribution of a foreword. Some friends and I used to joke about
the ego-to-accomplishment ratios of the people for whom we worked.
For some of our colleagues, the number seemed to approach infinity,
not a good thing. John’s ratio is as close to zero as can be calculated.
I particularly want to thank Lou Satenstein, Jon Stern, and Mike
Vacca. They stood by me during my first, most tentative baby steps
as a convertible trader back in 1994, and showed faith in me even as
I made every mistake conceivable. Not surprisingly, through ups and
downs, they continue to be among my best friends in the business.
A special thank-you goes out to my one-time colleague Elliot Sti-

efel. In the world of convertibles, Elliot is one of the best stock pick-
ers and pure traders I’ve met. We were a great tandem—I taught him
about options while he introduced me to charts. I like to think it was
a trade that helped both teams. Elliot has continued to be a terrific
friend and a great resource. Without his guidance and insight, this
book would be a far poorer effort.
I thank my colleagues on the BTIG convertibles team, Omar
Brown, Jake Creem, Bill Freihofner, Will Frohnhoefer (believe it or
not, the two of them are not related), Jeff Gould, Shannon Hsu (the
Asian guy with an Irish girl’s name who likes to speak with a Ger-
man accent), Dave Kallenberg, Mike Kirsh, Kevin McGuire, Mayank
Patel, and Donny Pizzutello, for all their assistance and encourage-
ment. I also thank the management team at BTIG, led by cofounders
Steven Starker and Scott Kovalik, as well as Anton LeRoy, Rick Blank,
and Jim Aniello, along with countless other employees of a great place
to work, for giving me the firm’s terrific stock platform from which to
preach the convertible gospel. To wit: As I write this, we are making
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Beating the indexes
plans for me to end my sabbatical by returning to BTIG as a con-
vertible strategist, helping translate the firm’s liquidity in convert-
ible-related equities into better prices for its convertible customers,
and bringing opportunities in convertibles to accounts traditionally
focused on stocks.
I’ve had many good friends in the convertible market over the
years, but three stand out, and this book is for them.
I begin with Sky Lucas, my mentor, boss, and friend. Sky is the
best trader I’ve ever known because he refuses to define the game
and the market in the penny-ante, shortsighted manner of the bench-

mark chasers. Nobody has a better vision of where things are going,
and nobody understands better the shortcomings of most professional
investors and how to take advantage of them. I never make a major
decision without asking myself “what would Sky do?” Of course, only
he knows for sure. Sky has always had confidence in me, even when
I’ve felt it was misplaced, and has encouraged me to keep sharing my
ideas in print.
Nobody will ever affirm my pride in spotting talent, teaching, and
mentoring more than Chris Sferruzzo. Chris was my clerk at my first
hedge fund. He displayed a blend of curiosity, street smarts, and work
ethic that you just don’t find. It became clear to me early on that Chris
had the goods to be a great trader—certainly a far better trader than
I was. Chris didn’t believe me when I told him he would be a huge
success, but fast-forward a handful of years, and he is now one of the
most important convertible managers on Wall Street. As with Sky,
Chris’ friendship is priceless to me.
Finally, much of my inspiration for pursuing a multifaceted
career comes from the example set by Franklin Parlamis. Trained as
an attorney, Franklin lightened the tedium of law school by writing
the underappreciated satire “The Passive Man’s Guide to Seduction,”
a hilarious send-up of pickup guides for nerds. Franklin went on to
work in Russia for a while before entering the world of convertibles,
almost on a whim, and going on to become one of the market’s most
successful managers. No part of a benchmark chaser, Franklin invests
when he sees value and sells—whether he owns the thing or not—
when he doesn’t. He trusts his own opinion and really doesn’t care
what anyone else says. We need more people in the business who
operate the way Franklin does. But there’s only one of him.
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About the Author

Bill Feingold began his Wall Street career in 1985 as a corpo-
rate-finance analyst with Dillon Read after graduating from Yale,
summa cum laude, Phi Beta Kappa in economics. Bill received Yale’s
Hadley Prize for being the top graduating social sciences major.
He earned his M.B.A. in 1991 with distinction in finance from the
Wharton School.
Currently, Bill is Managing Director and Convertible Strategist
at BTIG LLC in New York, having traded convertibles for the firm
before taking a leave to write this book. Bill was previously respon-
sible for managing a portfolio of convertible securities at Goldman
Sachs.
Between Goldman Sachs and BTIG, Bill contributed regularly to
the financial education Web site Minyanville and published his first
book, 2009’s The Undoing of Cowardice.
Before that, he was the senior partner and comanager of the
FrontPoint Convertible Arbitrage Fund from 2003 to 2005. From
2000 to 2003, Bill comanaged the Clinton Riverside Convertible
Fund, during most of which time the Fund grew substantially and
was one of the top performers in its strategy.
Between FrontPoint and Goldman Sachs, Bill served as a con-
sultant to Schaeffer’s Investment Research, a firm founded in 1981
and dedicated to the individual investor, with a focus on option-based
strategies. Bill created the Advanced Trading Center at Schaeffer’s,
designed for clients looking to expand their investment toolkits with
advanced option strategies, convertible bonds, and other techniques.
In the fall of 1999 and 2000, Bill cotaught the acclaimed Yale
seminar “Market Psychology and the Truth About Derivatives.” Bill’s
objective with the seminar was to provide liberal-arts students likely
headed for policy-making careers the skills necessary to get behind
the financial headlines and understand the real issues for themselves.

A native of New York City, Bill was raised in Berkeley, California.
He lives in Westchester County, New York, with his wife, two daugh-
ters, and two cats.
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Foreword
Some of the smartest money in the world makes a lot of its money
in convertible bonds by not telling you what Bill Feingold tells you
in the book you now hold in your hands. I do not know how to put
it more directly than that. Convertible bonds have a marvelous his-
tory of making serious money for those who understand their unique
potential. And you don’t need supercomputers or a staff of elite ana-
lysts to succeed in convertible bonds. Sure, that kind of firepower
helps if you are trying to raise, or continue to hold on to, big money
and impress folks who are charged with doling out billions of dol-
lars to the fanciest investment managers they can find. By the way,
I’m not putting those managers down because I’m supposed to be
one of those fancy managers myself, but having just read Beating the
Indexes, Bill’s second book, I think he makes a compelling case that
getting started in convertible bonds is easy—certainly much easier
than you might think.
Consider the case of a college student, who started trading con-
vertible bonds out of his dorm room and turned himself into a mul-
tibillionaire and head of one of the most famous hedge funds in the
world. Of course, many of you already know that I’m talking about
Ken Griffin. Here, I note a small, incidental connection between Mr.
Griffin and me, as shameless name-dropping—which normally makes
me cringe—is one of the most efficient ways to establish one’s cred-
ibility within the brief space of a foreword. With all the gravitas of

simultaneous appointments at Harvard, Oxford, and Stanford Univer-
sities, the superhistorian Niall Ferguson in his The Ascent of Money
mentions prominently only two hedge funds, as far as I can recall from
my reading, in his sweeping, global history of the financial world: Mr.
Griffin’s and mine. Mr. Griffin’s mention is easy to explain because
his career in convertible bonds has been amazing, but I have no idea
how a relatively smaller firm that trades hurricane and earthquake
bonds (we lose money when they occur) also caught the attention of
one of the most respected historians of our day. Yet, I will make a wild
guess: Maybe the point of singling out Mr. Griffin’s firm, and the firm
I cofounded with my brother ten years ago, was perhaps that one of
the most innovative and truly profitable functions that hedge funds
perform is making investments that bridge previously unconnected
worlds.
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Convertible bonds fuse together the worlds of stocks and bonds;
and the securities my firm trades link the worlds of natural catastrophe
insurance and bonds (catastrophe bonds). You may think stocks and
bonds are not so obviously disconnected as earthquakes and bonds,
but I will tell you that other than the common usage of the phrase
“stocks and bonds,” stocks and bonds are the proverbial “dogs” and
“cats” of the financial world—respectively, of course. The two mar-
kets are polar opposites, starting with the fact that they are often at
each others’ throats in the corporate finance structure: What is good
for stockholders is often bad for bondholders and vice versa. Although
some alignment of interest holds, there’s still a lot of bad blood there,
trust me. Stocks and bonds, as you probably know, are a few tens of
trillions of dollars in market size each. Currently, at a relatively much

smaller few hundred billion dollars in market size, the convertible
bond market is a kind of love child that only the nanny, its private
tutors, and a handful of trustees seem to know about (remember that
the parents are absolutely loaded). These days especially, stocks are
wild and bonds have impotently low yields. As such and after reading
this book, I find it credible to believe that opportunities for investors
in convertibles, particularly individual investors, may be just about as
high as they were 25 years ago, when trading convertible bonds out
of a college dorm room might have struck most casual observers as a
pretty innocuous, if also odd, activity.
Bill Feingold and I first met in 2006 at a Wharton Hedge Fund
Network event in New York. I did not attend Wharton, as did Bill;
I was just a guest speaker at the event. We hit it off instantly. His
father was a university professor; so was mine. As a consequence, we
both had the same kind of value-oriented, market-aware approach
to investments that you might expect from a couple of well, there’s
no good way to say it a couple of nerds. Bill and I each had traded
billions in nontraditional bonds over the years before we met, so we
eagerly got down to comparing notes. I’m afraid I’ve learned much
more from him than he from me. Bill’s first book, The Undoing of
Cowardice, had a significant impact on my approach to investing. To
use a sports analogy, another Bill influence, Bill’s first book helped
me hit more home runs while striking out less in my own work, so
naturally I was excited when he told me he was writing another book
that took his ideas even further. Having just read this newest book, I
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Foreword
xvii
can tell you that Bill has outdone himself and that this is the best book
of its kind I have ever read.

Books on finance typically come in two flavors: One kind is a col-
lection of stories; the other, a collection of equations. Some elite trad-
ing firms will mandate that new employees read a particular book,
but to my knowledge and in my experience, such mandatory reading
comes from only the first category, not the second. Perhaps this is
because, to modify an Edison quote, “Market genius is one percent
mathematics, ninety-nine percent experience.” Most smart money
traders are not born, but are mentored by seasoned traders. I believe
Bill’s second book represents a potentially new form of finance text-
book because he fuses stories and math together in a natural way
that comes close to replicating the experience of spending time on
the desk of a patient and talkative trader. For those of you who have
experienced this already in another market, you will recognize what
I am talking about as you make your way through this book. You will
note, too, how you are even given instructions on proper broker eti-
quette and how to work an order in a constructive manner. You have
to admit, that’s impressive.
Before closing, my one reading tip for you is to go back eventu-
ally to all the subsections of Chapter 10 that you may have skipped
because they were not directly addressed to your intended role in the
market. This is your chance to understand more fully how different
players approach the convertible bond market from different angles.
Ultimately, this notion of complementing needs among a variety of
players in the convertible bond market actually pervades the whole
book if you read closely for it. This is a refreshing departure from
the traditional “beat the market at its own game” mentality, which is
tiresome and not long sustainable by even traders armed with super-
computers. I can’t explain this better than Bill has, so read Part I to
understand to how to beat ’em by not joining ’em.
And speaking of supercomputers, mine are calling out to me

now, reminding me of my duty to be a fancy investment manager,
so I will be brief: If you are looking to enhance your related business
opportunities by reading this book, I think this is a good way to go
because you’ll be conversant in convertible bondspeak in no time,
which should get you quickly on your way. If you are reading this book
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as your first introduction to markets and trading, I envy you. Not that
I’ve got anything to complain about, but I wish this book were around
when I got started in markets 20 years ago.
Dr. John Seo
Cofounder & Managing Principal
Fermat Capital Management, LLC
Westport, Connecticut
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Preface
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I’ve been caught between worlds and professions for as long as I can
remember. As the son of a Berkeley English professor, I’ve long been
connected with teaching and writing. But as someone who bet his first
horse at age ten and was immediately hooked, I’ve also been drawn
to anything that involves estimating value and odds and dealing with
risk.
My father’s struggles with academic politics—approved for ten-
ure by his colleagues, he had to win a year-long struggle with a univer-
sity budget committee to make it official—convinced me not to leave
my future to such whims. Instead, I headed for Wall Street, hardly
known for job security. I figured I would make some money, or try to,
and then go into teaching.
Knowing nothing about my new field, I took a job as a junior invest-
ment-banking analyst. It seemed like that was what the “smart” kids
did out of school. But grinding out endless spreadsheets in the days
of sharing primitive personal computers was not my thing. Instead, I
was fascinated by how excited my roommate, who was trading con-
vertible bonds, seemed to be about his job. Convertibles—securities
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Beating the indexes
combining the protection and income of bonds with the upside of
stocks—were gaining in popularity and starting to emerge from the
recesses of Wall Street.
So when I went to business school, after a detour as a semiprofes-

sional horseplayer, I positioned myself as a trader. After an internship
at Goldman Sachs and a stint doing options research, I got my shot as
an options trader with PaineWebber, which led naturally enough to
convertible bonds. Convertibles, you’ll find, are a fascinating hybrid
investment with a little bit of everything, including options. And I
loved options.
Even then, though, I still had the writing bug. At PaineWebber,
I wrote a piece comparing option trading with stages of a basketball
game. It nearly got me fired because I knew my boss wouldn’t approve
and thus distributed it without his permission. But it was worth it. It
set me on a path of writing about finance in a manner that the intel-
ligent, but unfamiliar, reader will find accessible and fun.
After a handful of years as a convertible trader, the writing bug
came back to me. I found a way—for a short time, anyway—to have it
double as my livelihood. The convertibles analyst at Lehman Brothers
decided he wanted to be a trader. Some former colleagues of mine
were running the convertibles effort at Lehman, and after some poli-
ticking and doubts, they gave me a shot at moving into research and
writing about convertibles.
It was fun for a little while. I tried to change the nature of con-
vertibles research. Up until that point, most convertibles research
involved saying, “We like this stock—and by the way, the company has
a convertible, so you should buy it.” I tried to make the research more
about the convertible itself, and how its price moved after adjusting
for the stock. In short, I was trying to write research for the more
quantitative, hedge-fund types.
Over time, after running a couple of convertible hedge funds and
spending many more years in the field, I came to believe that con-
vertibles are actually far better when used more simply than the way
hedge funds do. It struck me that expecting convertibles to hold up

to the requirements of hedge funds—needing them to perform every
day according to the complex models the funds used—was unrealistic
and a recipe for trouble. At the same time, for investors not so worried
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PreFace
xxi
about day-by-day, tick-by-tick price changes, the value of convertibles
became clearer and more persuasive than ever.
My stint at Lehman doing convertibles research didn’t last long,
mostly because trading was still too much in my blood. But after my
hedge-fund stints and a short period as a proprietary trader at Gold-
man Sachs (just in time for the financial crisis), I went back to writing.
I began a column for Minyanville, for Todd Harrison, whom I’d met
through a mutual friend. I realized that I had the makings of my first
book, The Undoing of Cowardice, which was published in 2009. In
Undoing, I voiced my opinion that the popular impression of Wall
Street—as a world of unchecked, wildly aggressive risk takers—was
at odds with the way the business really works. As Wall Street was
collapsing, I wanted people to understand that a lot of the volatil-
ity comes not because professional investors take too much risk, but
because they tend to take the same risks—and they do this because
it’s the logical course of action given their incentives. Most of them—
with notable and critical exceptions—don’t want to stand out. They
want to keep their jobs. Losing money is okay as long as everyone else
is doing it, too.
In Undoing, I introduced readers to the world of convertible
bonds. I was writing columns on convertibles for Minyanville, trying
to show readers that the risk/reward trade-offs in that market were
remarkable and available only because of the forced selling by hedge
funds. But it wasn’t the primary theme of the book. After I published

Undoing, I went back to trading convertibles at a terrific little firm
called BTIG. I was happily minding my business there when Todd
called me. He told me that Minyanville had formed a joint venture
with Pearson, the big British publishing outfit responsible for one of
my favorite publications, the Financial Times. Would it be okay, Todd
asked, if Pearson got in touch with me? They liked some of the stuff
I’d written for his site.
I agreed, and soon I heard from Jeanne Glasser, who would
become my editor. I was impressed to learn that Jeanne had worked
with Mohamed el-Erian of PIMCO, whom I subsequently had the
pleasure of meeting, and whom I consider one of the two smartest
people in the world of finance. I gave Jeanne a copy of Undoing. After
reading it, she asked me to submit a proposal for another book, and
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Beating the indexes
I began to get excited. After a bit of give-and-take, we agreed that I
would write a book focused on bringing convertible bonds to a new
audience, while also touching on some of the themes of institutional
paralysis driven by an excessive focus on benchmarks and sameness
that I began in Undoing.
They teach you in business school that having the greatest product
in the world won’t do you any good if you don’t market it properly. And
convertibles, as an investment, have been singularly mismarketed.
First, most of the people who should be selling them barely under-
stand what they are. You shouldn’t be allowed to sell securities if you
don’t understand the basics of stocks, bonds, and options. That’s why
brokers are required to pass the Series 7 licensing examination. And
if you understand these things, you should be able to understand con-
vertibles well enough to explain them to your customers. But because

they require a bit more effort than stocks or traditional bonds, con-
vertibles fall by the wayside.
Second, the securities industry has failed to make the effort to
show its customers that convertibles provide all the attributes they
seek: upside, income, and protection. It really doesn’t need to be a
whole lot more complicated than that.
I’m trying to change this.
I think the time for a change has come. The wildness of the equity
markets is scaring people away, people who know they need the ben-
efits of stocks but understandably can’t stomach the downturns. One
of the best solutions is out there for them—convertibles.
A problem some people have with convertibles is that in the short-
term they often misbehave. Even though they have built-in defenses
making them far safer than stocks, you sometimes wouldn’t know it
during the downdrafts. But this problem, as I hope to illustrate, is
not with the convertibles themselves but with the investors who buy
them.
This difference may seem too subtle. And if you’re an institutional
investor judged by short-term performance measures, the distinction
may be effectively nonexistent. But if you have a legitimate multiyear
time horizon, it is absolutely critical.
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PreFace
xxiii
In fact, I think it’s so important to understand this distinction that
I’ve dedicated the first part of this book to understanding the motiva-
tions of institutional investors. Although most of them are intelligent,
capable people, the infrastructure of their professional lives forces all
but the best and bravest to run in packs. It forces talented athletes to
play like scrubs. For this reason, I think you can get the most out of

convertibles by learning to buy them individually instead of through
a fund.
Having said that, there’s nothing wrong with buying a profession-
ally managed convertible fund. Some are quite good. But even if you
do, as the saying goes, you’re likely to be a far more satisfied customer
as an educated consumer. That’s where this book comes in.
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