A Strategy of Avoidance Works Best

It’s been said that if you want to carve a statue of an elephant, start with a big slab of stone and just cut away everything that doesn’t look like an elephant.

That’s the approach you need to use if you want to prosper by surviving with convertibles. Think more about what you don’t want than what you do.

These are the things you avoid:

• Companies with significant debt other than the convertible

• Financial companies (sharp downward moves in the stock feed on themselves, as with Lehman)

• Airlines (heavily indebted, with convertibles only marginally better than stock, and highly susceptible to unavoidable costs as well as the business cycle)

• Companies with low equity market capitalizations relative to the size of the convertible