If you haven’t read Michael Lewis’ Liar’s Poker, you need to. It’s the story of the real market for bonds and how much of what we take for granted got started and still gets done day after day.

And it also offers a glimpse inside a culture I used to operate in a bond trader, which included a mentor–or so-called rabbi–to every new desk slave in bond trading rooms from London to New York and beyond.

But the bottom line in the book is that equities are for losers and real money is all about bonds. And it shows the two camps of investors, the first being those who know all about bonds, how they can drive an entire portfolio into the black and keep it there year in and year out. The other camp doesn’t want to even hear about bonds–ever–and in Michael’s book they go down to equities in Dallas.

You’ve joined us in the first camp, and for good reason. Take a gander at our Taxable Portfolio. You’ll find a collection of prime closed-end bond funds that are for more than just diversification. BlackRock Income Opportunity, PIMCO Strategic Global Government, DWS Multi-Market and Templeton Emerging Markets have collectively generated a consistent double-digit performance over the years, including the past 12 months, which have been anything but certain for most in the stock markets.

That may not get your attention until you notice the dividends that add to the cash pile each month. Those same bond funds are running at more than 7 percent.

Let’s put this into perspective: The benchmark intermediate-/long-term US Government market only managed a total return for the last 12 months of around 3 percent. For those in the “we-only-buy-stocks” camp, the S&P 500 barely managed a 10 percent gain for the last 12 months. Do we have your attention now?

Bonds Beat The Market

Many are concerned with the US Federal Reserve’s Open Market Committee (FOMC) raising rates lately. So how and why are bonds buys?

As with the stock market, there’s always a collection of solid companies with great stocks that are faring well, regardless of the S&P’s performance. Not all stocks are the same, and neither are bonds.

As mentioned above, the benchmark we and the market use for gauging the core of the bond market hasn’t been performing all that well. But it’s been much better for investors who went long term, rather than those who heeded the tired old advice to stay short term. The latter group felt the full brunt of the 2 percent-plus climb in yields driving prices down for the count during the last 12 months. Buying bonds is about much more than not losing more than the other guys.

Building A Base Of Bonds

The first step in building your bond portfolio is to focus on establishing a firm base of taxable bonds. The best place to start is with our Taxable Portfolio members, adding our collection of closed-end bond funds and our individual issues. The bond funds continue to deliver on our key objectives–long-term growth and consistent cash payments.

Each of the funds has a mix of domestic higher-paying US government and agency bonds, as well as a collection of bonds from key favored markets beyond our borders. This mix enables us to keep making money, even if the US bond market stalls out or has troubles with rising short-term interest rates.

In addition, just like a successful company with stock outstanding, each bond fund has a little debt funding of its own. This means they can better manage their capital to maximize higher returns, including dividends.

We focus on closed-end bond funds rather than open-end funds, as we detailed in last month’s Talking Points feature article. And remember not to just cherry pick one or two funds–buy the lot of them. In the Taxable Portfolio, we list our buy targets for each fund.

On To The Individuals

Once you have the base of the bond funds, add some of our individual bonds from the Taxable Portfolio. Our collection is focused on the higher-yielding sovereign market for good reason.

This segment of the bond market has the best combination of high yields and controlled risks. While not as safe as US governments, these foreign governments (e.g., Mexico, Brazil, Iceland and Colombia) have some underlying guarantees.

No major market that’s been working in the mainstream bond market has completely gone bankrupt in recent history. This means that even if Mexico, for example, has some near-term issues, the likelihood of us losing our capital is controlled.

Why? It’s simple–governments don’t go broke. They work out their debts. Regardless of whether we’re flat out wrong about our picks and don’t move along when we need to, we’ll still be able to work it out if Armageddon strikes.

Our recommended individual issues are benchmark bonds for their respective markets. Each should be relatively easy for you to buy from most major brokers.

However, if your broker doesn’t have the exact bond we recommend, it’s fine to purchase a similar one. You just need to own bonds with similar maturities in these local markets.

Note the ISIN number is the universal tracking number for these bonds. Many of you may be used to CUSIP numbers, which are only for US securities. Some of our bonds do have CUSIPs–but not all.

However, as long as you have the ISIN, your broker’s trading desk will be able to track down these bonds and execute your trade.

Broker 411

We’ve contacted many of the popular brokers many of our subscribers are using to learn more about the requirements for establishing an account with them. Below we detail the key information you need to be aware of when using them to execute your bond trades. (You’ll also find this information in our Broker Guide.)

Every one of the brokers we contacted–and we acted like an investor interested in starting a new account, not members of the financial press–offers general accounts designed for investing in stocks, mutual funds, bonds and more, all with low account balance requirements. In doing our research, though, it was clear that even if they all offered good deals to get your money, not all provide good service for using your money.

Charles Schwab’s representatives were among the more knowledgeable to whom we spoke. You’ll need to open your account with at least $2,500.

Bond research is easy–Schwab offers both a CUSIP-based search engine (i.e., if you know the exact bond you want to buy) or a more general search engine that lets you select from various criteria, such as date to maturity, issuer, etc. Schwab acts as principle, so its fees are mixed in with your purchase price. That makes identifying transaction fees more difficult, but this is the norm for the industry.

Fidelity’s representative was also helpful and more on the ball than many of the other brokers we contacted. Like Schwab, you’ll need $2,500 to start an account. One of the best benefits of Fidelity is that it has a transparent pricing system, where each bond purchased carries an execution cost. For any given trade, however, you’ll be charged a minimum of $19.95 and a maximum of $500.

Although we mention additional brokers below, none were able to match the service or options that Schwab and Fidelity do.

E-Trade representatives weren’t helpful, although they do offer bond services and CUSIP searches. Fees are generated through E-trade acting as principle, and only $1,000 is required to start an account.

Ameritrade also offers accounts for a $1,000 minimum. Although accounts let you trade bonds, it’s not Ameritrade’s focus. That’s clear when you learn the company doesn’t offer foreign bonds–a big problem if you plan on using that account for many of our recommendations–and you can’t buy bonds online. Instead, you’ll need to call the broker up to place orders.

Also, Ameritrade doesn’t offer a search engine or CUSIP checker. Fees are $5 per bond if you buy less than 50 and $2.50 per bond when you buy more than 50, with a $40 minimum–both of which are significantly more than what other brokers charge.

Last, Scottrade requires $500 to open an account. It charges via being principle, but requires a $10,000 or more purchase. Like the advanced bond services, Scottrade lets you search bonds either by CUSIP or a number of other criteria that can help you narrow down a possible bond investment.

Risk Pays

The following is free market commentary Neil George has written for his By George subscribers. The advice and recommendations below are simply for your benefit as investors. And recommendations listed below are not current Bond Desk recommendations, nor will they be followed and updated on a continuous basis. See above for the current Bond Desk recommendations and advice.

When nearly every self-appointed guru is telling you all about how risk should be scorned in any bond portfolio–from corporate junk bonds to emerging market bonds and even some in the subprime mortgage lending market–I’m going to tell you to buy and keep buying lower credit-rated bonds.

Don’t get nervous and hit the delete key; instead, read on.

Just because most investors think lower-credit rated bonds, otherwise referred to as junk, are bad meaning doesn’t mean that all of them are destined for the scrap heap. Instead, the reality is that there are many lower-graded bonds out there because the mainstream market and all those gurus aren’t doing their homework on the issues.

Traditionally, the term has been used to signify bonds and stock from dubious companies and other questionable issuers. Low rated by credit rating companies, these investments are supposed to have enticing–if not teaser–yields, only to end up going belly up and taking investor’s wealth with them.

But reality is often a whole different story than what we hear and read from the usual suspects down on Wall Street. The results have been that many true successes in the bond market haven’t been from supposedly super-safe US Treasuries but rather from bonds and bond funds with lower ratings.

But you can’t just throw money at a segment and hope you get it right. Just like you can’t just hope that investing in top-rated biggie names will make it for you, you can’t just jump into the unknown of lower-rated companies and think you’re going to clean up.

The proof can be seen in the broader market of lower-grade bonds. For the past five years–not just a quarter or two—we’ve been scoring with bond funds that invest in corporations and governments around the world with ratings below AAA.

The reason we focus on the lower-credit part of the market is that there’s not only a higher yield now but there’s a lot more potential for gains—if we do our homework correctly on understanding the issuers.

On the other side, if you’re just sitting with AAAs, you’ve got nowhere to go but down—your bonds are priced to perfection. The only way you’ll gain is if you make the right call on inflation and the general market; both are usually sucker bets.

When it comes to bond buying, it’s not just about the return on investment but also the return of investment. And again, lower-graded bonds are coming through more and more by losing less.

If you look at the default rate in the speculative grades of bonds around the world, fewer and fewer are leaving their investors holding worthless pieces of paper. Last year the overall default rate for these bonds continued to run at a fraction of the multi-decade average, resulting in a mere 1 percent-plus of all risky bonds defaulting.

This, in turn, should only help to propel the prices of quality lower-grade issues even higher throughout 2007, continuing the string of outperformance over the perceived super-safe segment of the market.

This dynamic is apparent in both the lower-grade corporate bond indexes, as well as the lower-grade emerging market indexes. They confirm that our picks remain on the right path.

During the past five years, both high-yield corporates tracked by the Bank of America and high-yield governments tracked by Bear Stearns keep trouncing the underlying US government market, with the gains building in the past few years.

The old adage of income investing—the amount of interest you want should depend on whether you want to eat well or sleep well—still applies. But the better investments—those that should give you restful, not restless, nights—aren’t found in the bond mainstream, just as with our stocks.

There are two ways to work with us on cashing in on our measured risk bonds plays inside the Cash Cows section of the Personal Finance Growth Portfolio the Bond Desk Taxable Portfolio.

The first is perfect for building an investment base. That section is appropriate for every investor–from the biggies to those building up their wealth–via our closed-end bond funds, which fit nicely and easily into your own portfolios.

The second route is courtesy of some of my favorite individual holdings both inside the US corporate market and some of the select foreign government holdings inside the Bond Desk Taxable Portfolio.

Those who’ve been following along have been enjoying the biggie cash flows from higher yielders while also slowly and steadily ramping up gains in bond and bond fund prices. In the meantime, everybody else seems to have been talking and writing about doing the opposite.