Harry Newton's In Search of The Perfect Investment
Technology Investor. Harry Newton
9:00 AM EST, Thursday, April 9, 2009.
bonds are down $59,000," Muriel said sadly.
the heck?" I yelped.
bonds are bigger than stocks. But they trade much less actively. Sometimes
my collection doesn't trade for days. If I own Citibank stock (God forbid)
I can see what I'm worth by checking the price it's trading at. Not so for
my bonds. When Deutsche Bank sends me a monthly statement or posts numbers
on my account on-line, they're using creative numbers. They make the numbers
using "matrix pricing." Nobody knows exactly how that works. The
computers do it. But it's like looking at a bundle of similar duration bonds,
checking their yields and then applying the yield number to all the "similar'
aren't really "similar." Here's yesterday's chart. You'd expect
the riskier ones to be yielding more. And they usually do.
real question is "Why do I care what my muni bonds are worth?" I
would only care if intended to sell them. But, if I buy bonds, I don't
intend to sell them, I intend to let them mature or be called. When I get
the cash money from being matured or called, then, I can decide what do. And
that -- if you read yesterday's column -- would be to buy new bonds.
are two ways of buying a portfolio of bonds. You can buy a laddered portfolio.
This means you have bonds maturing every year or so, going out as long as
you want. Or you can buy a dumbbell portfolio. You own lots of very short-term
bonds and the rest very long term. Neither portfolio will lose you money since
the idea is not to sell, but to be redeemed into higher-yielding bonds. What
you buy depends on how you feel interest rates will move in coming years.
of us believe inflation will skyrocket in coming years (as a result of all
the "stimulus" money printing by the Fed). And we believe we could
see yields as high as 9% on longer-term bonds. To achieve this, the price
of bonds will fall dramatically. For us to take advantage, we'll need to have
cash sitting around.
should not pooh-pooh this projection. In the early 1980s 30-year, long-term
muni bonds were yielding 15%. Inflation was rampant. Carter was in the White
house. I don't think it will go that high now, but it could hit 8% to 9%.
And that's triple tax-free. And since taxes are going up, that's very good.
I sold my business in 1997, Todd said "Clip coupons. Go play tennis."
It was good advice then. It's excellent advice now.
The way you figure what your bonds are worth: Call up and ask for three sales
goes on with stockmarkets? A neat explanation is from Tuesday's
newsletter from Richard Russell of Dow Theory Letters writes:
April 7, 2009
-- The market situation has seldom been more confusing. Many analysts are
convinced that we are in a new bull market. Others (me included) believe
we are in a bear market correction (rally).
the confusion, I'm going to step out and make a few guesses (might as well,
since nobody really knows what's going on).
(1) I believe
that we're in a secondary (upward) correction of a bear market. I'm going
to guess that this correction could rise further or at least last longer
than most people are expecting. A bear market rally is supposed to convince
the majority that a new bull market has started. The rally will often continue
until a large number of investors are back on board, and then the bear will
kill them as it fades away, leaving the new optimists high and dry and with
(2) Gold is
in a downward correction of its primary bull market. Gold may decline or
stall until it convinces the majority of gold-fans that the gold bull market
has died. Holders of "paper gold" and gold futures and options
will be frightened out of their holdings. What we're experiencing now is
the big correction that often occurs prior to the third speculative phase
in gold. Holders of physical gold (coins, bars) will do best, since they
will tend to hold on to their gold positions no matter what.
So what are
the markets trying to do? They're doing what they always do, keep investors
in the bear market and keep investors out of the gold bull market. Why would
they do that? Because that's the very nature of markets. Markets tend to
thwart the majority. And that's logical and self-evident. If markets existed
to make money for the majority, then most market participants would be millionaires,
and we know that sadly, that is not the case.
be compared with gambling at Las Vegas. When you gamble at Vegas, you are
bucking the house odds. Which is why if you play long enough at Vegas, you
will always lose your money. Vegas is stacked that way. Las Vegas is constructed
to separate players from their money. The stock market is a bit classier.
When you buy stocks, you are at least buying something. It feels good to
say, "I bought 500 shares of Johnson & Johnson."
When you put
your money down at Las Vegas, you are not buying anything, but with a slim
chance (the odds are against you) of winning more than you put down. Las
Vegas is one of the few places where you pay your dollars, and are guaranteed
to receive NOTHING of any value. "Gambling is a tax on people who don't
understand money," that's my favorite adage about gambling. Investing
in the stock market is a long-term tax on people who want something (profits)
without doing any real work for those imaginary profits.
is the first day of Jewish Passover. Part 1.
An elderly man in Miami calls his son in New York and says, "I
hate to ruin your day, but I have to tell you that your mother and I are divorcing.
Forty-five years of misery is enough."
are you talking about?" the son screams.
stand the sight of each other any longer," the old man says. "We're
sick of each other, and I'm sick of talking about this, so you call your sister
in Chicago and tell her." And he hangs up.
son calls his sister, who explodes on the phone, "Like heck they're getting
divorced," she shouts, "I'll take care of this."
She calls her
father immediately and screams at him, "You are not getting divorced!
Don't do a single thing until I get there. I'm calling my brother back, and
we'll both be there tomorrow. Until then, don't do a thing. Do You Hear Me?"
And she hangs up.
The old man
hangs up his phone and turns to his wife. "Okay," he says,"
They're both coming for Passover and paying their own airfares.
is the first day of Jewish Passover. Part 2.
Moses is leading the Israelites away from Egypt to the Promised Land. He arrives
at the Red Sea. Things look bleak. In the distance the Egyptians are gaining.
In front is the Red Sea.
calls for Vice President of Engineering. "Build me a bridge."
Engineering: "Boss, I'd love to. But look around. There are no trees.
No nothing. We're in a desert."
calls for his VP sales. "Go rush back to the Egyptians. Work a deal."
Sales, an hour later: "Sorry, boss. No deal. They want us dead. End of
Moses calls for VP Public Relations. "What can you do for me?"
PR thinks and says, "Here's the answer, Moses. You stand on this rock.
You lift your hands to the sky and you intone, 'God, make the Red Sea part.'
It will part. You will take the Israelites through the gap. You will see another
big rock on the other side. You will climb on it. When you see the Egyptians
in the Red Sea, you will hold your hands to the sky and you will say, 'God,
make the Red Sea come together.' The Red Sea will come together. All your
enemies will be drowned. And you can proceed peacefully with your people to
the Promised Land."
looks quizzically and asks, "This is going to work?"
Public Relations, "Boss, I have no idea. But, if it does, I'll get you
three pages in the Old Testament."
This column is about my personal search for the perfect
investment. I don't give investment advice. For that you have to be registered
with regulatory authorities, which I am not. I am a reporter and an investor.
I make my daily column -- Monday through Friday -- freely available for three
reasons: Writing is good for sorting things out in my brain. Second, the column
is research for a book I'm writing called "In Search of the Perfect
Investment." Third, I encourage my readers to send me their ideas,
concerns and experiences. That way we can all learn together. My email address
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