In Search of the Perfect Investment

I bought a New York muni bond in mid-2008 for $93.68. . When I bought it (thank you Todd), it was yielding 6.7% triple tax free.  It’s been paying me that yield ever since. It’s now worth $110. That’s a pretty decent return. Please don’t tell me I could have done better with equities. In mid-2008, the equity market was collapsing. and it’s only now that it’s a smidgen above where it was in mid-2008.

I have a particular preference for bonds (and high-dividend paying stocks) because I’m old, don’t have a day job and need the income. (This column is education and amusement, not a money-earner, even with those ridiculous Google ads on the side, which pay babkash —  yiddish for basiccally nothing.)

Muni bonds should be important to everyone else, too. Yesterday I played financial adviser to a friend who’s very successful in real estate, but lousy with stock picking. He actually bought Facebook at $41 and is still holding it. (I don’t make this up.) Facebook closed last night at $20.88. He’s down almost 50%. I wrote my friend:

If I were your financial adviser I would advise you to think of your investments as a simple three-fold strategy:

1. Your real estate business. That’s where you take the BIG risks and reap the BIG rewards. It’s what you control. And it will work because you control it. And because you like doing it. And because you’re good at it.

2. Your state’s tax-free muni bonds. Whenever you have free cash you should buy muni bonds. You can do this on your own. Or I can recommend an excellent muni bond-only boker (Todd). Think of your muni bond portfolio as  your rainy day/retirement money. This is money you may need if your buildings’ loans come due and you can’t refinance them adequately and could end up handing the keys to your lender — if you can’t write a check, But if you have some bonds, you can sell some, write the check and not lose your buildings. I instance the fact that commercial building prices are now 50% of what they were during the peak 2005-2006 period. So it could happen again. All we need is a continuation of this awful economy, more mess in Washington, and a Black Swan event —  Greece, Spain and/or Italy leaving the Eurozone… or maybe Germany leaving it? Or Israel and us declaring war on Iran.

3. Your own personal real estate. Your various houses, etc. You keep track of these because you don’t want to over-invest in personal property to the point where you’ll never get your money out. Too many rich people have too many houses, which are hard to manage and are totally illiquid, should the economy turn down further. Ditto for collections of contemporary art and expensive Patek Philipe “complications” watches.

You should NOT have any investments in equities, i.e. listed companies. You should not have any with a manager or do it yourself. It’s a serious waste of your time. It’s a myth that managers don’t involve your time. They do.

To repeat, you should not have any investments in equities. You do not want the agita. Moreover, equities have basically gone nowhere for 20 years. Why fight the trend? You don’t have the discipline. You know about inviolate stop losses (I’ve lectured ad nauseum) , but you still haven’t sold your Facebook. (I’m still short.)

You take your risks on your real estate business. You reap a few rewards, which you put into muni-bonds. They are safe, secure and easily saleable.

Now let’s go back to my bond. If I bought my bond (or equivalent) at today’s price of $110. I would be earning 4.55% yield triple tax-free. That’s not as good as AGNC, NLY, MiTT, ARR or any of the high-yielding mortgage REITs. But it’s safer and better than a slap in the belly with a cold fish.

There are issues with buying muni bonds today.

First, and the biggest, “one day rates will rise.” Everyone tells you that. (they’ve told me that for the past three years.) And one day they absolutely will and the price of bonds will fall. But “one day” seems like a long way away. The Fed told us this week it was holding rates at today’s low “screw the retirees” rate until at least late 2014. That gives you plenty of time to sell your bonds, and, hence, limit your capital loss.

Second, bond brokers will give you a lecture about “yield to worst” (i.e. the next call) and yield to maturity — when you get back $100, not the $110 you paid. They amortize that $10 over the years between now  (when you buy it) and when maturity happens and you get your money back. But, again, that’s a long time off and you can do something aggressive along the way — like sell the bond.”Worst” is in their heads. You can trade bonds.

Among bond brokers, there is a presumption that muni bond buyers are long-term holders. Like 20 and 30 years. That was the case years ago. But you can’t work with that assumption (or strategy) today. Everything (except Rosie) is for sale in a volatile world.

I’ll write more tomorrow. For now, note: Europe is screwing equities up here again today. And the Euro (as I predicted) has fallen once again and is now $1.21. If you must hold equities, stick with U.S. ones with NO exposure to Europe or Asia, e.g. Con Edison.

Wall Street Journal’s travel Tips: They’re really good. My favorite:

2. The cheapest times to buy vacation tickets are the end of August/beginning of September and the end of December/beginning of January. At these times consumers are worn out on travel and bookings simply come to a screeching halt, says Jolee Goularte, travel manager at Align Technology Inc. ALGN -1.15% In addition, corporate travel buying goes on hiatus in those two periods, especially between Christmas and New Year’s.

“So everything goes on sale,” she said.

For the entire Wall Street Journal piece, Click here.

The cowboy’s tombstone.

Here are the Five Rules for Men to Follow for a Happy Life that Russell J. Larsen had inscribed on his headstone in Logan, Utah. He died not knowing that he would win the ‘Coolest Headstone’ contest.

FIVE RULES FOR MEN TO FOLLOW FOR A HAPPY LIFE:

1. It’s important to have a woman who helps at home, cooks from time to time, cleans up, and has a job.

2. It’s important to have a woman who can make you laugh.

3. It’s important to have a woman who you can trust, and doesn’t lie to you.

4. It’s important to have a woman who is good in bed, and likes to be with you.

5. It’s very, very important that these four women do not know each other or you could end up dead like me.

Harry Newton who is proud of today’s column. It’s taken months of thinking. I’m even educating Todd, who still finds me good bonds. Thank you.

Rosie, not for sale.