Comments on: 7.25% Tax-Protected Guaranteed Return – Would You Take It? http://www.darwinsfinance.com/725-tax-protected-guaranteed-return-would-you-take-it/ Financial Evolution: Education, Adaptation, Achievement Fri, 12 Mar 2010 18:48:03 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: Darwin http://www.darwinsfinance.com/725-tax-protected-guaranteed-return-would-you-take-it/comment-page-1/#comment-513 Darwin Sun, 19 Apr 2009 00:51:52 +0000 http://www.darwinsfinance.com/?p=370#comment-513 I have to go on what the employee posted in the forum, but essentially, it's a government/municipal employee that's being offered this fixed return through the municipality (i.e. taxpayer funded). We all know the gracious contracts inured to government and municipal employees that until now, have continued to thrive off the public largess. I have yet to see widespread defaults on obligations from these entities, so as long as you have faith that you'll continue to see full pensions for teachers/police/firemen and as long as those constituents continue to represent a substantial portion of the voting populous (we all know laws and policies are based on what wins the next election), I don't see the assumption that the municipality will meet their commitment as that far-fetched. The risk cannot be quantified, as it is not "market risk", but rather, political risk. Incidentally, Madoff was offering double-digit returns on a fictitious "split-strike" method that seemed to return consistent, market-beating results regardless of what was occurring in equities markets. It was so evident that something was fishy here that multiple prospective investors turned him down and some even approached the SEC, but they refused to act. So, Madoff, Stanford's CDs and the like are very much different than a municipal obligation commitment. I have to go on what the employee posted in the forum, but essentially, it’s a government/municipal employee that’s being offered this fixed return through the municipality (i.e. taxpayer funded). We all know the gracious contracts inured to government and municipal employees that until now, have continued to thrive off the public largess. I have yet to see widespread defaults on obligations from these entities, so as long as you have faith that you’ll continue to see full pensions for teachers/police/firemen and as long as those constituents continue to represent a substantial portion of the voting populous (we all know laws and policies are based on what wins the next election), I don’t see the assumption that the municipality will meet their commitment as that far-fetched. The risk cannot be quantified, as it is not “market risk”, but rather, political risk.

Incidentally, Madoff was offering double-digit returns on a fictitious “split-strike” method that seemed to return consistent, market-beating results regardless of what was occurring in equities markets. It was so evident that something was fishy here that multiple prospective investors turned him down and some even approached the SEC, but they refused to act. So, Madoff, Stanford’s CDs and the like are very much different than a municipal obligation commitment.

]]> By: Wide Moat http://www.darwinsfinance.com/725-tax-protected-guaranteed-return-would-you-take-it/comment-page-1/#comment-509 Wide Moat Sat, 18 Apr 2009 12:50:50 +0000 http://www.darwinsfinance.com/?p=370#comment-509 In absolute terms, and given inflation over the last twenty years in developed economies, a 7.25% risk-free return sounds attractive. But over longer periods, and in developing countries, a 7.25% rate would have lost significant (or most of its) purchasing power. Also, what are the investments in? Anyone can make a promise that a return is risk-free, just as AIG could write an insurance contract for most any "unpredictable" event. Saying it doesn't make it so. Given your B school analysis and common sense, I have to say that only Bernie Madoff offers 7.25% risk-free returns. <abbr><em>Wide Moat’s last blog post..<a href="http://widemoatinvesting.wordpress.com/2009/04/16/pricing-power-and-economic-moats/" rel="nofollow">Pricing Power and Economic Moats</a></abbr></em> In absolute terms, and given inflation over the last twenty years in developed economies, a 7.25% risk-free return sounds attractive. But over longer periods, and in developing countries, a 7.25% rate would have lost significant (or most of its) purchasing power.

Also, what are the investments in? Anyone can make a promise that a return is risk-free, just as AIG could write an insurance contract for most any “unpredictable” event. Saying it doesn’t make it so. Given your B school analysis and common sense, I have to say that only Bernie Madoff offers 7.25% risk-free returns.

Wide Moat’s last blog post..Pricing Power and Economic Moats

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