Of Bonds and Apple March 3, 2015 NEW HAMPSHIRE ZEROES Ed Keeling: “I picked up a copy of Money Angles at a charity white elephant table and like the zero coupon story of bonds maturing in the unimaginably distant future of 2014 when, you wrote, ‘I will be sixty-six (not a pretty thought): the New Hampshire State Housing Authority may or may not be solvent; and a box of Jujyfruits may cost $48.’ Well — what happened? Did you hold the bonds till maturity? Were they called? Are Jujyfruits $48 a box? Don’t leave us in suspense.” ☞ JujyFruits are $12.80 for a pack of three; the bonds were noncallable, which was part of their exceptional allure; and I just spoke with the New Hampshire Deputy Treasurer: Yes, the $200,000 in face-value “zero-coupon” bonds that I bought for $5,300 in 1984 had indeed faithfully paid zero interest every year until maturity, and then — more impressively — were redeemed at par. You seriously think The Granite State would default on a bond issue? That $200,000 par value didn’t go to me, however. As inflation and thus the general level of interests declined (thank you, Fed Chair Paul Volcker, for saving the world), the value of tax-free municipal bonds that had initially been priced to yield 12% a year compounded to maturity soared. I think I sold mine for around $36,000 two or three years later — leaving the remaining $164,000 on the table for someone willing to wait anohter 27 years, but happy nonetheless. For the record: I’ve never bought a box of JujyFruits. I just think they’re funny. PUERTO RICAN ZEROES Ryan N: “I was curious to get your updated thoughts on purchasing Puerto Rican municipal bonds. I toyed with the idea of picking some up back when you first mentioned it but never got around to it. Alas, here I am thinking about it again and was wondering if any developments since then have swayed your thought process in one direction or another as to whether it’s a still good idea? I appreciate any input. Thanks in advance.” ☞ Well, in the first place, since I mentioned them September 10 (along with Home Depot), the bonds have gotten cheaper (and HD is up 30%). Ordinarily, that would make them even more enticing. But one very smart, very connected guy I know sees “no way out” for Puerto Rico and says that if it were he, he would consider selling — even the 8% “general obligation” bonds I bought at less than 90 cents on the dollar (now 83 cents), free of state, city, or federal income tax. But I’m not selling, for three reasons. The first (and only good one) is that I just don’t see Uncle Sam failing to find some way to prevent a complete default. A moratorium on interest payments as it’s all being sorted out, perhaps; some kind of restructuring, perhaps. But I don’t see the downside for bonds backed by the full faith and credit — and taxing authority — of the Commonwealth of Puerto Rico ever being worthless. We’ll see. The second is that I’m stubborn, don’t like being wrong, and don’t like taking losses. That may be three reasons, not one, but all are dumb: a rational investor would not be swayed by any of that. The third is that another supersmart guy I know came by to visit this summer when Apple was $99 a share and told me he was short (betting it would go down). I was long (I owned it) and had been for quite some time. I mocked his arguments — but quietly sold after he left, figuring I probably shouldn’t be greedy with my gain; and, after all, this guy is really really smart. Apple closed at $129 last night, meaning I could have made a further 30% on my money in barely seven months had I not listened to him. Of course, this has nothing to do with Puerto Rico — rationally speaking. Just because one really smart guy proved wrong doesn’t mean all really smart guys will be wrong. But there you go again expecting me to be rational. For that, you need to buy the platinum subscription. (I also own some Puerto Rico zero-coupon bonds, backed by sales-tax revenues, promising to pay $1,000 at maturity in 2054, when I’m 107, but costing just $74 each today. Odd little investments like this keep me young.)