The Worst Place You Could Invest $500 Million?
By Dr. Steve Sjuggerud
December 18, 2006
What would you do with $500 million dollars?
You might buy your folks a fancy car or house... or have a big party... but even after that, you'd still have $499 million to work with.
You might be charitable, and give a good portion of your fortune away like Warren Buffett and Bill Gates are doing.
Whatever you'd do, chances are, you'd put a good portion of your money into something that earns safe interest, so you could live off the fortune for the rest of your life. That seems like a sensible thing to do, right?
One good call would be to invest in something super safe, and tax-free. Something like the March 2006 recommendation in my newsletter True Wealth to buy shares of the Van Kampen Municipal Trust (VKQ), which currently pays a 5% dividend, TAX-FREE. Since you'll be in the highest tax bracket, to match that 5% tax-free interest rate, you'd need to find something paying a taxable yield of about 7.5%.
These kinds of bonds can be incredibly profitable... readers of True Wealth are already up 13% on that recommendation in less than a year, by simply buying boring, safe municipal bonds.
This brings me to an important question...
What interest rate would you find acceptable to lend out your $500 million? That safe, taxable-equivalent interest rate of 7.5% in VKQ above sounds good to me.
But let me change the terms of the deal a bit... Instead of putting your money into safe bonds, what interest rate would you accept to lend your money out to an unregulated business, with no collateral?
I don't know about you, but I wouldn't lend one penny unsecured to an unregulated business, at any interest rate. Yet unbelievably, earlier this month, an unregulated hedge fund in Chicago borrowed $500 million dollars – unsecured.
The interest rate on the loan, I was shocked to learn, was only 6.3%. Goldman Sachs and Lehman Brothers apparently had no problem suckering (I mean selling) their clients into these bonds at this lowly rate.
To me, this is bond deal is sign that we've reached an extreme in risk-taking in the “big-money” investments of the world – I'm talking about stocks and bonds.
Interestingly here, while Wall Street snapped up this unsecured bond offering, The Bond King's company (PIMCO) stayed out of it. Bill Gross, as you probably know from previous DailyWealth letters, is known as The Bond King, and oversees some $600+ billion. Mark Kiesel of PIMCO had this to say about the unsecured bonds: “When you don't like the business and you can't get your hands around it, no [rate of interest] is enough.”
A voice of reason!
Look, the way to make money investing is really simple. You must invest with this line of thinking: “Be fearful when others are greedy, and greedy when others are fearful.” I can't take credit for the quote... It's from Warren Buffett, who has the best track record in the investment business today.
So are investors greedy or fearful right now? That's all you need to ask... and all you need to know.
I can point to many complicated indicators that show big investors are willing to take crazy risks right now just to pick up a few extra tenths of a percent in interest. But instead of showing those to you, I hope the story above says it all.
When I size up the markets now, I see investors are greedy. You don't make much money investing under these conditions.
In DailyWealth, we were extremely bullish towards stocks from mid-July until now, and we got the call right. Now we're switching... we're being fearful when others are greedy.
When the time comes to be greedy again, like we were in mid-July we will be. But now is not that time...
Good investing,
Steve
