Munis in Mind (Part 3)

What if munis are headed for a meltdown?

One of the principal tenets of disciplined investing is, what if you’re wrong. It’s all well and good to have a view of the world that allows you to avoid panicking and stuffing your cash in a mattress—or in T-Bills—but what if your investment outlook is mistaken?

With equities, we call it the margin of safety. How much is a business worth when broken up. If the economy tanks, what’s the minimum free cash-flow that the company would generate? Measure its present value, and you get the business’s intrinsic value. If you can buy a stock at or below its intrinsic value, you’re protected if things go wrong.

With bonds, we protect ourselves by focusing on well-managed issuers providing essential services. For example, many municipalities borrow against their water system or electrical system, and use the fees that system charges to pay the interest. The bondholder has a first lien on the revenue. Even if the city goes broke, the bondholders get paid.

Essential services bonds provide a significant level of security. There are services like water, electricity, and education that all communities need. There are other services like sports stadiums and monorails that are optional. Bonds from growing regions of the country—like Texas—or from low-tax states like Florida or New Hampshire are also safer than bonds from low-growth high-tax regions like Ohio or Wisconsin

We look after our equity investments by focusing on price. We look after our bonds by analyzing quality. In either case, we’re protected if things go wrong. Because eventually, they will.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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By | 2014-09-11T15:52:07+00:00 September 30th, 2010|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
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