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Author: junkman02 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35362  
Subject: Trail Journal (April 26, ’09) Date: 4/26/2009 1:47 PM
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Ques: What is the opposite of a Gold Bug?
Ans: A CD Bug.

The former fears hyper-inflation and buys gold. The latter fears default-risk and argues inflation isn’t a problem. But the gold bugs make more sense. At least they are arguing from global, economic facts, rather than a misplaced faith in fiat currencies.

I’ve spent huge hours in the past week trying to understand my annoyance with CD bugs. In part, it’s due to the same zealotry about the evils of alcohol abuse that reformed drunks have. I used to be a CD bug. Then I found bond investing, and I was saved. So, of course, I’m scornful of the low return that CD bugs accept out of fear of default-risk, all the while accepting more inflation-risk that I would bet they will be able to manage. Because default-risk is immediate and inflation-risk is far-off, the CD bugs have been able to self-label themselves as “conservative”. But they aren’t conservative. They’re very aggressive. Just as an all-stocks portfolio is considered extremist, and an all-bonds portfolio is considered extremist, an all-cash portfolio has to be considered extremist. [An all-cash portfolio is also infantile and reckless. But that’s beside the point.]

All sorts of clever riffs could be run against the CD bugs. This morning’s version, as I lay abed thinking, was to do a take-off on Jonathan Swift’s “A Modest Proposal”. The title of the post was going to be “J. Foxworthy Meets J. Swift, and They Argue About CDs”. What stopped me cold, however, is that I like extremism. Extremism is a very useful intellectual tool. It’s a means of testing limits and boundaries. A thoughtful extremist is a very brave person. He is willing to stand apart from the crowd, though they scorn him, and do something that might well benefit them. I have benefited hugely from the CD extremists. I became a member of PenFed by following their lead. I own 6.25% CDs from following their lead. I’ve been forced to examine my beliefs about inflation-risk from following their lead.

So the analogy I would offer is this. In the old-fashioned days before writing down thoughts became a matter of typesetting at computer keyboard, one’s choice of writing materials and instruments wasn’t a trivial one. Sure, one would make ink from ashes and make a writing surface from tree bark. But then, as now, the activity to create those tools and materials, though a part of the craft of writing, wasn’t the writing itself. The buying of CDs and similar cash-equivalent instruments is merely cash-management. It is an adjunct to proper investing. But it is not investing itself. The mistake the CD bugs make is to define investing in terms of an activity that is merely an adjunct to it. That’s both the merit of trying to run an all-cash portfolio and the essence of its likely downfall.

Because their margins of error with regard to inflation-risk are so small, CD bugs have to become super-efficient cash managers. Through their extremism, they make it easier for true investors to focus on just the tasks and challenges of investing itself. The CD bugs have solved the cash-management problems. So, my fight with them is done. I know there is only a slender chance their plans will unfold as they plan, because I’ve run the numbers myself. I know that if their cumulative estimates of long-term inflation are wrong by as little as 25 basis points, they will end their lives in poverty. That’s a long-term risk they are willing to accept in exchange for the short-term comfort of always avoiding default-risk. If they are making such a choice in a fully reflective manner, rather than being brow-beaten into it by the fear mongers who over-emphasize default-risk and under-emphasize inflation-risk, then the CD bugs have done their due diligence, and the choices they make for themselves have to be respected.

My efforts to argue that better ways to manage inflation-risk might be available from bond investing was my attempt to provide a counter-point view. But as the parable of the mustard seed suggests, not all counter-point views fall on fertile soil. I made an effort with my posts, and I’ll make more efforts in the future. But right now, it’s become time to take some vacation time and to hike my own hike.

Travel well on your own journey, Charlie (a reformed CD bug)
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Author: SooozFool Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27190 of 35362
Subject: Re: Trail Journal (April 26, ’09) Date: 4/26/2009 7:13 PM
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Charlie,

It's impossible to miss the fact that you want a bonds-CD "smack down" pretty badly, but nobody will engage you, so you've resorted to calling CD holders "extremists." Nobody has ever made me feel like a bona fide bad-a** simply because I hold CDs. Thanks for making my day.

Soooz
Considering getting a tattoo before buying TIPS

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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27191 of 35362
Subject: Re: Trail Journal (April 26, ’09) Date: 4/26/2009 7:29 PM
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so you've resorted to calling CD holders "extremists."

That's not what I read or understood in the post. The label "extremists" applies to those who are at the "extremes" in terms of holdings, like all cash, or all stocks, or all anything else. I think it's a relatively fair use of the word.

Considering getting a tattoo before buying TIPS

Hee hee ... I like that, I'll have to use it someday :-) Not for TIPS, of course (because I already own some), but for other stuff.

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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27192 of 35362
Subject: Re: Trail Journal (April 26, ’09) Date: 4/26/2009 10:32 PM
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Sooz,

That brought I smirk to my lips. Thank you thank you.

jack

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Author: blacktreechaser Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 27209 of 35362
Subject: Re: Trail Journal (April 26, ’09) Date: 4/29/2009 10:05 AM
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I hope your subject line is not implying that your out on the PCT somewheres, packing your laptop and wireless card...if that is the case, maybe its time to consider a 12-step program???

:)

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