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No. of Recommendations: 1
YTM,

I'll send you a private message about the specifics of the trade if you really need them. But I'm not going to post details in a public forum like this.

I will say this much. Whatever price I did pay, the YTM (on an inflation-adjusted basis, assuming a 5% inflation-rate, which is the benchmark I work with), was positive by an acceptable margin. In other words, the price one pays for a bond is irrelevant. It's the purchasing-power that is returned that matters, which gives me an opportunity, once again, to hammered on a topic dear to my heart, namely, the three types of bond buyers there can be: Capital Consumers, Capital Preservers, and Capital Appreciators.

But rather than talk theory, let's work through a specific example. If a self-indentifed "conservative" investor's goal was to preserve her purchasing-power, and if she loaded up on PenFed's 10-year CDs offering a 5% APY, as I know she did, then she made the same mistake that all such people do. After taxes and inflation, her real-rate of return is negative. So all she is doing is burning through her capital. She's a Capital Consumer, not a Capital Preserver (much less a Capital Appreciator) with respect to that transaction. In other words, if her intention was to preserve her nominal principal, then she will likely achieve her goal, but at the cost of losing a significant amount of purchasing-power and an even greater amount of opportunity (had the money been put to work elsewhere).

In the larger scheme of things, losing a portion of one's portfolio by doing the equivalent of "sitting in cash" is something all of us have to do, because it's nearly impossible to run a cash-lean portfolio. Also, to the extent one's portfolio is far in excess of one's likely draw-down needs is also the extent to which cash can be carried. In other words, some people are so rich, as is a certain other person who used to post in this forum about investing, but whose latest remarks have been confined to food, that suffering the erosions of taxes and inflation is an affordable matter for them. So, for them and their unique circumstances, PenFed's 10-year 5% CDs were A Good Deal and better than what they are likely to be able to obtain for the near future. So, looking ahead, they loaded up, and kudos to them for doing so. They saw an opportunity that met their needs, and they pursued it.

But for ordinary and average investors (such as myself) whose goal is to obtain at least a real-rate of return from money put at risk, buying such CDs is Not A Good Idea. Instead, we buy other things, one of which was the triple-AAA issue I stumbled onto this morning for its appearing briefly (and for the first time) in the offering-lists.

Charlie (a very conservative, very risk-adverse investor whose portfolio goal is a real-rate of return after taxes and inflation and who applauds the fact that others have other goals.)
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