What Would Grandpa Say?

Many of you may already know we are not fans of municipal bonds. In fact, we do not hold any municipal bonds in any of our investment portfolios because we think they are too risky. I bet that surprises a lot of people, especially retirees. My astute, well read, late grandfather would be shocked to hear this, having retired from Ma Bell after 42 years, an old school, buy American, blue chip investor. That’s because many advisors routinely recommend that retirees buy and live off of the income generated by supposedly safe individual municipal bonds.

But Warren Buffett, perhaps the most famous investor in the world, may just be having some second thoughts as to how safe municipal bonds really are? The financial press is reporting that Mr. Buffett’s company, Berkshire Hathaway, has decided to significantly reduce its municipal bonds insurance business. They did this by terminating billions of dollars of what the industry calls credit default swaps, otherwise, Berkshire Hathaway may have been on the hook to “pay out” if any of the municipal bonds it insured had defaulted.

On the surface, insuring municipal bonds seems like a great business. Muni’s, you see, are backed by the strength of the issuing state or municipality, and so far this year there has only been six defaults. So why stop insuring municipal bonds? We don’t know for sure and there may be some other business reason why this may be happening, but the first thing that comes to my mind is that, perhaps, Berkshire Hathaway might be thinking municipal bonds are just too risky.

Pick up any newspaper today, or watch any television news program, and you will see that the country is teeming with cities and towns barely able to pay its bills. According to CNN Money, “Since at least 2009 Buffett has warned about the risks of insuring municipal bonds. In his annual letter to shareholders, he said rather than raise taxes to fill budget gaps, government officials might be inclined to default on bonds whose payments are guaranteed by insurance companies. Guaranteeing muni’s against default, he wrote, ‘has the look today of a dangerous business – one with similarities, in fact, to the insuring of natural catastrophes’.” What do you think?

Here’s a link to a 4 1/2 minute video analyzing Mr. Buffet’s decision to stop insuring municipal bonds.

http://finance.yahoo.com/blogs/daily-ticker/buffett-exit-muni-bonds-signals-trouble-ahead-local-165817581.html

About Paul Nichols

Paul is the founder of Financial Abundance, a Registered Investor Advisory firm and EDI, an Estate Planning Firm with offices in State College and Lewisburg. He has been working with individuals, families and businesses for over twenty years, including many Fortune 500 companies. He has educated tens of thousands of people through seminars, workshops and various international speaking engagements where he shared the stage with many notable individuals such as Ronald Reagan, Robert Kiyosaki (author of Rich Dad, Poor Dad), Mike Ditka, General Schwarzkopf, and Newt Gingrich to name a few.

In 2000, after many years of traveling to consult companies and individuals, Paul decided to relocate from Colorado to State College, PA (his wife’s hometown) to develop a local advisory firm.

Paul operates under the core belief that education plus understanding leads to clarity and confidence; resulting in peace of mind. He is a proud father of three and devoted husband of 20 plus years.

Some of Paul’s accomplishments:
Regular contributor to the Centre Daily Times, via the “It’s Your Money” blog
Featured in the movie Navigating the Fog of Investing
Regular contributor to Town & Gown as the publications Investor Coach
Host of the weekly iTunes Podcast, It’s Your Money
Member of the Western PA Better Business Bureau
Member of the Centre County Chamber of Business and Industry