X-Message-Number: 1853
Date: Mon, 1 Mar 93 10:57:50 EST
From:  (Perry E. Metzger)
Subject: Re: CRYONICS: Investments

> 
> Message: #1820 - Reply to P. Metzger
> Date: 24 Feb 93 23:37:05 EST
> From: MICHAEL RISKIN <>
> Message-Subject: CRYONICS: Reply to P. Metzger
> 
>       Probably much to your surprise, I am personally an investor in OTC
> small-medium cap biotech equities. In fact, thats all I invest in. Even
> you might find that investment strategy "gambling" . Your painting a
> picture of me as "having an irrational fear of equities" or that my "head
> is in the sand" was an irrational assumption  on your part. 

It was not an irrational assumption -- although it might have been an
uninformed assumption.

>       If you are a professional investment counselor,

I'm not, and I never given anyone, including my friends, specific 
investment advice. Its a longstanding personal rule.

> your first duty is
> to listen to the needs of your counselees. For example, it is well known
> that older clients, dependent on current income, and intolerant of short
> term losses often chose bonds over equities. Alcor is in a similiar
> position where our current needs are income, combined with an unwillingnes
> to place membership money in positions where nearer term losses of only
> 10% are possible, and unacceptable. 

Alcor is most certainly NOT in that position, and this is what I am railing
against. An 80 year old who isn't a cryonicist wants his money to last
with absolute safety for a couple more decades at most. Alcor needs its money
to survive and produce income for possibly centuries. Losing a few percent
on the long term trust funds right now with the expectation that our long
term capital growth will be far stronger is perfectly acceptable given that
the patient care fund, for example, has built in overfunding so that the
short term reduction in income would be acceptable to us. The thing we
cannot accept is the fact that inflation in the long run turns the real
growth in government bond investments negative, and that this trend has
been pretty much in place for the past seventy years or so.

>       If you know of an investment that produces 7% annual income while
> affording equity growth, with a substantial degree of capital safety let
> us know about it.

Well, how about passive investing in the S&P 500? Seems to more or less
match the criteria you list, although I haven't looked at the long term
average return in a while (certainly the REAL growth isn't that
spectacular these days). I would not invest solely in such a fund --
one wants to diversify one's money, and certainly even some investment
in bonds would make sense. The point is simply that your criteria are
not wholely impossible to achieve. (By the way, bond yields have fallen
lately -- you can't get 7% "riskless" anymore.)

> You indicated that US bonds were themself unsafe in that
> they could be defaulted. I am not a professional researcher or financial
> advisor....so could you advise me as to the last time the US government
> failed to pay its bond indebtedness,

The US federal government has not defaulted on its debts since the 
Revolutionary war, after which we paid off only a fraction of the incurred
debt of the continental congress. U.S. municipalities have frequently
failed to pay their obligations -- many states defaulted in the 19th century,
and many towns and other entities have defaulted this century, the most
spectacular recent occurance being the WHPS (I think I have the acronym
right) default in the early 1980s. Many supposedly stable governments around
the world have defaulted over the years, including several in the last
couple of decades.

Default qua default is unlikely for the US as political consequences would 
ensue, and as investors have been foolish enough to buy debt denominated in
a currency that the US government controls. Since the US government controls
the currency (unlike, say, the recent issue of Italian government bonds
denominated in German Marks), it is possible for the US to inflate the
currency to pay off the debt. This is not a certainty, but it is a
strong possibility. Hyperinflation is a tool that has been used countless
times even this century because so many people still don't understand
what causes inflation. "Printing money" being used to pay the debt is,
of course, just a sort of slow-motion default. Actual default is also
a possibility, but unlikely unless real political instability comes to
the U.S. Who can tell? After all, a week ago no one thought terrorists
would strike in the financial district in Manhattan.

In any case, however, Mr. Riskin seems to be implying that I'm foolish
to be worried about the US Government's stability simply because it
has failed to fail thus far. Well, we are talking about trying to keep
assets preserved for patients that might be in storage for centuries.
Consider what the world was like a mere century ago...

One of the biggest powers of Europe was the Austro-Hungarian Empire, which
had lasted for many centuries. Surely, investments in their bonds would
have been safe, right? The Russian government had yet to fall to the
Bolsheviks, indeed, Communism was still a gleam in some nuts eyes. An
entire superpower, the Soviet Union, was yet to be born and die. (Surely,
investments in the bonds of the Russians were safe back then, right?) The
British Empire controlled ONE QUARTER of the earth's surface and was the
undisputed superpower of the day. Africa was divided up between the Europeans.
The U.S. did not yet have an income tax, or did England. The international
currency was the British Pound, the currency everyone could trust not
to be debased -- which it was, to pay for the first world war, which
resulted in the growing ascendancy of the dollar, which has been the 
international currency in the years following the second world war. Back
a century ago, investing with the banks run by the Austrian and Italian
branches of the Rothchild family was a safe bet -- following the Nazis,
of course, those banks ceased to exist. Back a little more than a century 
ago, the big investment worldwide was in American railroad bonds -- but,
of course, the Interstate Commerce Commisssion managed, in the long run,
to make those bonds far less worthwhile. Still, they were very safe, often
used via J.P. Morgan's invention of the voting trust to control the underlying
railroads and assure good managment -- a technique made illegal by the
anti-trust laws and by the securities laws of the Great Depression. In the
U.S., currency still couldn't be manipulated terribly effectively because
there was no Federal Reserve, and worldwide, the gold standard ruled the
day. In short, the world was a very different place.

In this light, given the rise and fall of great powers over the years,
and given the growth in the government of the US along with the growth
of its debt and the utter foolishness of its leaders, investing in the
future of the U.S. Government, meaning T-Bills and T-Bonds, seems foolish
at least in the long run. There is a lot of risk involved in keeping
one's eggs in that basket.

> and which bonds you believe we should
> stay away from because of factual reasons to fear their safety?

Well, short term bonds are always safer than long term bonds. Of course,
long term bonds have more attractive rates -- but Greenspan will
not be Fed Chairman forever, Congress is talking seriously about
making the fed "more responsive" to the politicos, and inflation is
a strong possibility for the future. The long bonds always fluctuate
swiftly when inflation strikes. This is fine if one is an elderly person
who just needs coupons to clip for the next five years but is not so good
if one anticipates living a long time and having to worry about inflation and
if one worrys about keeping one's trust funds suriviving for centuries.
Certianly the bonds are safe enough FOR THE VERY MOMENT, but they shouldn't
be regarded as any safer than any other investment. As for corporate
bonds, that of course depends on the corporation and on the anticipated
fluctuations of the tax laws -- for the moment, debt has advantages to
companies over equity, but a change in dividends rules could alter that.

In short the answer is "I don't know and no one knows". You can't find
an investment you can buy and forget. No investment will remain safe
forever or even necessarily for a year. You always have to be an "active"
investor no matter what you do. There is no other choice. Alcor can't
just assume that its funds are going to be safe by selecting a few
good investments and leaving things there -- what seems fine today
may be different in a year. Bonds are no safer than stocks, real estate
no safer than stocks, gold no safer than bonds, etc.  No matter what
you do, you are going to have to accept that there is risk involved
and intelligently allocate assets. At the moment, I'd say that an emphasis
on bonds seems to be a bit of a mistake, although I must also admit that
given that the new administration might very well push the U.S. into
recession again with the new tax laws and regulations that are being proposed,
it is also to be expected that stock yields won't be as spectacular in
the near term either. Caveat emptor.

Perry

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