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Pride and Profits from Public Stocks (Part 2)

20 November 2007 - Features - Editor

Pride and Profits from Public Stocks (Part 1)

Post Tax Discounted Flows from Stocks

Executive claims, standard assessment measures for stocks, and the most popular expert analyses, suffer from two common defects. Firstly, they focus on the future, and secondly, they stop at the pre-tax line. Such approaches can mislead the most conservative investors, and it is behind widespread notions about stocks outperforming bonds. While this may be the case, yields from bonds of properly managed public bodies have distinct advantages.

There are many reasons for actual cash flows to match projections. The annual volume of transactions can be reasonably certain for institutions such as airports, hospitals, and schools. Failures in the private sector world of stocks to achieve projected sales levels are much more likely. Price elasticity of demand for essential services is definitely less than in the cases of goods and services that have to face consumer choices: determined politicians can enforce price increases. Overall, the gross revenues on which tax free municipal bonds are based are more sound and likely than in the cases of guidance and projections by executives responsible for stocks.

Unexpected collective bargaining by employees of local self government bodies cannot be ruled out, but the other heads of expenses are more stable than in the case of stocks. Private stocks are not underwritten, so why should tax free municipal bonds require this kind of reassurance? Perhaps this was relevant when administrations were less accountable, but public sector management sciences have made rapid strides in recent times. This is not to say that political or individual malfeasance can be completely eliminated, but it is relatively easy for investors to now pick sturdy bonds based on secondary information sources.

Conditions in Which Bonds Beat Stocks

Anyone who has run out of clauses in the Income Tax rules to claim deductions should consider tax free municipal bonds. These types of securities can also be used to provide steady though modest incomes for investors in search of stable financial support for essential household and family budgets. Come to think of it, stocks of all companies that are heavily dependant on government contracts and awards are nearly the same as bonds, except for the taxes to be paid on their dividends and capital gains!

Everyone wins when cities and other similar public bodies that offer bonds have equal and direct access to private capital. A trend in favor of tax free municipal bonds will encourage diligent and responsible competition between bodies. You can also enjoy the twin benefits of citizenship and the almost assured proceeds from bonds of the public facilities you use and influence. Write to us if you would like to know more about tax free municipal bonds from bodies with the right track records.

 


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