The Beauty of Municipal Bonds
Setting aside the fact that the Stock Market’s valuations often have no connection to anything resembling reality; and notwithstanding the fact that interest rates paid on cash deposits barely cover the cost of driving to the bank to make them; and forgetting for a moment that the southern Californian real estate market may or may not be one enormous bubble that may or may not be on the verge of popping — aside from all that, municipal bonds are a beautiful way to invest.
Their return on investment isn’t as high as riskier ventures, although the tax-free earnings they return make them progressively more valuable as one climbs the taxation brackets. They have almost no chance of becoming the next Google or Las Vegas. But they almost always return what they promise: a stodgy, fair premium on investment, and they’re largely immune to the vagaries of “trading,” in which well-connected insiders play with other people’s money, chasing the latest whim or rumor. Municipal bonds are the oxen of the investment world, dedicated toilers who don’t move very fast while getting the job done.
What’s really beautiful — one is tempted to say “poetic” — about munis is that they genuinely help thousands of people have better lives. When one “invests” in a blue-chip stock that’s been part of the Dow Industrial average for 30 years, one is bettering no one’s life but oneself and the corporate ringmasters who control the circus. The capital that you apply to common stock in, say, General Motors, does not allow the company to build more factories, hire more workers, or improve gasoline mileage. It merely allows the stock price to go up, enriching those who owned it before you.
When one buys a municipal bond, however, one is allowing a municipality — a school district, a county transportation system, a water treatment authority — to have better classrooms, roads, and sewage systems. The capital you provide is actually used for investing in infrastructure. (The small interest paid in the form of a dividend is the organization’s cost of borrowing money from you.) Buying municipal bonds is an uncomplicated and effective way to loan money to a large group of people so that the common good may be improved, not merely the personal wealth of a small coven of insiders. When our state floats a bond issue to hire more cops, reduce classroom size, construct bridges, develop recycling plants, we’re glad to provide them with (a tiny portion of) what they need. We get a small but fair return on capital, they get a better society, and we feel like money has been used to make the world an incrementally better place.
Wouldn’t it be nice if all our purchases worked that way?