Hay Jon

[Mik]

Just got this from my financial guys. Your thoughts? I just don't see how it really works. I pretty much subscribe to the Buffett approach - I don't invest in things I don't understand.

So to offer a solution, we have reached out to our providers and will be working with Citigroup to offer a customized buffered note solution to our clients. The terms of this note are as follows:

Tenure (term): 3 years
Downside Protection: 15%
Return Cap: approximately 16% (or 5% annualized)
Payoff Profile: In-The-Money Digital
Underlying Index: S&P 500 PR

We have used notes similar to this in our portfolios for over a decade and believe that this note offers a favorable risk/return profile in the current market environment. As you may remember, these notes track an underlying index, in this case the price return of the S&P 500 Index. With the In-The-Money Digital payoff profile, as long as the underlying index produces a 3-year return above -15%, you will receive the cap of about 16%. Going all the way back to 1950, the index has produced 3-year returns over -15% approximately 92% of the time meaning that there is a 92% likelihood (based on historical data) that the note will hit its 16% cap.1 And if the index returns less than -15%, you get the index’s return less the downside protection (so if the index finished down -20%, the note would return -5% for investors).

Given the current low interest rate environment that we are experiencing with the Federal Reserve holding short-term rates at near 0%, we believe that this note is an attractive option for excess cash while rates begin to normalize. While there is a bit more risk compared to an additional FDIC insured account but given the high probabilities of this note hitting its return cap, we think that the risk is merited given the abysmal yields investors are receiving on cash currently.

If you would like to participate in this buffered note, please contact your Advisor by December 2nd. Please remember, this is for idle cash or other low-performing assets outside of our current management. Your current portfolio is already appropriately positioned with similar buffered note exposure.

[jon-nyc]

Well they’re doing three things here:

1. capping your loss at 15% over three years.

2. taking your gains above 16%.

3. taking all your dividends.

They note that (1) is very unlikely to get triggered - only 8% of 3 year terms since 1950.

So they are charging you a decent amount for protection against a rather unlikely event.

Note that (3) slips under the radar for most people - they never say “and we’re taking your dividends”, they say you get price return not total return of the S&P.

Also remember we will almost certainly have a couple years of inflation which makes this trade even more favorable to them.

I’d stay away.

[jon-nyc]

It would be interesting to see how much it would cost a retail investor to replicate this with a stock purchase, a call and a put. When I’m home i might run the numbers.

[Mik]

Now I understand. Thanks. I know I asked about these a couple or five years ago. Seems like betting against yourself, or more like an annuity where you screw yourself for an illusion of safety.

[jon-nyc]

Yeah. I remember they offered you one a few years back.

[Horace]

Some douche chiropractor acquaintance of my wife called us into his office a few years ago for a one on one pitch of one of these things. I posted about it at the time, about how I walked out and had to check myself from telling him to go fuck himself, because, as a salesman, he'd brought his kid in to watch the presentation with my wife and I. It's overpriced options that you could buy individually, were you to be so inclined. Which you shouldn't be.

You should ask me for my advice, since i am the only poster on TNCR to have ever given life changing investment advice. Not that any of you took it.

[Mik]

Buy Apple?

[Horace]

Yep, five years ago. It's not like I've papered the board with stock picks, that was the one I called.