But a high-risk investor can actually do a fairly good job of approximating total tax avoidance. If she invests in a basket of fairly high risk, poorly correlated securities, in an average year she will have some gains and some losses, but more probably a net gain. (Common stocks have averaged about 11 percent annual appreciation over the past 70 years.) She can sell all of her losers to establish tax losses and sell winners that generate an equal amount of gains. The tax-free proceeds of these sales can pay her living expenses, and any balance can be reinvested in new stocks. Until she runs out of losses, she will pay no tax. In effect, she can use risk—here viewed as a dispersion of returns—to create a tax shield, whereas we have shown why an investor who opts for a risk-free return has no such shield.

With a tax structure that favors value-creating high-risk investing and rather heavily penalizes more conservative investment patterns, it is no surprise that the United States leads the world in business innovation. The good news is that we seem, for the moment, to be better than the other guy. However, viewed through the lens of total value, the U.S. tax system is a large encumbrance when compared to an ideal system designed to maximize value creation. This is the bad news. But it is also good news, in a sense: There is room for improvement. As we get smarter, we’ll get better.

Using the MBA method, a loan is considered contractually delinquent if the payment is not received by the end of the day immediately preceding the loan’s next due date (generally the end of the month). For example, a loan due on November 1, 2006 with no payment received on November 30, 2006 would be reported delinquent on the November statement to bondholders.

Using the OTS method, a loan is considered contractually delinquent if the payment is not received by the close of business on the loan’s due date in the following month. For example, a loan due on November 1, 2006 with no payment received on November 31, 2006 would not be reported delinquent on the November statement to the bondholders.

The OTS method delays the reporting of delinquent loans by one month relative to the MBA method. It is important to know which reporting method is used by each originator or servicer when comparing delinquency statistics.

Still, there is ample information available to investors to monitor their individual transactions. Most dealers publish surveillance reports. Moody’s publishes a series of monthly reports (see the appendix to this chapter) that detail CDO performance, broken down by vintage and collateral type. These reports are the closest publication we have to a market performance matrix. Moody’s even details CDO equity returns. The reports are extremely beneficial when examining macrotrends in the CDO market but, because names are not listed, the reports cannot be used to determine the performance of specific deals.

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