A little bit of knowledge can often be worse than none.

Common sense suggests that reading esteemed financial publications and major brokerage house research reports would help investors make good decisions. In many situations it leads to exactly the opposite.

The handling of Puerto Rican (PR) tax-free bonds provides a perfect example of this phenomenon. Most people don’t have the ability to evaluate individual muni bonds. They count on their brokers or financial advisors to steer them into appropriate issues while relying heavily on rating agencies’ bond quality designations.

PR’s bonds had previously been widely recommended. Their coupon rates were higher than most other issuers and they offered tax-free treatment in all 50 states. Until recently, Puerto Rican general obligation (GO) bonds had been rated highly enough that debt holders believed they could expect to be paid back principal plus interest as promised.

Brokers sold, and individuals bought, PR munis at prices reflecting  S&P, Moody’s and other ratings that falsely conveyed a rosier-than-real picture of that government’s ability to repay.  The last remnants of that fantasy ended when Barron’s Aug. 2013, cover story belatedly broke the news which bond trading firms already knew… PR was in serious financial trouble.

 Spreads on Puerto Rico’s 10-year paper had already shot higher, pushing prices on existing PR bonds lower. The Barron’s story led to panic dumping and even lower resale prices for those investors wishing to exit their positions.

On February 4, 2014, ratings giant Standard & Poors also admitted what had been painfully obvious. They downgraded Puerto Rican GOs to junk status. This came only after severe damage to holders of older PR bonds. Spreads versus investment grade paper had ballooned from under 3% to about 7.5%. Way too late to help anybody, Moody’s finally joined in the downgrades, too.

Between August, 2013, and last week many bond holders, scared by the new reality that wasn’t really new, sold at horrible prices to avoid possible defaults. They felt compelled to unload them.  PR paper had now been offically deemed ‘too risky for conservative accounts’.

The same brokerage firms that had originally touted the bonds as good investments were advising clients to sell them before losses got even worse. Who bought the bonds that these customers sold? The brokerage firms took them off customers hands while providing only wholesale bid prices.  Most of the paper landed squarely into those same firms' bond inventories.

Fast forward to the March 8, 2014, issue of Barron’s. After Wall Street firms got the chance to scoop up customer bonds cheaply, it was announced that Puerto Rico had already lined up buyers for $3 billion of new debt. The issue, with an effective yield of about 9%, was oversubscribed by two to three times.

Bond firms will reap huge underwriting fees  moving the new junk-rated paper into public hands while benefiting greatly themselves from the higher prices on their recently acquired inventory of now ‘money good’ older bonds, purchased from scared  clients, after the Barron's article and multiple rating agency downgrades.

The proceeds from the enormous new offering will make payment of old PR debt possible in the same way that overextended consumers sometimes pay off the minimum balance on one credit card by using a cash advance from another credit card.

This week’s new capital raise will give an immediate boost to the value of the old PR bonds. It came too late to help anyone who fretted over the financial headlines and sold already.

Ironically,  PR muni owners who never saw the Barron’s story or the rating firms’ downgrade notices are better off than those who kept up with the financial news.

The same principle applied when dealing with stocks from late 2008 right up through the present. Experts clearly identify reasons why individuals should sell. This leads people to jettison their holdings at bad prices as, always ready to help, professionals buy the shares from them at discounted prices.

Unsophisticated investors are often worse off for having the proverbial ‘little bit of knowledge’ provided through sound bites from their trusted advisors and the media.