Harry Newton's In Search of The Perfect Investment
Technology Investor. Harry Newton
AM EDT, Wednesday, October 14, 2009: "You're
wrong, Harry. Real estate today is the greatest opportunity around." The
speaker had five big advantages:
He knew the area he was buying in -- intimately. He could close his eyes and
"see" every building, on every street, on every corner. He'd been
buying and selling in that neighborhood for 30+ years. He'd gotten rich in that
He had cash. Nothing he bought was contingent on borrowing money from a stingy
He had no urgency. He could make an ultra low-ball offer and sit back.
He had no emotion. He didn't need the property because his wife loved the place.
5. He had a deal
flow. The local brokers and bankers knew he was buying and could make a quick
fall of our discontent: This
autumn the chickens are coming home to die. Many of us invested in businesses
that looked good -- at the time. But in hindsight, they made three fatal mistakes:
They borrowed far too much money.
They relied on their lenders to act rationally.
They assumed infinite expansion. This assumption meant ramping up overhead,
like leases, factories, etc.
As a result many
of these brilliant investments are now filing for Chapter 11. We are all waking
up to letters like this one which I received yesterday from the CEO:
I regret that
my first communication with you is the unpleasant task of notifying you that
we have filed a petition to reorganize the company under Chapter 11. This
was unavoidable and necessary for the companys survival.
I have been
with the company for ten months and joined XYZ (named changed) because I was
convinced that the company could be rescued from its historically ill-advised
management decisions that resulted in imposing severe and substantial debt
burden on its balance sheet; a crushing cost structure from a lease for facilities
beyond its needs and its means; and three straight years of eroding sales
due to the implementation of confusing and conflicting sales and marketing
strategies. I was so confident of being able to succeed that I agreed to make
a personal investment to provide needed working capital to achieve these objectives.
Unfortunately, we were unable to reverse all of the negative factors aligned
In addition to the problems attendant to the conduct of business in the current
recessionary environment, there are four specific reasons which compelled
the commencement of this Chapter 11 filing.
1. In 2004, XYZ entered into a lease agreement for space in excess of 100,000
square feet in contemplation of massive future expansion the annual
fully loaded cost of which is approximately $1.5 million. Unfortunately, sales
growth did not materialize (since 2005 sales have been declining at an annual
rate of almost 20%). As a result, we utilize only a mere fraction of the total
leased space and the facility cost makes profitability unobtainable at our
current level of sales. Despite our efforts we were unable to negotiate any
relief of this financial burden with the landlord.
2. In 2007, ABC LLC agreed to lend $6 million to XYZ, of which ABC advanced
only $3 million of the loan. ABC has contended that XYZ a was in covenant
default of the loan, a contention which XYZ has disputed. As a consequence,
ABC initiated litigation in federal district court against XYZ, seeking to
recover approximately $3.7 million. Insufficiency of the advances under the
loan and the costs attendant to the litigation have severely burdened XYZ
and inhibited our ability to raise investor capital. Moreover, the legal fees
and the distraction associated with the lawsuit have been a detriment to the
company's operations. This litigation also limited my ability to communicate
with you, as I was instructed by the companys outside lawyers not to
reveal financial information that would be used by ABC against the company
to receiving the $3 million advance on the ABC loan, the company, lead by
the former CEO, invested significant amounts in re-branding by retaining consultants
to change the design of the product. The re-branding campaign was launched
in the first quarter of 2008 but failed due to, among other things, customer
confusion with respect to the new labeling, bottle quality and appearance,
coupled with an ill-advised pull-out from the grocery sector. After only four
months in 2008, the re-branding strategy was abandoned and all new product
shipments were halted, resulting in significant financial losses and substantial
erosion of customer confidence.
4. Although the summer has historically been XYZs best selling season,
and notwithstanding our efforts, the current recessionary climate resulted
in disappointing summer sales numbers, especially over the July 4th and Labor
Day weekends, with a resultant impact on our cash flow.
We have spent the past several months soliciting some of our current investors
and explored new sources for the capital necessary to maintain operations
and grow the company. Unfortunately, we received absolutely no interest in
funding the company. Investors old and new declined to invest because of our
debt load and burdensome cost structure.
Based on these factors the Board of Directors decided that the most prudent
course of action was to file for bankruptcy protection in order to stabilize
our operations; focus on how best to address our contractual, financial and
operational burdens; to assess the practicality of our current business model;
and to attract investor capital.
During the Chapter 11 reorganization we will continue to operate our business
as usual with the goal of emerging with a stronger and more viable company.
I will communicate with you throughout this process and keep you apprised
of the status of our company.
This letter could
have been stated as a one-liner, viz, "Harry, you just lost your entire
investment in the company."
Message of Dollar Disdain. The Australian dollar is up from 55 cents
to 91 cents. The Euro is $1.49. It once was under a dollar. Our American dollar
is slumping. There are three easy ways to play this -- the ETFs: EWZ (Brazil),
EWA and GLD.
But, don't go
overboard. Everyone and their uncle is so aware of the dollar collapse that
it's possible to see a short-term bounce in the dollar. It's happened before.
A couple of years back I moved money to Australia at almost the U.S.'s nadir.
It then rose strongly and it's only now that my Australian dollars are
coming back close to where I bought them. (Fortunately, I'm up on the whole
deal because I was earning 8% in Australia until recently when they dropped
The growth of
government debt has "decoupled" from the rest of the economy.
businesses and the financial sector reduce leverage, public sector debt growth
has simply exploded. As you can see from the chart, every non-governmental
sector of the economy is now in debt reduction mode while governmental debt
is growing a breakneck speeds.
message of dollar disdain: Judy Shelton writes
in today's Wall Street Journal:
of Dollar Disdain
With U.S. debt set to exceed 100% of GDP in 2011, it's no wonder people
are looking for alternative ways to preserve wealth.
spending, unending fiscal deficits, unconscionable accumulations of government
debt: These are the trends that are shaping America's financial future. And
since loose monetary policy and a weak U.S. dollar are part of the mix, apparently,
it's no wonder people around the world are searching for an alternative form
of money in which to calculate and preserve their own wealth.
It may be too
soon to dismiss the dollar as an utterly debauched currency. It still is the
most used for international transactions and constitutes over 60% of other
countries' official foreign-exchange reserves. But the reputation of our nation's
money is being severely compromised.
Funny how words
normally used to address issues of morality come to the fore when judging
the qualities of the dollar. Perhaps it's because the U.S. has long represented
the virtues of democratic capitalism. To be "sound as a dollar"
is to be deemed trustworthy, dependable, and in good working condition.
It used to mean
all that, anyway. But as the dollar is increasingly perceived as the default
mechanism for out-of-control government spending, its role as a reliable standard
of value is destined to fade. Who wants to accumulate assets denominated in
a shrinking unit of account? Excess government spending leads to inflation,
and inflation plays dollar savers for patsiesboth at home and abroad.
A return to
sound financial principles in Washington, D.C., would signal that America
still believes it can restore the integrity of the dollar and provide leadership
for the global economy. But for all the talk from the Obama administration
about the need to exert fiscal disciplinethe president's 10-year federal
budget is subtitled "A New Era of Responsibility: Renewing America's
Promise"the projected budget numbers anticipate a permanent
pattern of deficit spending and vastly higher levels of outstanding federal
Even with the
optimistic economic assumptions implicit in the Obama administration's budget,
it's a mathematical impossibility to reduce debt if you continue to spend
more than you take in. Mr. Obama promises to lower the deficit from its current
9.9% of gross domestic product to an average 4.8% of GDP for the years 2010-2014,
and an average 4% of GDP for the years 2015-2019. All of this presupposes
no unforeseen expenditures such as a second "stimulus" package or
additional costs related to health-care reform. But even if the deficit shrinks
as a percentage of GDP, it's still a deficit. It adds to the amount of our
nation's outstanding indebtedness, which reflects the cumulative total of
annual budget deficits.
By the end of
2019, according to the administration's budget numbers, our federal debt will
reach $23.3 trillionas compared to $11.9 trillion today. To put it in
perspective: U.S. federal debt was equal to 61.4% of GDP in 1999; it grew
to 70.2% of GDP in 2008 (under the Bush administration); it will climb to
an estimated 90.4% this year and touch the 100% mark in 2011, after which
the projected federal debt will continue to equal or exceed our nation's entire
annual economic output through 2019.
The U.S. is
thus slated to enter the ranks of those countriesZimbabwe, Japan, Lebanon,
Singapore, Jamaica, Italywith the highest government debt-to-GDP ratio
(which measures the debt burden against a nation's capacity to generate sufficient
wealth to repay its creditors). In 2008, the U.S. ranked 23rd on the listcrossing
the 100% threshold vaults our nation into seventh place.
If you were
a foreign government, would you want to increase your holdings of Treasury
securities knowing the U.S. government has no plans to balance its budget
during the next decade, let alone achieve a surplus?
In the European
Union, countries wishing to adopt the euro must first limit government debt
to 60% of GDP. It's the reference criterion for demonstrating "soundness
and sustainability of public finances." Politicians find it all too tempting
to print moneysomething the Europeans have understood since the days
of the Weimar Republicand excessive government borrowing poses a threat
to monetary stability.
can also be drawn from Japan's unsuccessful experiment with quantitative easing
in the aftermath of its ruptured 1980s bubble economy. The Bank of Japan's
desperate efforts to fight deflation through a zero-interest rate policy aimed
at bailing out zombie companies, along with massive budget deficit spending,
only contributed to a lost decade of stagnant growth. Japan's government debt-to-GDP
ratio escalated to more than 170% now from 65% in 1990. Over the same period,
the yen's use as an international reserve currencyit clings to fourth
place behind the dollar, euro and pound sterlingdeclined from comprising
10.2% of official foreign-exchange reserves to 3.3% today.
The U.S. has
long served as the world's "indispensable nation" and the dollar's
primary role in the global economy has likewise seemed to testify to American
exceptionalism. But the passivity in Washington toward our dismal fiscal future,
and its inevitable toll on U.S. economic influence, suggests that American
global leadership is no longer a priority and that America's money cannot
If money is
a moral contract between government and its citizens, we are being violated.
The rest of the world, meanwhile, simply wants to avoid being duped. That
is why China and Russialarge holders of dollarsare angling to
invent some new kind of global currency for denominating reserve assets. It's
why oil-producing Gulf States are fretting over whether to continue pricing
energy exports in depreciated dollars. It's why central banks around the world
are dumping dollars in favor of alternative currencies, even as reduced global
demand exacerbates the dollar's decline. Until the U.S. sends convincing signals
that it believes in a strong dollarmere rhetorical assertions ring hollowthe
world has little reason to hold dollar-denominated securities.
Sadly, due to
our fiscal quagmire, the Federal Reserve may be forced to raise interest rates
as a sop to attract foreign capital even if it hurts our domestic economy.
Unfortunately, that's the price of having already succumbed to symbiotic fiscal
and monetary policy. If we could forge a genuine commitment to private-sector
economic growth by reducing taxes, and at the same time significantly cut
future spending, it might be possible to turn things around. Under President
Reagan in the 1980s, Fed Chairman Paul Volcker slashed inflation and strengthened
the dollar by dramatically tightening credit. Though it was a painful process,
the economy ultimately boomed.
U.S. can once more summon the resolve to address its problems is an open question.
But the world's growing dollar disdain conveys a message: Issuing more promissory
notes is not the way to renew America's promise.
playing Where's Waldo? in my mouth. Yes, there
is one live tooth in my mouth. Only one remaining. And for the past two days
-- guess what? It's hurting. So, I'm off to early morning "emergency"
dentist appointment. The last time I visited him, he had three dentists eyeing
(with mouth wide open): "My mouth is a disaster."
dentist (after some thought), "No, Harry. It's an annuity."
with this morning limited time (and aching mouth), I offer you...
inevitable (easy) blonde jokes.
+ During a recent
password audit, it was found that a blonde was using the following password:
When asked why
such a big password, she said that it had to be at least 8 characters long.
+ Two blondes
living in Oklahoma were sitting on a bench talking, and one blonde says to the
other, "Which do you think is farther away... Florida or the moon?"
The other blonde
turns and says "Helloooooooooo, can you see Florida?"
+ A blonde pushes her BMW into a gas station. She tells the mechanic it died.
After he works
on it for a few minutes, it is idling smoothly.
She asks, "What's
He replies, "Just
crap in the carburetor"
She asks, "How
often do I have to do that?"
+ A police officer
stops a blonde for speeding and asks her very nicely if he could see her license.
She replied in
a huff, "I wish you guys would get your act together. Just yesterday you
take away my license and then today you expect me to show it to you!"
This column is about my personal search
for the perfect investment. I don't give investment advice. For that you have
to be registered with regulatory authorities, which I am not. I am a reporter
and an investor. I make my daily column -- Monday through Friday -- freely available
for three reasons: Writing is good for sorting things out in my brain. Second,
the column is research for a book I'm writing called "In Search of the
Perfect Investment." Third, I encourage my readers to send me their
ideas, concerns and experiences. That way we can all learn together. My email
address is .
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