In Search of the Perfect Investment

If you’re alive, it was a good year. If the family is alive, it was an even better year.

That’s it.

If you focus on all the junk  — like what’s happening in Washington, or the disasters in commercial real estate and  “alternative investments,” or all the investing mistakes  you made — it will have been a very bad year.

Claire is on the way to becoming the world’s best lawyer, if she isn’t there already. Michael graduated very well — with high distinction. He and Anne got engaged and are now up to their eyeballs in the “stress” of planning next year’s wedding extravaganza. Susan ran the show, while I gawked in admiration, but basically contributed little.

I’m still working on investment ideas for 2010.  Send me your thoughts. Use the “Contact” button up top. I’ll compile our collective thoughts in the next few days. Best not to agonize over this too much. That definitely is “bad year” making.

The problems with illiquid funds
The number one problem with illiquid funds — like those called “alternative investments” — is you can’t sell them when they drop 15%.

The second problem is they have a long life — typically seven to ten years. That means the fund passes through one or two boom-and-bust economic cycles. and typically the “bust” part of that cycle wipes out all the gains of the boom cycle, and a little more.

The third problem is you have no control. The managers don’t listen. They treat you like an annoyance — a circulating fly that needs to be swatted.

The fourth problem is that the managers of the fund and their investors have different goals. The investors want the fund to prosper. The managers want their fees to prosper. Their “fees” can prosper in many ways — like fees on in addition to the simple fees on managing. There are the fees on advising companies bought, assets acquired, etc.  There is serious power in controlling large swaths of money. A manager wants the fund to keep going.  An investor like you and me wants our rewards out asap.

Goldman Sachs Vintage Fund IV was pitched to me as a fund that bought distressed assets — the perfect vehicle for lousy economic times, like now. I have $660,952 invested in the fund. According to my September 30, 2009 statement, it’s worth $521,333 — a 20% drop in value. I could handle that loss if it weren’t for the “distress” pitch.

What’s most interesting about the fund is that there’s a total of $666,216,207 invested in the fund. According to the September 30 “statement of assets, liabilities and partners’ capital,” there’s an accrued management fee of $17,544,547.  That seems like a lot of money for losing me (and everyone else) 20%. That accrued fee far and away exceeds what Goldman people put into the fund. It seems to be about three times as much.

Of course, miracles happen. And the fund’s assets might suddenly be worth what we paid for them, plus something. Prayer is a good investment strategy. (Sic.)

Remember Monday’s column in which I wrote “Be ultra-wary of Wall Street’s manufactured products” and how Goldman Sachs bet against its own clients? The New York Times wrote a lead editorial on this nasty practice:

Betting Against All of Us

During the bubble, Goldman Sachs and other financial firms created complicated mortgage-related investments, sold them to clients and then placed bets that those investments would decline in value. The practice, detailed in The Times by Gretchen Morgenson and Louise Story, allowed Wall Street to profit handsomely as its clients tanked. It also amplified the financial meltdown, spreading the losses to pretty much everyone.

These deals are now the targets of various government and industry-led investigations. It may turn out that some or all of the products and practices were not illegal, in part because the derivatives at the heart of the transactions have been largely deregulated since 2000.

There are several outrages here. Despite pledges to rein in the excesses, financial reform legislation is months away from passage. The House-passed bill would impose some controls over derivatives, although it is unclear whether it would stop this particular practice. The Senate has not yet produced a bill. And neither the White House nor Capitol Hill has adequately addressed the bigger question of how to curb the high-risk proprietary trading by banks that has created conflicts with clients and endangered the economy at large.

Meanwhile, Wall Street continues to defend what looks to us as rank financial speculation. The way the wizards explain it, betting against one’s clients is one of many techniques to prudently guard against loss.

The Times article points out that unusually large contrary bets placed by Goldman and others were not primarily defensive. According to industry experts interviewed, these bets put the firms’ interests clearly at odds with their clients’ interests. Goldman says that its clients knew that it might place contrary bets. But does that excuse placing them? What goals, other than lining it pockets, were served by the deals?

Disclosure doesn’t dispel another question: Did Goldman and other firms create securities that were bound to fail in order to up the odds that its contrary bets would pay off? Some of the securities were so prone to failure that they soured within months of being created.

To be thorough, investigations of these and other questions would have to reach into the Obama Treasury Department. One of the most aggressive creators of the questionable investments was a firm called Tricadia, whose parent firm was overseen by Lewis Sachs, now a senior adviser to Treasury Secretary Timothy Geithner.

Unsavory and dangerous practices like firms betting against their clients need to be thoroughly investigated. They won’t end until Congress adopts ambitious financial reforms.

New Year’s Eve.
“We close early tomorrow.” said Anders, the manager of the Roosevelt Island Tennis Club.

“Why,”  I asked?

“In order to get ready for the New Year’s Eve Party.”

“But,” I objected, no one invited me to a party.”

“So,” Anders replied, “Go to Time Square and party with all the other losers.”

Times Square on New Year’s Eve. I’d rather be in Rio.

Rio on New Year’s Eve. It’s warmer, too.

More on WordPress and Michael’s fantastic layout.
Is anybody familiar with WordPress? If so, how do I…
1. Get the site to show links that are not underlined.  Right now you have to hover your mouse to see what’s a link.

2. Do tables. The simplest solution seems to be do them in Excel or Dreamweaver and insert them as an image. I’d rather do them native — easier to edit.

This morning, WordPress blew up, refused to save a draft of this column. That forced me to re-write parts of it. That’s  a bad omen. Lesson: keep saving.

Crazy Heart

Bad Blake (Jeff Bridges) is a broken-down, hard-living country music singer who’s had way too many marriages, far too many years on the road and one too many drinks way too many times. And yet, Bad can’t help but reach for salvation with the help of Jean (Maggie Gyllenhaal), a journalist who discovers the real man behind the musician. As he struggles down the road of redemption, Bad learns the hard way just how tough life can be on one man’s crazy heart.

That’s the story of the movie. My wife liked it. She thinks it will win an Oscar for good acting. It was too slow for my impatient taste. I don’t like reveling in failure.

Our wonderful government. From yesterday’s the New York Times.

After the August 2004 bombing of two domestic Russian passenger aircrafts by suspected Chechen rebels, T.S.A. officials rushed to install a new generation of machines, costing $160,000 each, that blew puffs of air on passengers, to sniff for traces of explosives. A total of 207 of the machines were bought, and they were billed as a dramatic improvement to air security.

But even before the machines were all installed, the program was abandoned, as dusty airports caused the highly sensitive equipment to break down too often. They also were not as effective as expected in finding bombs. More than $20 million was wasted on the effort, for equipment alone.

The T.S.A. is also years behind schedule on a plan to take over the process of matching passenger names with the terror watch list, one of the most important recommendations of the Sept. 11 commission. Historically airlines did the matching, and the commission complained that they were not as diligent as the government and did not have instant access to the government’s most up-to-date watch lists.

So far 18 of the about 80 commercial carriers have switched to a government-run new system; 27 others are still testing it.

Lecture Tour with A Difference
On New Year’s Eve, Dan was in no shape to drive, so he sensibly left his van in the car park and walked home.  As he was wobbling along, he was stopped by a policeman.

‘What are you doing out here at four o’clock in the morning?’ asked the police officer.

‘I’m on my way to a lecture,’ answered Roger.

‘And who on earth, in their right mind, is going to give a lecture at this time on New Year’s Eve?’ enquired the policeman.

‘My wife,’ answered Dan grimly.

Harry Newton