Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM Wednesday, April 13, 2005: The
was weird yesterday.
As the Wall Street Journal explained this morning, "Through 2005,
investors have cringed whenever U.S. policy makers opined on the economy. Early
Tuesday, stocks fell sharply as investors hunkered down for another pummeling
ahead of the release of minutes from the March 22 meeting of the Federal Open
Market Committee. Investors
instead got a pleasant surprise when the minutes showed policy makers aren't
likely to put the pedal to the metal on interest-rate increases any time soon,
and stocks rallied into the close." (See my chart above.)
In other words, the Fed will continue to lift interest rates -- but gradually
as it has been doing. This does not mean stockmarkets won't go down this year.
I predict they will go down. But it does mean stockmarkets are as irrational as
ever (look at yesterday) -- perhaps more so, given the extent of programmed trading,
which accentuates dips and rises.
More reasons why the housing boom is unsustainable:
Interest rates are rising. Adjustable Rate Mortgages (ARMs) will start to get
very expensive. Yet, according to the Mortgage Bankers Association, 37% of
homeowners are expected this year to finance their home purchases using ARMs.
The reason is simple: one-year ARMs average 3.9% last year, compared
with 5.84% for 30-year fixed rate mortgages. But in three years,
when these rates adjust to reflect higher rates, a whole bunch of "homeowners"
are gong to get nasty surprises. It gets worse. The National Association of Realtors
says 42% of first time homeowners put no deposit down. There are
also a whole bunch of homebuyers who have been buying their homes using interest-only
loans, i.e. no principal repayment. Go figure what will happen in the next
few years. In many areas of the country, homes will be foreclosed and prices will
come tumbling down. I got these numbers from the Financial Times. Click
bad are Wall Street analysts? Pretty bloody awful is the simple answer.
On Monday, the Wall Street Journal ran this most remarkable story"
After all the
post-bubble scandals involving analysts who recommended stocks they knew were
troubled, you would think that Wall Street analysts would be doing a better
job of picking stocks.
You would be
As has been
the case in past years, stocks with large proportions of "sell"
recommendations from Wall Street analysts have lately performed better
than those with plenty of "buy" or "hold"
ratings and no sell ratings at all, according to an analysis by Zacks Investment
Research in Chicago, done for The Wall Street Journal. In fact, the stocks
with sell recommendations have widened their lead since the stock bubble burst
It might seem
surprising that the stocks that Wall Street hates would do better than
the ones it loves, but it makes a certain amount of sense.
investors actually look around for stocks with a lot of sell recommendations,
and, if the company looks likely to survive, they buy. The reason is simple:
Wall Street analysts hate to tell clients to sell. They avoid lowering their
recommendation on a stock until after something bad has happened, when the stock
already has fallen.
noticed it and I frequently buy stocks when they have sells on them," says
Robert Marcin, who runs a hedge fund called Defiance Asset Management in Conshohocken,
Pa. "By the time analysts get around to putting sells on stocks, the stocks
are probably primed to perform well."
recalls speaking with an analyst last year about home builder KB Home, on which
the analyst had an "underperform" rating -- a nice name for a sell.
"It is up 100% since I spoke" with the analyst, he says.
maker Gateway. At the start of last year, eight of the 14 analysts following
it rated it a sell, and no one considered it a buy (the rest called it a "hold.")
Gateway rose 31% last year, eclipsing the 9% gain of the Standard & Poor's
500-stock index. By the end of the year, its gains had turned some analysts
into bulls -- just in time for it to fall 33% in this year's first quarter.
analysts' awareness of the problem, they clearly have trouble with their ratings.
The problem has gotten worse lately, even after the Wall Street stock-research
scandals. After the market's bubble, e-mail messages showed that some analysts
had put buy ratings on stocks they privately ridiculed. Brokerage firms had
to pay millions of dollars in settlements and promised to change their ways.
Analysts were pressured to issue more sells. Wall Street firms assured clients
that, henceforth, a buy would be a real buy, and when an analyst lost faith
in a stock, he or she would issue a sell.
On the face
of it, things did change. For a brief period in 2000, just as the stock bubble
was bursting, 95% of the stocks in the S&P 500 had no sells at all,
according to Zacks. No stock had more than one sell rating. That soon changed.
Today, only 38% are without sell recommendations. Of the 62% with
at least one sell, 9% have five sells or more.
But human nature
doesn't seem to have changed. Even after this groundswell of Wall Street
sincerity, the stocks with the highest percentage of sell ratings still are
doing better than those without any sells.
In fact, the
period when buy-rated stocks have recently performed best was during the stock
mania of the late 1990s, when out-of-favor stocks were being abandoned and it
was hard to find sell-rated stocks at all. From 1991 through 1996, the stocks
with the most sell ratings outgained those without any sells, Zacks found. But
from 1996 through 2000, those with no sells outpaced those with the most sells
-- possibly in part because there were so few sell-rated stocks to measure.
Since 2000, even though Wall Street supposedly has become more discriminating,
the sells are leading again. In 2003-04, for example, the sells rose 36%
on average, while the buys rose just over 25%. ...
not all stocks with heavy sell ratings are good stocks to own, and not all stocks
with many buys are bad stocks. Enron, for example, was widely hated by analysts
shortly before its demise, and they were right.
have to do a fair amount of research" if you invest this way, to be sure
you aren't getting an Enron or a WorldCom, says David Dreman, chairman of Dreman
Value Management in Jersey City, N.J. He likes to buy stocks such as retailers,
which can rise and fall sharply based on the economy, and tobacco makers, whose
fortunes can depend on litigation. He finds analysts tend to abandon them at
the bottom and begin recommending them at the top.
But the experience
can be scary. He bought scandal-plagued Tyco International in 2002 in a belief
that its business was solid, but the stock continued plunging, losing another
50% of its value. He needed courage to hold on, but today the price is almost
twice what he paid.
believes analysts are often wrong. A study he has done shows that analyst forecasts
for corporate profits in a wide group of large and small companies have been
off over the past 30 years by an average of 40%, either above or below
the actual result.
president of Boston money-management firm Delphi Management, ignores analyst
reports and does his own research, saying, "We've always thought that they
were promotional literature."
facts about technology:
+ In the early 1990s, Novell spent $1.5
billion building a software suite around WordPerfect and Quattro Pro to
compete with Microsoft Office. In 1996, it sold the whole thing to Corel for
$10 million, which proceeded to screw it up also.
+ In a survey of 136,000 PCs at 251 North American companies, AssetMatrix Inc.
found Windows XP Service Pack 2 (SP2) installed only 9% of the PCs. The
reluctant companies identify software compatibility issues as the main reason
they're holding back. What that means in simple language is that after you install
SP2 on your computer, some of the software on your computer will no longer work.
As I've written a million times, beware of installing SP2 on your PC. If in
doubt (or lacking time to do the testing), don't install SP2. My personal
experience shows most of us don't need it.
less opulent than Vatican, reports disappointed Pope. The
Onion is a satirical site on the Internet. Today it runs this perfectly wonderful
soul of Pope John Paul, which entered heaven last week following a long illness,
expressed confusion and disappointment Saturday, upon learning that the Celestial
Kingdom of God to which the departed faithful ascend in the afterlife is significantly
less luxurious than the Vatican's Papal Palace, in which the pope spent the
past 26 years of his earthly life.
Peter's Basilica, with its 90-foot bronze baldachin designed by Bernini,
is one of the many Vatican splendors no longer enjoyed by Pope John Paul
all the marble statues, sterling-silver chalices, and gem-encrusted scepters?"
the visibly disappointed pope asked. "Where are the 60-foot-tall stained-glass
windows and hand-painted cupolas? Where are the elaborately outfitted ranks
of Swiss Guards? Why isn't every single surface gilded? This is my eternal reward?"
to the New Testament, has "brilliance like a very costly stone... of pure
gold, like clear glass..." with "twelve gates... each gate a single
pearl." Yet the pope, who spoke from the afterlife, said heaven is nothing
like the "solid-gold city" detailed at length by John of Patmos in
the Book of Revelations.
the Bible was not intended to be taken literally, after all," John Paul
II said. "Don't get me wrong: It's very nice up here quite beautiful
and serene. It's just not as fancy as what I'm accustomed to. If I'd known heaven
was going to be like this, I would've taken one last tour through my 50 rooms
of velvet-draped thrones and priceless oil paintings before saying 'Amen' and
breathing my last."
According to the
pope, heaven is merely a place of unending peace and happiness, wherein all
the spirits of the Elect live together forever in perfect harmony and goodness,
basking in the rays of God's divine love.
here, everyone is equal," John Paul II said. "No one has to go through
an elaborate bowing ritual when they greet me. And do you know how many times
my ring has been kissed since I arrived? None. Up here, I'm mingling with tax
collectors, fishermen, and whores. It's going to take a little getting used
to, is all."
The pope said
it is amusing to think that he has been waiting for this "so-called Paradise"
his entire life.
almost 84 years reciting novenas and Hail Marys to get to this restful place,"
John Paul II said. "If I'd wanted peace, quiet, and pretty clouds, I could've
moved to the Italian Riviera. Frankly, this afterlife represents a significant
drop in my standard of living."
artist's depiction of a disappointingly austere heaven.
difference between Potentially and Realistically
A young boy went up to his father and asked him, "Dad, what
is the difference between potentially and realistically?"
The father thought
for a moment, then answered, "Go ask your mother if she would sleep with
Brad Pitt for a million dollars. Then ask your sister if she would sleep with
Brad Pitt for a million dollars, and then, ask your brother if he'd sleep with
Brad Pitt for a million dollars. Come back and tell me what you learn from that."
So the boy went
to his mother and asked, "Would you sleep with Brad Pitt for a million
dollars?" The mother replied, "Of course I would! We could really
use that money to fix up the house and send you kids to a great University!"
The boy then went
to his sister and asked, "Would you sleep with Brad Pitt for a million
dollars?" The girl replied, "Oh my God! I LOVE Brad Pitt I would sleep
with him in a heartbeat, are you nuts?!?!?! "
The boy then went
to his brother and asked, "Would you sleep with Brad Pitt for a million
dollars?" "Of course," the brother replied. "Do you know
how much a million bucks would buy?"
The boy pondered
the answers for a few days, then went back to his dad. His father asked him,
"Did you find out the difference between potentially and realistically?"
The boy replied,
"Yes... Potentially, you and I are sitting on Three Million Dollars..............
but Realistically,......... we're living with two Sluts and a Queer."
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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