Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM Monday, April 18, 2005:
First, bragging rights. Readers of this column know I've been saying for weeks,
"The stockmarket is not the place to be." Hopefully, that advice
has minimized our losses. My big mistake was not aggressively recommending
put options. That's something I'm learning. When you feel, as I have, that the
market was going to take a major tumble, you need to protect yourself and your
portfolio by buying put options. Hedge your holdings. This way you make up in
profits on the put options what you lose on the stocks you're
long on. Hopefully some of you did this. After all, I did quote Fred Hickey's
put option recommendations -- he has put options on a bunch of tech stocks.
For his list, click here.
is "What do we do now?"
You can smell
the fear on Wall Street. It's palpable.
Stocks fell on Friday to their lowest point since the election.
When the markets closed on Friday, the question on everyone's lips was "What
about next week?" Would prices fall sharply -- perhaps as much as 25%?
After all, said many Wall Streeters, the same thing happened in 1987. The
market fell the week before the BIG One-Day Crash. Will it now fall BIG
I don't know the
answer. And no one else does either (though Tokyo ominously started the week
with a sharp 3%+ drop).
Over the weekend every guru and his uncle published their "findings"
and concluded that stocks were now even better value. After all the stocks are
cheaper and the economy is recovering. Blah. Blah. Blah. Typical:
"This is one of the most dangerous times I've ever seen for the average
investor in my 25 years on Wall Street. But it also promises to be one of the
most rewarding for seasoned, proven stock-pickers."
"Nothing to fear but fear itself. ... The good news is that, at some
point, the uncertainties I've talked about here will be resolved, even if the
political atmosphere remains poisonous. When that finally happens, stocks could
be galvanized to really move up and out of this fearful trading range."
Luskin also writes that "Fred Goodman, who publishes the best technical
analysis of the stock market I've ever seen (find it on my Web site), confirms
it. He tells me the American Association of Individual Investors sentiment poll
now shows its members about as bearish as they were back in February 2003, just
before the panic bottom in March that gave birth to the current bull market."
Maybe the experts
are right. And it's a great time to buy. Maybe it's not.
I, for one, have serious concerns about the great economic issues of our time
-- soaring budget deficits and trade deficits, high oil prices, low dollar prices,
rising interest rates, low consumer sentiment -- the University of Michigan's
consumer confidence Index is at its lowest point since September, 2003.
And I have no
ax to grind, no newsletter to peddle, no portfolio management services to hype.
I'm writing to teach myself, to make sense out of this very difficult situation.
So, for the time
being my tendency is to follow Todd's Rule: "When in doubt, stay out."
Is it too late
to buy put options? I don't know the answer to that one. I'm guessing
that the price of put options has risen. I'm writing this column long before
Monday's market opens. I'm in Boston visiting my daughter and watching her friend
run in the Boston Marathon. I'm staying at a ridiculously overpriced Boston
hotel called the Wyndham, which can't get its much-touted wireless Internet
access to work.
There clearly are a bunch of tech stocks that could be and should be shorted
-- even at Friday's lower prices. All of us know the depressed tech areas. Wireless,
PC hardware and enterprise software are a good place to look for
put options. But like Fred Hickey, I wouldn't bet the shop on put options. We
should limit our exposure to no more than 3% of our portfolios. Should
the market bounce, we may lose all the monies we spend on put options. But that's
a small price to pay for protecting whatever equities we still hold. On the
other hand, we may make a killing if the market does, in fact, drop dramatically.
My friend Tim
McInerney, a biotech guru, counseled me last week. There are only two events,
he said, you should be concerned with -- the price you buy and the
price you sell. All the other prices along the way are irrelevant.
The question is
now: Will today's prices be irrelevant and will stocks climb back? The answer
is clearly Yes -- but only for stocks with solid, growing earnings and,
increasingly, those paying a dividend. For example, I own shares in General
Electric, which reported strong earnings growth last week. I don't own shares
in IBM, which didn't report strong earnings growth.
I do have one
strong recommendation -- Don't buy the recommendations of all the newsletter
peddlers and portfolio managers who claim "times are tough. But stick
with me. Give me your money and I'll guide you though." Don't believe
a word of it. Times are tough. Nobody knows the correct path. Don't waste your
money on high-priced gurus. Which is why I recommend, "When in doubt,
stay out." At least for now.
Let's look for
some put options and let's watch. There is talk, says the New York Times, that
"Wall Street is prepared for some bad news on inflation this week, with
forecasts for an increase of 0.6 percent in the Producer Price Index for finished
goods in March and a 0.5 percent jump in the Consumer Price Index. The indexes'
core rates, which exclude food and energy, are expected to show smaller gains
- just 0.2 percent each, according to Bloomberg News. That may be comforting
to Wall Street and the Federal Reserve, but consumers pay higher prices every
day. In the 12 months through February, the price of gasoline jumped 14.7 percent.
Chicken was up 5.2 percent; pork, 6.3 percent; and white bread, 6.4 percent.
Tobacco and smoking products were up 5 percent, and medical care and legal services,
4.3 percent. ... Housing starts for March are forecast to show a 4.3
percent decline, to an annual rate of 2.1 million, while the leading indicators
are expected to be down 0.3 percent."
One good news:
The yield on the benchmark 10-year Treasury note fell to 4.24 percent,
its lowest level in two months, as bond prices rose sharply. Nice mini-boom
in bonds! This little boom in bonds reinforces my belief that diversification
and lots of cash remain the only way to handle these weird markets. Fortunately,
I own a few triple tax-free bonds. They provide some modicum of tax-free income.
stocks, continued: AIG and Berkshire Hathaway's General
Re got their share of bad press over the weekend. AIG smells like the
early days of Enron and WorldCom, when bad news was just dribbling
out -- just before the torrent began. I don't like also what I read about General
Re's growing involvement in the AIG mess. Click
And also General Re's involvement with a bankrupt insurer called Reciprocal
of America. Click
here. If you can't access either of these lins, you need to sign up
for The New York Times online. It's free.
The demise of Reciprocal of America, a malpractice insurer, has left
the children of Bertha Walker of Kansas City, Kan., uncertain that they will
get the money awarded to them. Photo from the New York Times.
is great. I can't live without it. The best TiVo deal today is $99
for an 80-hour box plus $299 for product lifetime subscription. Total: $400.
Click here or Click
here. The box is from a company called HUMAX.
A product lifetime subscription to the TiVo service covers the life of the TiVo
Digital Video Recorder (DVR) you buy -- not the life of the subscriber. The
product lifetime subscription accompanies the product in case of ownership transfer.
The subscription remains in effect if your DVR needs to be repaired or replaced
due to a malfunction (see manufacturer warranty details). Because a product
lifetime subscription is linked to a particular DVR, it cannot be transferred
to any other DVR (unless the DVR is replaced due to a malfunction covered by
the manufacturer's warranty). Each DVR purchased requires its own service subscription
Modems work better and are much faster than DSL lines. That's
been my experience. Other people like their DSL lines.
surgeons get paid big money
A mechanic was removing a cylinder head from the motor of a Harley motorcycle
when he spotted a well-known heart surgeon in his shop. The surgeon was there
waiting for the service manager to come take a look at his bike when the mechanic
shouted across the garage, "Hey Doc, can I ask you a question?"
The surgeon, a bit surprised, walked over to where the mechanic was working
on the motorcycle.
The mechanic straightened up, wiped his hands on a rag and asked, "So Doc,
look at this engine. I open its heart, take the valves out, repair any damage,
and then put them back in, and when I finish, it works just like new. So how
come I get such a small salary and you get the really big bucks, when you and
I are doing basically the same work?"
The surgeon paused,
smiled and leaned over, and whispered to the mechanic. "Try doing it with
the engine running."
what exactly is the problem?
A woman and a baby were in the doctor's examining room, waiting for
the doctor to come in for the baby's first exam. The doctor arrived, examined
the baby, checked his weight, and being a little concerned, asked if the baby
was breast-fed or bottle-fed?
down to your waist," the doctor ordered.
He pinched her
nipples, then pressed, kneaded, and rubbed both breasts for a while in a detailed
Motioning to her
to get dressed, he said, "No wonder this baby is underweight. You don't
have any milk."
she said, "I'm his Grandma, but I'm glad I came."
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 .
You can't click on my email address. You have to re-type it . This protects
me from software scanning the Internet for email addresses to spam. I have no
role in choosing the Google ads. Thus I cannot endorse any, though some look
mighty interesting. If you click on a link, Google may send me money. That money
will help pay Claire's law school tuition. Read more about Google AdSense,
here and here.