Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST, Tuesday, August 21, 2007: Spent
yesterday playing tennis and moving into our new, nearly-finished house. I feel
more positive about markets. Good to get away.
The New Yorker
magazine made me feel more positive with this piece by my favorite author James
Surowiecki. The piece is called Beware Bailouts:
Illustration by Christoph Niemann
In August of
1998, disaster loomed for the U.S. economy. Panic among investors after Russia
defaulted on its sovereign bonds led to plummeting stock prices and a freeze
on global credit markets. The hedge fund Long-Term Capital Management saw
its multibillion-dollar portfolio evaporate in days, and investors pulled
their money from any asset that had even a tinge of risk. But then the Federal
Reserve came to the rescue, slashing interest rates three times in the space
of a few weeks and pouring huge amounts of cash into the financial system.
The stock market rebounded, and the economy boomed. Early the next year, Time
put the Fed chairman, Alan Greenspan, on its cover, along with the Treasury
officers Robert Rubin and Larry Summers, with the headline The Committee
to Save the World.
Nine years later,
its been another terrible August on Wall Street. The meltdown of the
market in subprime loans, which over the past six months has led to the shuttering
of many home lenders and mortgage brokers, has spilled over into the broader
credit market. Bankers and bondholders are demanding very high interest rates
for risky loans and, in some cases, refusing to lend money at all. Hedge funds
and brokerages that invested in subprime securities have found themselves
stuck with billions in assets that no one wants to buy, while, in the past
month, panicked investors have sent the stock market down almost ten per cent.
As anxiety over a global credit crunch spread, Wall Street implored an apparently
reluctant Fed to rescue investors once again. And, last Friday, thats
exactly what it did, cutting the discount ratethe rate at which it lends
to banksby half a point. In response, investors sent the stock market
For anyone with
a 401(k), it was hard not to greet the Feds move with relief. But the
short-term relief comes with a long-term cost. Money managers created the
current turmoil by failing to take risk seriously, enabling borrowers with
sketchy credit records to borrow money nearly as cheaply as blue-chip companies.
In the past weeks, managers had been paying for their folly. The Feds
decision to flood the system with cheap money will create a textbook case
of whats usually called moral hazard: insulating fund managers from
the consequences of their errors will encourage similarly risky bets in the
Now, you can
take a fear of moral hazard, and a desire to see foolishness punished, too
far. In times of real crisis, we dont want the Fed to follow the advice
that Herbert Hoover says he got from Andrew Mellon during the Great Depression:
Liquidate labor, liquidate stocks, liquidate the farmers, liquidate
real estate. . . . Purge the rottenness out of the system. When the
health of the U.S. economy is under serious threat, the Fed should act. But
in this case its far from clear that the turmoil was an actual menace
to the underlying economy of the U.S. Bailing out hedge-fund managers was
great for Wall Street, but it may not have been such a good deal for Main
so dominates our image of the U.S. economy these days that its easy
to assume that whats bad for the Street must be bad for everyone else.
But, while its true that a complete market meltdown would have disastrous
effects on the economy as a whole, market downturns like those of the past
few weeks often have only a small effect on businesses and consumers. In part,
thats because much of what happens on Wall Street consists of the shuffling
of assets among various well-heeled players, rather than anything thats
fundamental to the smooth functioning of the U.S. economy. (The economy did
fine before the advent of hedge funds and private-equity funds, and would
probably do fine in their absence.) Similarly, while stock-market tumbles
are always painful, they have no concrete impact on most American consumers,
who own little or no stock. (In any case, the S. & P. 500 is still up
ten per cent over the past year, which hardly suggests imminent disaster.)
And, in the short run, theyre irrelevant to most corporations, too,
since few companies actually use the stock market to raise capital.
The bond and
loan markets do, of course, matter quite a bit to companies and to individuals,
because no economy can run without a steady supply of credit. But, although
standards for corporate lending have tightened in recent weeks, and interest
rates on corporate bonds may have risen steadily, theyre still low by
historical standards, while the rates for most traditional mortgages have
barely risen. That may be why the economy as a whole shows few signs of imminent
doom. Corporate profits continue to go up. Unemployment is still relatively
low, and wages in the last quarter rose at a surprisingly fast rate. Likewise,
in July, retail sales were healthier than expected, and industrial production
was reasonably brisk.
not to say that the economy has suffered no fallout from the subprime collapse.
The fall in housing prices, the drying up of new construction, and the sharp
rise in foreclosures in many areas are having a serious impact on employment
and economic growth. But these are not problems that the Feds action
will solve. Cutting the discount rate is not going to help subprime borrowers
get new loans, nor will it get the housing market moving again. What it will
do is reassure investors and save some money managers from well-deserved oblivion.
It may be that the risk of a full-fledged credit crunch was high enough to
make this worth doing. But there is something unseemly about watching the
avatars of free-market capitalism rely on the government to pay for their
bad bets. And there is something scary about contemplating the even bigger
bets theyll make in the future if they know that the Fed is there to
bail them out. ?
the Tumult, Is It Buffett Time? And the Wall Street Journal
writes about Buffet-size opportunities in today's depressed markets:
The bond market
has seized up, stocks are in turmoil, private-equity funds are sidelined and
hedge-fund managers and lenders are hosting fire sales.
These are happy
days for Warren Buffett.
spend money faster than Imelda Marcos when things are right," he says,
referring to the former Philippines first lady and renowned shopper.
For the past
three years, Mr. Buffett's traditional bargain-hunting investment strategy
has been partly stymied as debt-fueled private-equity funds and hedge funds
drove asset prices out of his value-investing orbit.
Today he's sitting on a war chest of nearly $50 billion in cash.
Now, with the
shakeout in the subprime-mortgage market forcing the end of easy money and
the distressed sale of assets -- such as Thornburg Mortgage Inc.'s sale yesterday
of $20.5 billion of its top-rated mortgage-backed securities -- many see Mr.
Buffett, the 76-year-old chairman of the giant Berkshire Hathaway Inc. holding
company, as one of the last buyers standing.
So what is Berkshire
buying or looking to buy? Mr. Buffett hews to Berkshire's policy of not discussing
potential transactions. But it is safe to guess that sellers of all shapes
and sizes -- from beleaguered lenders hurt by the mortgage-backed and commercial-paper
markets, to sponsors of private-equity deals that run the risk of falling
through -- are reaching out to him.
speculate Berkshire could be a buyer for parts of mortgage lender Countrywide
Financial Corp., whose stock price has been hit hard by subprime worries.
Countrywide's assets, including its debt-servicing business and its portfolio
of high-quality mortgages and mortgage-backed securities, could be attractive
to Berkshire, these investors say.
be the first time a financial firm asked Mr. Buffett for help. In 1991, he
took over as chief executive of Salomon Brothers, then in the midst of a criminal
probe for a scandal involving the Treasury market. Many credit Mr. Buffett
today for shepherding Salomon back into the good graces of securities regulators
later, he came close to bailing out hedge-fund Long-Term Capital Management,
which was run by some of his old Salomon crew, but later changed his mind,
in part because he wanted the firm's assets -- its stocks, bonds and other
securities -- not its management company and its complex partnership structure.
Countrywide runs some straightforward lending businesses, a strong brand name
and high-quality mortgage assets that could complement Berkshire's other securities
investments. For example, Berkshire is a longtime shareholder in Wells Fargo
& Co. and M&T Bank, also reputed to be conservative lenders with strong
brand recognition and long operational histories.
In fact, Mr.
Buffett has already been dipping his toe a little deeper into the market for
mortgage-backed securities. In the second quarter, Berkshire reported that
its insurance division doubled its investment in mortgage-backed securities
rated double-A or higher, to $3.7 billion, from the first quarter.
As with other
investments, Mr. Buffett declined to elaborate.
betting that he's likely to swoop in and make some good calls. While the Dow
Jones Industrials Average sank last week, Berkshire's normally steady shares
rallied. The Class A shares gained $2,200, or 1.9%, yesterday in 4 p.m. composite
trading on the New York Stock Exchange to $120,700, up 8.2% since Aug. 10
and 9.7% higher in the year to date.
Berkshire Hathaway's market," says Thomas Russo, partner at investment
fund Gardner Russo & Gardner, where he manages about $3 billion. Mr. Gardner,
also a longtime investor in Berkshire, says Mr. Buffett should be able to
cherry-pick from a variety of cheap assets.
deals, which rely on the debt markets for financing, could also be attractive
to Berkshire. Texas utility TXU Corp., which is trying to persuade its shareholders
to agree to its sale to Kohlberg Kravis Roberts & Co. and TPG, would complement
Berkshire's stable of companies, which includes the utility conglomerate MidAmerican
The trick would
be getting a good price if the deal falls through, which might be difficult
given TXU's improved operating performance recently. Also, Berkshire doesn't
participate in auctions, so any deals would have to be privately negotiated
with Mr. Buffett.
for TXU declined to comment. A Countrywide spokesman wrote in an email that
company policy prevents it from commenting on rumors of mergers and acquisitions.
also be taking advantage of cheaper stock prices in companies he already owns.
For example, Berkshire bought shares of USG Corp., the wallboard maker, for
as high as $46 in the past year and built up a little over a 17% stake. Yesterday,
the shares closed at $37.96.
Aside from the
nearly $47 billion in cash and cash equivalents on its balance sheet as of
June 30, Berkshire also holds about $74 billion in stocks and about $27 billion
in bonds, some of which Mr. Buffett has said he wouldn't hesitate to redeploy
to other investments if they looked like they would yield better returns.
so far this year has generated about 32% of its revenue from insurance units
including Geico and General Re, can also borrow cheaply since it carries a
sterling triple-A credit rating.
doesn't shy away from good, quick trading opportunities . After the Enron
Corp. and WorldCom debacles in 2002, Berkshire bought the high-yield bonds
of some 25 energy companies and some telecommunications firms, which had all
been priced lower because of various scandals. By the end of that year, Berkshire
had sextupled its "junk" bond investment to $8.3 billion.
At the end of
2003, Berkshire reported realized gains from the investments of about $1.1
billion, or 13.3%. Today, Berkshire still owns $2.9 billion in junk bonds,
which Mr. Buffett says he'd sell if somebody brings him a deal that he can
appear to be a shortage of people who are courting him these days. "I'm
definitely more popular than I was a few months ago," he says -- and
then quips: "But I started from a low base."
super service: My son's friend broke the Canon SD700 camera I had
handed down. (I now have the SD850.) Canon couldn't fix the SD700, apologized
and sent my son a brand-new SD800. Yes, you read right. They gave him a better
To repeat:: Canon
makes the best point-and-shoot camera. The latest model is the SD850, which
I have and love. The SD800 is cheaper and perfectly fine also.
The Canon SD800 has image stabilization and incredible software. It lets
you turn out professional-looking photos in all good and miserable conditions.
aids: My audiologist wants $5,925 for
a pair of Siemens hearing aids I can buy on the Internet for $2,930.
I send her a clip of the web site, with an email saying "Can't you do
better?" One day later, she came back at $4,060 -- a 31%
savings for one email.. I think I'll try another "Can't you do better?"
today. I wonder if she'll match the Internet price? This is fun.
readers have emailed me "hearing aid" stories. The themes are:
The industry is rife with rip-offs.
2. VA hospitals are the cheapest place to buy hearing aids. They sell them to
you at cost.
3. Most people go through many pairs before they finally end with a pair that
works. The process can be long, boring and expensive.
4. The fastest way to your wife's heart is by buying a hearing aid.
from India, Thailand, Cambodia, Singapore and Australia: I
picked my son up this morning. He just landed on a Continental Air from New
Delhi. The plane was -- can you believe this -- early. He loved his quick summer
trip. And I just loved getting up at 4:00 AM and schlepping his dog to Newark
to greet his home-coming master. Finally, my day's big accomplishment.
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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