Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST, Wednesday, August 8, 2007: This
may be the hardest and the easiest stockmarket to predict. It's impossible to
predict day to day. The gyrations are enormous. Up 200 one day, down 200 the
next, etc. It's particularly easy to panic -- the disease which afflicts me.
Panic forces you to act, especially to sell. Panic can lead to a too-early sale.
Panic can also lead to a sale that you'll be eternally grateful for. The key
is to make panic based on logic and sound rules. The soundest rule is Harry's
15% Sell Rule. If it's down by 15% from its peak, sell it. In a volatile
market (e.g. today's), selling it today can come home to bit you in the tushy
tomorrow, as it zooms back. Hence "panic" can lead to self-misery
and ridicule by all your "sophisticated" friends who say you sold
"too early" and "you're a lousy investor; you shouldn't own equities,
you should be in for the long-term, etc. etc."
When to sell is the hardest part of the investment equation. The "traditional"
It's risen to your price target. Good luck figuring one.
2. The company has disappointed in its earnings, or other fundamentals.
3. Newton's 15% Sell Rule kicks in. I have back-tested this rule with many studies.
Its track record shows you save far more than you would have made staying
in and watching it go down further or rebound into the ionosphere.
After you sell,
the best thing you can do is NOT to watch the stock you sold. Newton's
new Law (made up today) of Stockmarket Masochism says that your stock
will bounce back. And you feel like a total moron. If you're like me, you'll
probably mope around all day, making the lives of everyone you meet totally
miserable. My "solution" is to take my misery out on some victim on
the other side of the tennis net. That nearly worked last night, except I lost.
But I played well -- the best I've ever played. So that mitigated my misery.
One of my proudest moments was panicking into selling Cisco at $36+ in the year
2000. Obviously (see chart) I should have sold it at $68 (85% of $80, its peak),
but I wasn't watching and my Cisco stock was pledged to the bank as security
deposit on a commercial lease.
My panic at that
time gave me the incentive to work through the layers of idiocy at the bank
who were concerned that selling Cisco would cause their security deposit to
evaporate. But my decision was right. Cisco has still not recovered to its $36
By the way, if
tennis doesn't work to absolve your feelings of idiocy, try buying something
on eBay. That will keep you amused (i.e. busy) for hours.
happening in the markets and in the economy? Despite
Monday's big bounce I remain no more optimistic long-term than I was on Monday
when I wrote "The party is well and truly over." A reader recommended
I read the blog "Cassandra does Tokyo -- Mostly original content that
examines financial surreality in equity markets in general, and the Japanese
Stock Markets in particular."
with dislocation, talks about a dysfunction investment strategy, runs this icon...
and then has these interesting words:
swans, falling from sky..
I'm reading the excellent book, Fooled by Randomness -- the Hidden Role of
Chance in Life and in the Markets. The phone rings twice this morning. Neither
Muriel nor Lucinda, who work for me, will be coming to work this morning. The
reason? Torrential rains last night wiped out train service all around New York
City this morning. The rains will affect trading on Wall Street. We'll save Muriel
and Lucinda up for a sunny day. (I couldn't resist that one.)
But there is
a another possibility, and I think it perhaps more likely. SOME VERY LARGE
FUNDS ARE IN THE PROCESS OF DE-LEVERAGING/LIQUIDATING (EITHER FORCIBLY OR
VOLUNTARILY), THE NAMES OF WHICH WILL BECOME APPARENT TO ALL SHORTLY. This
means that they are having to buy-in their shorts presumably a combination
of expected under-performers, most likely from the realm of the shitty, the
overvalued, the large cap & cap-weighted ETFs or all the preceding, and
sell/puke those generally smaller-cap alpha-generating things that are "cheaper"
or exhibit characteristics of value that are likely to yield positive relative
return in the future, AND THEY ARE SELLING THEM WITHOUT RESPECT TO PRICE OR
VALUE BECAUSE THEY HAVE TO, either because investors have asked for their
money back, or to meet margin calls elsewhere, or because their lenders have
pulled their lines, and so on.
Make no mistake:
This is a liquidation event, and it is of a magnitude much larger than seen
in 04, 05, 06, or early 2007, and rapidly approaching that of 2002. While
GS/Mark Carhart's $10 billion Alpha fund was down 8% in late July, IT IS LIKELY
THAT THE LOSSES FOR HIS AND SIMILAR FUNDS IN AUG TO DATE WILL STAGGERING BY
For those under-leveraged and under-exposed, this will be opportunity. For
those investing in the typical beta fund with concentrated smaller-cap longs
versus ETFs, with any kind of value bias, there will be no exit. The response
by the end investors - particularly HNW retail who for the most part are absolutely
clueless about risk, and generally feedback trading, the will be redemption
PANDAEMONIUM as knaves digest the realization that oh-so-much is, in fact
correlated to credit, and that their loss-tolerance is, contrary to bluster
and swagger, very small indeed.
to take a guess or two as to "WHO" precisely is getting waterboarded
by the market??!?
Australia thinks will happen to the U.S. As the U.S. Reserve Bank
decided to hold its rate steady, Australia raised theirs. Here's the statement
from Glenn Stevens, governor monetary policy:
At its meeting
yesterday, the Board decided to increase the cash rate by 25 basis points
to 6.5 per cent.
data in recent months have signalled a pick-up in the pace of growth in demand
and activity. Capacity utilisation is high after a lengthy period of expansion,
and unemployment over recent months has continued to decline. Business and
household confidence are strong. The demand for finance has strengthened,
even apart from the temporary surge in June, particularly in the business
sector. These conditions have been accompanied recently by higher-than-expected
the outlook, the Board gave careful consideration to recent developments in
the global economy and financial markets. Credit markets in the US have experienced
some turbulence in recent weeks, which may pose downside risks to the US
economy. While this will need to be kept under review, developments to
date do not appear to have changed significantly the broader global outlook.
Even with the US slowing down, forecasts of global growth have recently been
revised upward. High world commodity prices remain an important source of
stimulus to Australias national income and spending.
For some months,
the Board has recognised that stronger economic conditions were likely to
put upward pressure on inflation, notwithstanding some dampening influence
from the higher exchange rate. As a result, the Board has been of the view
that further monetary policy tightening could be required. The main factors
that had allowed time for further consideration were that, prior to this month,
the two most recent inflation results had been unexpectedly subdued, and wages
growth had remained moderate. However, the high CPI outcome for the June quarter
indicated a less favourable near-term outlook, with the implication that any
further increases in inflation would take place from a higher starting point
than previously envisaged.
Based on these
considerations, the Board judged that a somewhat more restrictive monetary
policy setting was required in order to keep inflation consistent with the
target in the medium term.
tells fibs about its delivery times. It says on its web site it "ships
within 1-2 weeks." Michael, my son, ordered a ThinkPad notebook on August
1. He needs to take it to business school. Lenovo is now telling us it won't
be shipped from the factory until August 27. That's not 1-2 weeks. That's too
late. My son is furious. Lenovo's customer "service" stinks. Talking
to overly polite but powerless people in India doesn't cut it. Even Lenovo's
main North Carolina headquarters office switchboard is answered in India. The
mailing address of Lenovo's president is secret. The operator will not divulge
it. Dealing with Lenovo is an exercise in pure insanity. They obviously just
don't care. One good reason to be wary of their stock.
Bourne Ultimatum is boring: The movie is an endless
chase broken with occasional violent fights. There is no plot -- or at least
one that makes any sense. The technology is not believable; the bad guys even
less so. Matt Damon is the movie's only redeeming asset -- but his handsomeness
is not sufficient to justify the steep admission cost (even for seniors)..
A Jewish husband and wife were having dinner at a very fine restaurant
when this absolutely stunning young woman comes over to their table, gives the
husband a big open mouthed kiss, then says she'll see him later and walks away.
The wife glares
at her husband and says, "Who was that?"
replies the husband, "she's my mistress."
the last straw," says the wife. "I've had enough, I want a divorce!"
"I can understand
that," replies her husband, "but remember, if we get a divorce it
will mean no more shopping trips to Paris, no more wintering in Barbados, no
more summers in Tuscany, no more Jaguar in the garage and no more yacht club.
But the decision is yours."
Just then, a mutual
friend enters the restaurant with a gorgeous babe on his arm. "Who's that
woman with Moishe?" asks the wife.
mistress," says her husband.
prettier," she replies.
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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