Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST Friday, December 1, 2006: A
friend called yesterday. He had just invested in a great software company, which
could do basically everything collaboration-wise that Microsoft, Oracle and
other biggies couldn't. He'd invested $25,000 and for that, plus six months
of his half-time work, he'd got 10% of the company. Sounds great, except:
The company is four years old and is essentially broke.
2. My friend is not pleased with how the management has already spent his money
(on high salaries).
3. My friend didn't visit any of the several big-corporate beta testers of the
new software -- to find out if they liked the software. This was probably important,
since none of the beta testers were paying any money. Their betas were free.
everything I know. Should I be interested sufficiently in potentially investing
the time to read stuff on the company and do some checking? My criteria these
days is simple:
I rather be playing tennis, writing my book, spending time with the family,
traveling to some exotic locale or sleeping (and doing all the foregoing in
now you've figured my feeling -- Go back to bed.
things to note:
1. These days software companies are trivial to start. Anyone (except me) can
write software. The tools are ubiquitous.
2. This is not the 1990s. Angels and venture capitalists will not shower you
with money for your latest shiny new thing.
3. Companies and people are very leery of new software. Installing it, trying
it, reorganizing your life around it is very time-consuming. I have four pieces
of allegedly super software I'd like to try, learn and use. Some have been sitting
around for weeks. (Maybe this weekend.)
4. This company clearly doesn't have the money for "sales and marketing."
My rule: a technology company needs at least ten times as much money
for sales and marketing as it needs for engineering. Few have those dollars,
or even think about them. Most software companies employ engineers.
There's one final
issue. What sort of company is it? In Newton's Telecom Dictionary, I
define sandbox, as
inventors look for outside financing from angels or venture capitalists. Some
people look for the money to grow their company, by selling product or service
and ultimately making a profit. Some people look for the money so they can continue
having fun writing software, creating hardware, and doing whatever cool new
things amuse them. These are "sandbox" companies. They will never
produce a real product for their customers or a profit for their stockholders.
To be a successful investor, you need to identify sandbox companies and avoid
them like the plague. I get a lot of proposals by inventors seeking money. In
response to one, I wrote, "The problem I have - and I can smell this one
- is that this is a sandbox company. My job, as investor, is to throw more toys
into the sandbox.
95%+ of new software
startups don't make it today. Those which do often have the backing some mean,
horrible vulture capital company that steers management to act in businesslike
ways -- like making something people want and selling it to them.
Clip this column. Read it next time your neighbor's kid software genius has
a new idea.
OH. I forgot. My friend just got cleaned out in a messy divorce. He can't afford
to put $25,000 into a fantasy software venture. He should have the money in
a bank CD earning 5.2% -- what I'm getting today from my bank.
to make money the old, dumb way. My father believed that God's greatest
invention was compound interest. Nothing beats the simplicity and purity
of compound interest, he used to say. Stick $100,000 in a 5.2% bank account
for 10 years and you'll have $166,018.85 at the end of the 10 years.
If you added $10,000 a year to the account, you'd have $299,580.06 at
the end of 10 years. If you put $20,000 in each year, you'd have $433,141.27
at the end of ten years. Play around with these numbers by clicking on financial
calculators at the top of the left column.
Richard Russell has been writing financial newsletters since 1958. Click
here. This is his most popular piece:
entails a lot more than predicting which way the stock or bond markets are
heading or trying to figure which stock or fund will double over the next
few years. For the great majority of investors, making money requires a plan,
self-discipline and desire. I say, "for the great majority of people"
because if you're a Steven Spielberg or a Bill Gates you don't have to know
about the Dow or the markets or about yields or price/earnings ratios. You're
a phenomenon in your own field, and you're going to make big money as a by-product
of your talent and ability. But this kind of genius is rare.
For the average
investor, you and me, we're not geniuses so we have to have a financial plan.
In view of this, I offer below a few items that we must be aware of if we
are serious about making money.
Rule 1: Compounding:
One of the most important lessons for living in the modern world is that to
survive you've got to have money. But to live (survive) happily, you must
have love, health (mental and physical), freedom, intellectual stimulation
-- and money. When I taught my kids about money, the first thing I taught
them was the use of the "money bible." What's the money bible? Simple,
it's a volume of the compounding interest tables.
is the royal road to riches. Compounding is the safe road, the sure road,
and fortunately, anybody can do it. To compound successfully you need the
following: perseverance in order to keep you firmly on the savings path. You
need intelligence in order to understand what you are doing and why. And you
need a knowledge of the mathematics tables in order to comprehend the amazing
rewards that will come to you if you faithfully follow the compounding road.
And, of course, you need time, time to allow the power of compounding to work
for you. Remember, compounding only works through time.
But there are
two catches in the compounding process. The first is obvious -- compounding
may involve sacrifice (you can't spend it and still save it). Second, compounding
is boring -- b-o-r-i-n-g. Or I should say it's boring until (after seven or
eight years) the money starts to pour in. Then, believe me, compounding becomes
very interesting. In fact, it becomes downright fascinating!
In order to
emphasize the power of compounding, I am including this extraordinary study,
courtesy of Market Logic, of Ft. Lauderdale, FL 33306. In this study we assume
that investor (B) opens an IRA at age 19. For seven consecutive periods he
puts $2,000 in his IRA at an average growth rate of 10% (7% interest plus
growth). After seven years this fellow makes NO MORE contributions -- he's
A second investor
(A) makes no contributions until age 26 (this is the age when investor B was
finished with his contributions). Then A continues faithfully to contribute
$2,000 every year until he's 65 (at the same theoretical 10% rate).
Now study the
incredible results. B, who made his contributions earlier and who made only
seven contributions, ends up with MORE money than A, who made 40 contributions
but at a LATER TIME. The difference in the two is that B had seven more early
years of compounding than A. Those seven early years were worth more than
all of A's 33 additional contributions.
This is a study
that I suggest you show to your kids. It's a study I've lived by, and I can
tell you, "It works." You can work your compounding with muni-bonds,
with a good money market fund, with T-bills or say with five-year T-notes.
Rule 2: DON'T LOSE MONEY: This may sound naive, but believe me it isn't.
If you want to be wealthy, you must not lose money, or I should say must not
lose BIG money. Absurd rule, silly rule? Maybe, but MOST PEOPLE LOSE MONEY
in disastrous investments, gambling, rotten business deals, greed, poor timing.
Yes, after almost five decades of investing and talking to investors, I can
tell you that most people definitely DO lose money, lose big time -- in the
stock market, in options and futures, in real estate, in bad loans, in mindless
gambling, and in their own business.
RULE 3: RICH
MAN, POOR MAN: In the investment world the wealthy investor has one major
advantage over the little guy, the stock market amateur and the neophyte trader.
The advantage that the wealthy investor enjoys is that HE DOESN'T NEED THE
MARKETS. I can't begin to tell you what a difference that makes, both in one's
mental attitude and in the way one actually handles one's money.
investor doesn't need the markets, because he already has all the income he
needs. He has money coming in via bonds, T-bills, money market funds, stocks
and real estate. In other words, the wealthy investor never feels pressured
to "make money" in the market.
investor tends to be an expert on values. When bonds are cheap and bond yields
are irresistibly high, he buys bonds. When stocks are on the bargain table
and stock yields are attractive, he buys stocks. When real estate is a great
value, he buys real estate. When great art or fine jewelry or gold is on the
"give away" table, he buys art or diamonds or gold. In other words,
the wealthy investor puts his money where the great values are.
And if no outstanding
values are available, the wealthy investors waits. He can afford to wait.
He has money coming in daily, weekly, monthly. The wealthy investor knows
what he is looking for, and he doesn't mind waiting months or even years for
his next investment (they call that patience).
But what about
the little guy? This fellow always feels pressured to "make money."
And in return he's always pressuring the market to "do something"
for him. But sadly, the market isn't interested. When the little guy isn't
buying stocks offering 1% or 2% yields, he's off to Las Vegas or Atlantic
City trying to beat the house at roulette. Or he's spending 20 bucks a week
on lottery tickets, or he's "investing" in some crackpot scheme
that his neighbor told him about (in strictest confidence, of course).
the little guy is trying to force the market to do something for him, he's
a guaranteed loser. The little guy doesn't understand values so he constantly
overpays. He doesn't comprehend the power of compounding, and he doesn't understand
money. He's never heard the adage, "He who understands interest -- earns
it. He who doesn't understand interest -- pays it." The little guy is
the typical American, and he's deeply in debt.
The little guy
is in hock up to his ears. As a result, he's always sweating -- sweating to
make payments on his house, his refrigerator, his car or his lawn mower. He's
impatient, and he feels perpetually put upon. He tells himself that he has
to make money -- fast. And he dreams of those "big, juicy mega-bucks."
In the end, the little guy wastes his money in the market, or he loses his
money gambling, or he dribbles it away on senseless schemes. In short, this
"money-nerd" spends his life dashing up the financial down-escalator.
But here's the
ironic part of it. If, from the beginning, the little guy had adopted a strict
policy of never spending more than he made, if he had taken his extra savings
and compounded it in intelligent, income-producing securities, then in due
time he'd have money coming in daily, weekly, monthly, just like the rich
man. The little guy would have become a financial winner, instead of a pathetic
RULE 4: VALUES:
The only time the average investor should stray outside the basic compounding
system is when a given market offers outstanding value. I judge an investment
to be a great value when it offers (a) safety; (b) an attractive return; and
(c) a good chance of appreciating in price. At all other times, the compounding
route is safer and probably a lot more profitable, at least in the long run.
take of the hearing-impaired dog
Morty visits the veterinarian in Boca Raton and says, "My dog
has a problem."
The doctor replies,
"So tell me about the dog's problem."
should know, he's a Jewish dog. His name is Irving and he can talk," says
"He can talk?",
the doubtful doctor asks.
Morty points to the dog and commands: "Irving, Fetch!"
Irving, the dog,
begins to walk toward the door, then turns around and demands, "So why
are you talking to me like this? You order me around like I'm nothing. And you
only call me when you want something. And then you make me sleep on the floor,
with my arthritis. You give me this fah-kahkta food with all the salt and fat,
and you tell me it's a special diet. It tastes like dreck! You should eat it
yourself! And do you ever take me for a decent walk? NO, it's out of the house,
a short pish, and right back home. Maybe if I could stretch out a little, the
sciatica wouldn't kill me so much! I should roll over and play dead for real
for all you care!"
The Doctor is
amazed. "This is remarkable! What could be the problem?"
Morty says, "Obviously,
he has a hearing problem! I said 'Fetch', not 'Kvetch'."
Catholic heart attack
A man suffered a serious heart attack and had an open heart bypass surgery.
He awakened from the surgery to find himself in the care of nuns at a Catholic
Hospital. As he was recovering, a nun asked him questions regarding how he was
going to pay for his treatment. She asked if he had health insurance.
He replied, in
a raspy voice, "No health insurance."
The nun asked
if he had money in the bank.
He replied, "No
money in the bank."
The nun asked,
"Do you have a relative who could help you?"
He said, "I
only have a spinster sister, who is a nun."
The nun became
agitated and announced loudly, "Nuns are not spinsters! Nuns are married
The patient replied,
"So, send the bill to my brother-in-law."
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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