Harry Newton's In Search of The Perfect Investment
AM EST, Wednesday, December 17, 2008: The
Dow rose 4.2% yesterday because the Fed cut interest rates to effectively
zero. The Fed did this because it believes the economy is in the toilet and
needs the boost of "free money." Of course, the last time the Fed
did this, it was trying to kick the economy out of Tech Wreck of 2002-2002.
And it effectively created the housing boom and, now, the real estate bust.
God knows what
comes next. What we do know -- or at least what I know -- is
that the Government has become the primary force for which way the
stockmarket now moves. This meddling by the Government is why it's impossible
to figure this market. My recent short recommendations (like D.H. Horton,
Best Buy and Google) are all up. My long recommendations (sadly, few and far
between), like yesterday's DGP and earlier GLD are up. Overall, though, I
suck. Fortunately, I'm mostly in cash.
Government has become such an overhang that I will admit to being totally
baffled. December is typically a good month. And I suspect that hedge funds
with money are buying for two reasons -- because they're afraid of missing
the bottom (assuming that's what we hit recently) and because they want their
funds to look a bit better at year end. We are getting close to the end of
Madoff lessons: A Madoff FRAUD victim told
CNBC today that the major lesson she had learned was "Don't put all
your eggs in one basket." I don't think that was the key one. My
Don't get suckered in by the alleged high returns and dump more money in.
If anything, take money out. Don't put more money in. It destroys your
allocation. Re-balance regularly.
2. More money
to manage doesn't bring bigger results. In fact, it's much harder to
make big returns with big money.
3. More money
and more success bring more hubris. More hubris brings more invincibility.
And more invincibility leads to mistakes, which leads to more gambles and
ultimately to cheating. There's no evidence to suggest that Madoff didn't
do OK at one point. Only when he got too big and things went against him did
he resort to lying, cheating and stealing.
4. Be wary of
people who give large amounts of money to charities. There's usually a reason
beyond the inherent goodness of the charity or their heart. For people in
finance, charity is a sales expense.
Due diligence makes sense. Asking some of the financial institutions who flunked
Madoff would have been a major eye-opener. Societe-Generale kept its clients
away from Madoff -- though it still lost billions with that rogue trader.
Don't trust fund of funds to make your investment decisions. That puts another
layer of fees and incompetence between you and the manager.
7. There are
actually very few good money managers. All go wrong eventually. The lady's
point about all your eggs in one basket does make sense.
8. Back test
the strategy. If he's playing commodities and says he's had a consistent 12%
return for the past 10 years. Check out if this is plausible.
9. Don't trust
the SEC, the state regulators or anyone else to protect you. NY AG Cuomo and
his Mass equivalent Bill Galvin did wonders for holders of auction rate securities.
But even that was after the fact, not while it was going on. Bloomberg's
story this morning is an eye-opener:
read this piece on middlemen. From today's
New York Times.
Dec. 17 (Bloomberg)
-- U.S. Securities and Exchange Commission Chairman Christopher Cox said
the agency failed to act for almost a decade on credible and specific
allegations of wrongdoing by Bernard Madoff, who authorities say bilked
investors of as much as $50 billion.
dating back until at least 1999 were repeatedly brought to the attention
of SEC staff, but were never recommended to the commission for action,
Cox, 56, said in a statement yesterday. He announced an internal probe to
review the deeply troubling revelations.
revolted by what he found out, but its also in his interest to be
revolted, said James Cox, a securities law professor at Duke University
in Durham, North Carolina who isnt related to the SEC chairman. Hes
taken a lot of heat over SEC enforcement.
The SEC, already
faulted in connection with the collapse of Bears Stearns Cos. and Lehman
Brothers Holdings Inc., now faces criticism for failing to detect what Madoff
termed a giant Ponzi scheme. Senate Banking Committee Chairman
Christopher Dodd yesterday called on the agency to explain how the massive
fraud went undetected. Madoff, 70, was arrested Dec. 11 after he allegedly
told his sons that his eponymous firm, founded in 1960, was no more than
a giant Ponzi scheme, the SEC said.
wielding subpoena power to obtain information, SEC staff relied upon
information voluntarily produced by Mr. Madoff and his firm, Cox said.
review will include all staff contact and relationships with the Madoff
family and firm, he said, and mandate the recusal any SEC employee
with more than an insubstantial personal contact with Madoff
and his family.
a former assistant director of compliance and examinations at the SEC, is
married to Madoffs niece, Shana, who was a compliance lawyer at the
Madoff firm. Swanson left the SEC in August 2006 and is now the general
counsel of Bats Trading Inc., the third-largest U.S. equity exchange by
Case, Middlemen in Spotlight
By ERIC KONIGSBERG
As a go-between
who shepherded clients and their money to Bernard L. Madoff, Walter M. Noel
became so prosperous that he was only too happy to show off his good fortune
to the world.
In 2002, Vanity
Fair dispatched the photographer Bruce Weber to shoot a lavish spread of
Mr. Noels wife and their five grown daughters at his home in Connecticut
(Golden in Greenwich, read the headline). That was followed,
in 2005, by a Town and Country story on the Noel familys tropical
retreat in Mustique.
joining Mr. Noels addresses in Palm Beach and Southampton and
on Park Avenue were visible evidence of his investment empire, the
Fairfield Greenwich Group, which had $14.1 billion in February.
firm, including four sons-in-law as partners, now has the distinction of
being the biggest known loser in the Madoff scandal, to the tune of $7.5
Greenwich and a handful of other big feeder funds that were essentially
pouring billions of dollars each into Bernard L. Madoff Investment Securities,
a lucrative business evaporated last week when federal prosecutors said
Mr. Madoff had been operating what may have been the biggest Ponzi scheme
puts his own fraud at $50 billion and discussed details of it with federal
prosecutors in New York on Tuesday, according to people briefed on the meeting.
Greenwich Group charged clients an annual fee of 1 percent of assets
invested for providing access to exclusive hedge funds and performing due
diligence on them, in addition to a fee of 20 percent on investment gains
each year, according to people close to the funds operations.
At that rate, an investment of $7 billion paid Mr. Noels company $70
million annually, and then $140 million more in a year in which Mr. Madoff
reported a 10 percent gain (he steadily reported returns of 10 to 12 percent).
largest fund, the $7.3 billion Fairfield Sentry fund, invested exclusively
with Mr. Madoff. Mr. Noel has not disclosed how much of that was his own
or belonged to family members and how much was his investors. One
of his daughters said, through a spokeswoman at Rubenstein Public Relations,
that a very substantial part of each family members personal
assets was invested with Bernard Madoff alongside those of our investors.
Greenwich is based on East 52nd Street, though Mr. Noel worked frequently
from Fairfield with his partners, Jeffrey Tucker, formerly of the Securities
and Exchange Commission, and Andres Piedrahita. The 78-year-old Mr. Noel
had a masters degree in economics and a law degree both from
Harvard and had worked for decades in banking before he founded Fairfield
Greenwich, which established itself primarily as a marketing entity.
grew beyond, you know, an informal, personal concern where Walter and a
couple of people were investing money for his friends, they developed as
a marketing force to put Madoff and investors together, said George
L. Ball, a former executive at E. F. Hutton and Prudential-Bache Securities
who became friends with the Noels decades ago when both lived in Greenwich.
Mr. Noel met
Mr. Madoff in the early 1980s and the businesses of both men grew symbiotically.
Mr. Noel was as good a salesman as Mr. Madoff could have wished for. Mr.
Noel is routinely described as affable, assured, graceful and nonaggressive.
Hes a terribly good person, almost in the sense of Jimmy Stewart
in Its a Wonderful Life combined with an overtone of Gregory
Peck in To Kill a Mockingbird, Mr. Ball said.
Mr. Noel grew
up in Nashville and met his future wife just after law school, when mutual
friends set them up on a blind date.
a modestly prosperous life in Greenwich, and were perhaps best known among
associates for their Christmas cards the people with five stunning
girls, in the words of a family friend.
know, Walters success came after several thin years, wrote John
J. McCloy, a banker from Greenwich who described himself and his wife, Laura,
as the Noels best friends for more than 30 years, in May
in a letter recommending the Noels to membership in a private club.
In an interview,
Mr. McCloy declined to name the club and said that he and his family had
not invested with Mr. Madoff.
went on to praise the Noels for their personal charity.
is a person, when friends have been down on their luck, who will quietly
send a check in the mail, or airline tickets, she said. ...
the industry continue to question Fairfields due diligence. Michael
Markov, a hedge fund consultant, said that he was hired by a fund two years
ago to look into Fairfield Sentrys returns and found that it was statistically
impossible to replicate them, he said.
said that he found only one hedge fund whose returns correlated to Mr. Madoffs.
That was the Bayou fund, which was prosecuted by the government for fraud
Indian and the White Man
Chief, 'Two Eagles,' was asked by a white government official, 'You have
observed the white man for 90 years. You've seen his wars and his technological
advances. You've seen his progress, and the damage he's done.' The official
continued, 'Considering all these events, in your opinion, where did the
white man go wrong?
The Chief stared at the government official for over a minute and then calmly
replied. 'When white man find land, Indians running it. No taxes, No debt,
Plenty buffalo, plenty beaver, Clean Water; women did all the work, Medicine
man free. Indian man spend all day hunting and fishing; all night having
The chief leaned
back and smiled. 'Only white man dumb enough to think he can improve system
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
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