Harry Newton's In Search of The Perfect Investment
AM EST, Monday, December 29, 2008: Illiquid
investments, yield chasing, avoiding debt and patience. Thoughts coming out
of the weekend of family, tennis and a little rest.
much has Harvard really lost? The biggest
"hit" to my portfolio this year have come from illiquid investments
-- chiefly real estate. How you value illiquid investments is key -- mark
to market, cost, somewhere in between. "Market" might today be $1.
Cost might be millions of dollars. This came from the Huffington Post:
admission that it lost $8 billion from its $36 billion endowment fund, as
staggering as it sounds, may grossly underestimate the true magnitude of
the loss between from July 1 through Oct. 31 2008. According to a source
close the Harvard Management Corporation (HMC), which runs the fund for
Harvard, the loss is closer to $18 billion if the losses on the fund's illiquid
investment are realistically appraised.
To be sure,
the highly-talented -- and highly-incentivized-MBAs at HMC did exceedingly
well for Harvard during the early years of the new millennium. From 2000
to 2008, they more than quadrupled the notional value of Harvard's wealth
through a strategy that involved shifting the lion's share of Harvard's
money from American stocks, bonds and cash to to highly esoteric investment
which were not only illiquid but whose imputed value often could not be
easily determined by outside parties. So, by the time the bubble burst in
the fall of 2008, less than a fifth of Harvard's endowment fund was invested
in exchange-listed stocks and bonds. Where was the rest of Harvard's money?
Nearly 28% of Harvard Endowment fund was in what the fund manager's called
"real assets," a category comprised of timber forest and arable
land in remote areas, commercial real estate participators, and huge stockpiles
of oil and other physical commodities. Such "real assets" plunged
in value, if they could be sold, much more severely than the stock market
averages. Oil, for example, one of the fund's largest investment, lost about
t two-thirds of its value. Another huge chunk of the endowment was in private
equity placements and hedge funds which imposed restrictions on withdrawals.
In the case of so-called "gated" hedge funds, some of which suffered
enormous losses, Harvard could only extract its investment by selling its
participation at a steep discount to a "secondary" hedge fund.
Another 11 percent of Harvard's money had been sunk in volatile emerging
markets. Here the investments took a double hit: First, the local stock
markets collapsed in most of these countries, with, for example, Russian
stocks, losing 80%, of their value. Second, on top of these losses. the
local currencies lost much of their value against the dollar, with the Brazilian
Real, for example losing 40% of its value. Given the true cost of getting
its money out of this financial exotica, my knowledgeable source finds the
claim by Harvard's money managers that the fund only lost 22 percent not
only "purely pollyannaish" but self-serving (they got increased
bonuses for 2008). But while Harvard's money managers may chose to look
through rose color glasses at the value of their portfolio , Harvard University,
which relies on the interest from its endowment fund for one-third its budget,
needs to be more realistic. As its President, Drew Faust, noted in letter
to the Harvard faculty, "We need to be prepared to absorb unprecedented
endowment losses and plan for a period of greater financial constrain,"
damage goes far beyond the ivy-covered walls of Harvard. Money managers
at other non-profit institutions, no doubt inspired by the dazzling success
of the Harvard Management Corporation in rapidly multiplying the notional
value of its endowment fund adopted similar strategies, including plunging
their funds into the murky get-rich-fast universe of illiquid investments.
Consider, for example, the adventures of Calpers, the giant pension fund
of the California Public Employees' Retirement System, I which heavily invested
in the same sort of "real assets" as Harvard. Leveraging its own
funds, It bought so much undeveloped real acreage, that by 2008 it became
the largest private land owner in America, and as the real estate bubble
expanded, it marked up the notional value of its portfolio accordingly.
Then came the subprime debacle, and the real estate bubble imploded, leaving
Calpers with unsalable land and, because of its borrowed funds, a 103% loss.
Together with other losses in hedge fund and conventional investments, Calpers
found that it had lost nearly 40% of the value of its entire pension fund.
In Calpers's case, it had little choice other than to realistically report
its enormous losses since it had pension obligations that now might require
raising money from local governments in California. Other nonprofit funds
with more leeway, such as Harvard, have yet to fully come to grips with
the problematic value of their illiquid investments.
Kingsdale's latest columns. Jim has posted
two new aticles to his site Energy Investment Strategies. He writes:
the Road to Deflation, suggests that the enormous and growing hoard
of cash in investors' portfolios that is normally considered a bullish indicator
because it must eventually be reinvested can also be seen as a rational
best use of money by investors during a period of deflation. So if we are
in deflation, that cash hoard may remain and may grow - for good reason
- so long as deflation persists.
The second piece,
Financial Meltdown: Bad Luck - or Good?, is a personal reflection
on the period just past and how I like to look at the turmoil we are entering
I am out of the market almost entirely and have no idea whether oil is going
to $25 or $75. My best guess is that we will see a false rally in
stocks, and perhaps in oil. Nimble traders may make money in such a rally,
but I am in the camp that says there will be plenty of upside for longer
term investors once it is clear that deflation is not our problem, and there
will be no real upside for them until then. So I want to see some evidence.
perfect investment. A bottle of something useful. I
heard on the grapevine that the man who invented New Skin had bought himself
a $30 million apartment in the Time Warner center at Columbus Circle. I heard
he gutted it for millions more and fixed it up the way he wanted. I got to
thinking on the weekend. Which other useful fluids do I wish I had invented?
Here my collection, all out of my closet.
The one you can't read is the spray bottle fourth from the right. Optometrists
sell this magic stuff for $5 to clean your classes. I suspect it's plain water.
On the right is New Skin, Krazy Glue and Goo Gone. Except for the stuff to
clean your glasses, all are real chemicals I swear by.
and yield risk. Reader Dick Hudgens of Lubbock,
I have been
gone on a cruise for a couple of weeks and have been trying to catch up
on reading your columns. On Dec. 18 you made 17 points about investing and
on item #13 you stated that a "big four" accounting firm
should audit any funds that you consider as investment candidates. Let me
explain: Having a "big four" accounting firm is no guarantee
of anything. Look at Enron and their auditor, Arthur Anderson. I am
a CPA and I would not trust any of the big accounting firms farther than
I could throw the buildings which house their offices. I think that CPA
firms involved with any of the current businesses that are in trouble ought
to be investigated and punished if they have been found to be negligent
or crooked. The auditing firms need to clean up their act and restore confidence
in the auditing process. It may take government regulation and intervention
to get this done. On the other hand who the hell is going to clean up the
government? They have more to do with this current mess than anyone else.
In item #16 you mentioned yield risk. This has to be one of the key
principles to observe when investing. The old rule, "the higher
the yield , the higher the risk" has to be one of the easiest ways
to gauge the risk of any investment. When a Treasury Bond is yielding 3%
to 4% and you find an investment that is two or more times as high as the
Treasury Bond yield then red flags should pop up and great caution
should be exercised in regard to the high yielding investment.
sales are awful. But the prices are great. There
are racks of designer clothes at Saks at 70% off. When I arrived back in the
city last night, my mail bulged with catalogs offering 50% to 70% off. In
41 years living in the U.S. I've never seen such markdowns.
There is a solution.
In France, it's illegal to sell anything in a retail store below your
cost. Hence, Paris retailers in today's tough times are sending their surplus
merchandise for sale out of the country. In France, it's also illegal to put
the sign "Sale" in a retail store window -- unless it's during
the three weeks in winter and three weeks in summer, which the government
designates as times that retailers are allowed to have sales. I don't make
this stuff up.
sad about Santa Claus. It's become increasingly difficult for him
to make the iPods, Wiis, MP3 players and computers kids these days demand.
So he is asking for a bailout. For a short video clip on his appearance before
virtues of Rye Bread
Two old guys, one 80 and one 87, were sitting on their usual park
bench one morning. The 87 year old had just finished his morning jog and wasn't
even short of breath. The 80 year old was amazed at his friend's stamina and
asked him what he did to have so much energy.
The 87 year
old said, 'Well, I eat rye bread every day. It keeps your energy level high
and you'll have great stamina with the ladies.'
So, on the way
home, the 80 year old stops at the bakery. As he was looking around, the lady
asked if he needed any help. He said, 'Do you have any rye bread?'
a whole shelf of it. Would you like some?'
He said, 'I
want 5 loaves.'
She said, 'My
goodness, 5 loaves... by the time you get to the fifth loaf, it'll be hard.'
'I can't believe
it," he replied, "Everybody in the world knows about this except
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
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