Harry Newton's In Search of The Perfect Investment
AM EST, Wednesday, December 31, 2008: Most
everything I knew about investing came unstuck in 2008. The bad news: My net
worth is down 23%. The good news: It could have been worse.
the last day of the year. Did I learn anything?
First, the world of investing has become an endless cycle of bubble and bust.
Theres always a bubble somewhere. There are two bubble implications:
You must not invest long-term in illiquid things you don't control -- i.e.
investments you can't dump when things start to go awry. These things are
called "alternative" investments -- and they've been this year's
big disasters for me (and Harvard, etc.) They were part of my Grand Portfolio
Diversification Scheme. They include two commercial real estate funds,
a leveraged buyout fund and a private equity fund. Had I not been locked into
these things, I would have dumped them back in 2007. For now, alternative
investments are dead -- for me and I bet for everyone else.
My new rule is my portfolio will never have more than
10% illiquid assets -- unless I control them. It's my own business, for example.
You must think like a "trader." When commodities turn down, get
out of them instantly. Wen your "hot" stocks are up, take money
"off the table." When you smell a downturn, get out completely.
When in doubt, get out. And stay out. Wise words.
forward, securities traded on exchanges look increasingly attractive -- stocks,
bonds, treasuries, etc. You can sell them from one day to the next. That's
a huge plus. Given now a preference for listed securities, I'll lay out The
+ Don't buy
stocks or bonds on margin.
+ Don't borrow
more than 50% when you buy real estate. Don't borrow short-term, i.e. less
than five years.
+ Never a borrower
or a lender be. Shakespeare said it 350+ years ago. And he was right.
+ The 15% Stop Loss Rule is inviolate. When it falls 15% from
any point, you're out. But you're allowed to sell earlier if your gut warns
of an upcoming disaster. I got out of my commodities fund when it was down
just 6% for the year (though I made money on it). It later fell heavily. And
is now down over 45% for the year.
+ Saying NO
firmly and often saved me oodles. Had it not been for NO -- the hardest word
in the language -- my losses would be much larger.
+ You have to check in on your stocks and bonds weekly. If you can't, cut
down the number you own until you can. Know why you bought them. If your reasons
are no longer valid, get out -- instantly, if not sooner.
+ All Wall Street
"inventions" are good for Wall Street. Most are not good for the
investor, i.e. you and me. Wall Street tends to substitute creativity for
safety. Words on Wall Street mean whatever Alice wants them to mean. Hedge
funds are rarely hedged, and often a ripoff. Fund of funds are an absolute
ripoff. Then there are options, credit default swaps, derivatives, structured
investments, auction rate securities, splits, ultra-short ETFs, etc. They
all have their day in the sun before they fail, disappear and new ones are
created. Only a few stay. I predict a return to long-only mutual funds.
+ Don't chase
yield. I always thought 18% a year was risky, but not 8%. I was wrong. Anything
above 2% is ultra-risky, until proven otherwise.
+ No one will
protect you. That includes your favorite, expensive money manager, Big Four
accounting firms, regulatory agencies, the rating agencies, the sell-side
analysts, the attorney-generals, the SEC, or anyone else. You are 100% master
of your own destiny. If you don't understand it, don't touch it.
+ Every great
investment manager and/or corporate manager eventually loses his touch. Don't
get wedded to anyone. There's a sound argument for never meeting the management..
+ Cash is always
king. Black swans are more common than Wall Street would let us believe.
+ KISS. Keep
it simple. Don't sneer at a peaceful life. Stick your money in treasuries
and some safe muni bonds. Go play tennis. Never read this column again.
Brett Arends of the Wall Street Journal learned in 2008:
a terrible year, but those who learn some valuable lessons won't walk away
empty handed. What lessons have you learned, or had reinforced? I'd love
to hear. Here are 12 that struck me.
* 1. You
have to take charge of your own finances. And that means understanding where
your money is invested and why. There's only so far you can rely on advisers,
portfolio managers and company plans. After all, you will own the results,
* 2. Never put all your trust in one financial whiz, no matter how highly
recommended. Few turn out to be Bernie Madoffs, thank heavens. But most
of Wall Street's best and brightest still lost 40% or more this year.
* 3. Never invest in something you don't understand. For years, I refused
to recommend Fannie Mae and Freddie Mac stock for this reason, despite the
urgings of various market sources. Imagine my relief when it emerged that
nobody else really understood them either -- including their own CEOs. Simple
stocks, like Amazon, or Anheuser-Busch, rarely embarrass you in this way.
* 4. Invest
more, not less. Is that a guffaw from the peanut gallery? I don't blame
you. Your savings just fell 40% or more. But higher risk and lower returns
means you need to invest more to reach your goals.
* 5. Never assume there is investment safety in numbers. The most "popular"
investments often turn out worst -- from technology stocks (1999) to real
estate (2004) to emerging markets (2006-7).
* 6. Your
grandma was right after all. A penny saved really is a penny earned. Debt
really is dangerous. And an economy where it's easier to borrow $10,000
on a credit card than find a working electrician is heading for trouble.
* 7. Psmith was right, too. Who? This fictional character, created by the
great English comic novelist P.G. Wodehouse, frequently warned against the
perils of confusing "the unusual with the impossible." Certainly
the events of the last year were unusual. Alas, too many thought they were
* 8. Own plenty
of bonds. Yes, they're less exciting than stocks. Turns out, that's the
point. There's little use keeping everything in stocks "for the long
run" if they kill before you get there.
* 9. When
someone offers you obviously good value -- like inflation-protected Treasurys
with a 4% real yield -- take it. When they offer you bad value -- like those
same bonds with a real yield of 0%, as they had last winter -- don't.
* 10. Avoid needless risks. Those who speculated on Citigroup or WaMu or
General Motors stocks suffered more than most this year. The biggest investment
mistakes will generally be those you bought, not ones you missed.
* 11. Take
all expert predictions with a pinch of salt. That goes double when the experts
all agree. Remember, most economists successfully predicted 12 of the last
four recessions, but somehow missed this one. After long experience, when
I read a headline like "Pound Poised to Gain in 2009 as Top Strategists
See Slower Cuts in Rates" (Bloomberg, Dec. 30) it makes me fear for
the poor old pound sterling.
* 12. Still trying to predict the next short-term move, or call the market
bottom? Sure, maybe November (Dow 7550) will turn out to be the market low.
But that's what some people said in January (Dow 11971), March (11740),
July (10963), September (10365), and October (8176). One day, doubtless,
they will be right.
taxman answers from the Caribbean. Remember
yesterday? I asked why would a company sell land at such a great
loss? Clearly, I wrote, it needs cash. It will get cash from the sale and
it will get cash back and cash benefits from the IRS. The IRS has rules about
tax loss carrybacks and tax loss carryforwards. Go back, get back the taxes
you paid in previous years. Go forward, save on taxes you will pay in the
IRS rules? Here's
the scope from our Caribbean vacationing accountant:
you are in the business of building and development, the land is inventory
and the loss would be an ordinary business loss, not a capital loss. You
would carry back the loss two years and forward 15 years.
sad 2008 disaster. Iceland has suffered the worst
from this year's financial crisis. It privatized its banks in 2000. The banks
borrowed heavily, offering high interest rates to savers -- and Europeans
(especially the British) flocked there. Iceland's stockmarket rose ninefold
between 2001 and 2007. In five years, the average family's wealth rose 50%.
Households amassed debts of up to 213% of their disposable income. (In the
U.S. it's 140%.) This year everyone pulled the plug on Iceland after they
noticed that Iceland's banks had grown highly leveraged. After the Lehman
Brothers bankruptcy, interbank lending froze. Iceland's three largest banks
had liabilities of 10 times the country's national GDP. And the government
nationalized them. National debt was downgraded. Iceland's stockmarket shut
down (temporarily) and the krona ceased to function as an international currency
-- no one wanted it. Iceland has borrowed some money. Most foreign deposits
in Icelandic banks Meanwhile, it's back to fishing and praying. There's a
really excellent chart on what happened in Iceland in the latest issue of
year in review.
Uncle Jay explains the news. It's cute. Use Internet Explorer. Click on YouTube.
two wonderful New Yorker cartoons
Hug the kids
and the spouse. Make a New Year's Resolution: "When in doubt, get
out." See you next Monday, January 5.
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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