Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST, Monday, February 26, 2007: I've
never been a fan of mergers. Most work out for the management (who get big bonuses),
but not for the shareholders (who usually get screwed as their stock declines).
The latest mess merger (now predictably erupting) is Daimler's acquisition of
Chrysler. There are three lessons:
1. If your company buys something big (like Daimler's acquisition of Chrysler)
or something in a different industry (like AOL's buy of Time Warner) sell it.
If you sell your own company, take cash. Stick 50% plus in muni bonds and 50%
in index funds initially -- until you figured out a long-term strategy. Remember
the rule: It's much harder to keep a fortune, than to make it.
there are rumors of a divestiture (a sale of a disaster acquisition), the stock
often rises (e.g. DaimlerChrysler). That might be a good time to buy and angle
for a short-term gain.
Is the stockmarket peaking? The
economy remains robust , though easing. Housing's downtown is having a limited
impact. But there are sufficient disturbing signs to argue in favor of "taking
a little off the table." Short-term bank CDs are paying over 5%, which
is not shabby. There are tea leaves to read: This weekend's Economist talks
about margin debt. I'm not in favor of borrowing money to buy shares. But
hedge funds do it, increasingly. And their prime broker banks make a great deal
of money lending the funds the money to hang themselves with -- as some already
have. From the Economist:
reaches its highest ratio since the 1920s
in the American stock market has reached a new record of $285 billion In other
words, more borrowed money is being used to buy shares than ever before.
There are two
ways of looking at this statistic. The first is to say that, thanks to inflation,
nominal figures are always bound to reach new highs. The previous record was
set in March 2000, so it was about time the margin figure set a new peak.
After all, the Dow Jones Industrial Average has been consistently surging
into record territory.
view is to point out that the last peak was reached at the height of the dotcom
bubble. As David Rosenberg of Merrill Lynch observes, margin debt has jumped
by $40 billion in the past three months, a similar rate to early 2000, when
the markets were in frenzy. As a proportion of market value, margin debt is
now at its highest since the late 1920s, an era that was a by-word for speculation
(and resulted in the crash of 1929-32).
There are further signs that sentiment is getting overheated. The proportion
of cash held in mutual funds has dropped to 3.9%, equal to its record low
(although those lows were recorded only in 2005). Stockmarket analyst Alan
Newman says we have gone almost 950 trading days without a 10% correction
on Wall Street, the third-longest period in history.
will dismiss these worries out of hand. They will point to still-strong corporate
profits, low price-earnings multiples (at least, relative to the heady days
of 2000), the apparent cheapness of shares relative to government bonds, the
amount of cash sitting on the sidelines in private-equity funds, and the health
of the global economy, as signs that all is well. Indeed, it is probably because
they feel that way that margin debt is so high.
that plays into investors willingness to gamble is the low level of
volatility in the markets. Only commodities have recently seen big fluctuations.
Low volatility has three potential effects.
The first is
that, if markets are less jumpy, their risk is reduced. This will induce investors
to pay more for a risky asset, such as shares.
The second factor
is that many hedge funds thrive on volatility. When markets are less turbulent,
they will have to work harder to realize their profits. One way of doing this
is to use borrowed money to get a bigger bang for their buck--another potential
explanation for the surge in margin debt.
A third factor
is the way that banks control risk. They use value-at-risk, or VAR, models.
These try to calculate the maximum amount of capital which might be lost from
trading activities. A key component of these models is past volatility. When
it is low, banks feel safer, and can put more capital to work.
This helps explain low corporate bond yields, as well as rising share prices.
It is worth
noting, however, that all three factors could be subject to quick revision.
If volatility rises, shares will look riskier. Hedge funds will be tempted
to cut their borrowings, and investment banks their trading positions. This
could cause a sharp correction, as investors all try to head for the exits
at the same time.
Until such an
event occurs, the circle is virtuous. Low volatility props up markets, which
keeps volatility low. What is needed for the circle to turn vicious is a trigger.
So the bears are dependent on a satan ex machina--a huge corporate default,
a geopolitical risk come true, or a bird-flu epidemic--to turn sentiment around.
They are anti-Micawbers, waiting for something to turn down.
Internet is not always the cheapest: Items:
1. I bought a
round-trip ticket New York to Savannah. I checked Expedia, Cheaptickets, Kayak
and Delta the airline. It was cheapest on Delta.
2. Our friend,
the interior decorator, tells me antique dealers are now posting all their goodies
on their web sites. But the price is typically 30% higher than what you
can get in person. There are two reasons for this: First, it increases the perceived
value of the stuff they sell. Second, it's possible some rich dude might actually
buy it off the web. Meantime, the real clients know it's cheaper to call.
3. Buying more
than one of item is always cheaper on the phone -- well, not always.
But it is easier to bargain with a human than with a browser and web site.
out for dust on your digital SLR photos: One day you'll
see little gray spots on the photos from your pricey digital SLR camera. Welcome
to that irritant called dust. And it's on your charge-coupled device CCD. First
rule. Read the instruction manual. To get the CCD on my Nikon D100, I had to
buy an $80 power supply. Second, to blow the dust off, I needed to buy a rubber
blower at the local pharmacy. Then I had to figure out how to lock the mirror
up so I blow on (but not touch) the CCD. After several tries, it worked. The
first few times, I just moved the dust around. Finally I photographed a white
piece of paper. Bingo, no dust. This problem doesn't happen with point-and-shoots,
because they're sealed.
Mother Superior called all the nuns together and said to them, "I
must tell you all something. We have a case of gonorrhea in the convent."
"Thank God," said an elderly nun at the back. "I'm so tired of
An elderly gentleman had serious hearing problems for a number of years.
He went to the
doctor and the doctor was able to have him fitted for a set of hearing aids
that allowed the gentleman to hear 100%.
In a month, the
elderly gentleman went back to the doctor. "Your hearing is perfect. Your
family must be really pleased that you can hear again."
replied, "Oh, I haven't told my family yet. I just sit around and listen
to the conversations. I've changed my will three times!"
Two elderly gentlemen from a retirement center were sitting on a
bench under a tree when one turns to the other and says:
83 years old now and I'm just full of aches and pains. I know you're about my
age. How do you feel?"
Slim says, "I
feel just like a newborn baby."
"Really? Like a newborn baby?"
"Yep. No hair, no teeth, and I think I just wet my pants.
There's no question: Owning your own business is the way to go.
I saw a bunch over the weekend. I remain mightily impressed with the entrepreneurial
spirit. It's alive and prospering.
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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