Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST Friday, February 29, 2008: I
ask myself what have I've learned (if anything) from the tumult of the last
several months? The one overwhelming lesson:
I invest in anything I need to ask: "What's the worst thing that can
worst thing is losing 100% of my money.
you and I focus on 100% potential loss, concepts of what is risky suddenly
change dramatically from the conventional wisdom.
ultimate reversal: In November I recommended everyone get out of equities. In
the main I did. And I put the money in "safe" auction rate preferreds,
which are backed by "safe" municipal bonds.
I stayed in equities I'd be down by maybe 8% -- I was heavily in index
funds. Now I'm in "safe" in auction rate preferreds, I'm staring at
100% loss on my money.
I know in my heart of hearts that I have not lost 100% of money. When
the secondary market for these things opens in March, I'm sure some smock will
pay me 50% on my money.
lose 50% on a "safe" muni bond investment versus 8% in the market
makes me wonder if I'm not a total moron and a total panic merchant. (See Swensen
second thing I have learned: If you don't have control (i.e. it's not your business
you have your money in), then you'd better be diversified. Diversification
is the only way to protect your ars against black swans. (We've had a
lot of them lately.) Fortunately, I'm still in commodities (gold, silver). Fortunately
I'm still in Australian mining shares. Fortunately, I still own some emerging
market index funds. Fortunately, I still own some good real estate. And fortunately,
I've still got some cash.
the family's life style won't suffer. What will suffer is my psyche, as I berate
myself for being an idiot and allowing my broker to put me into auction rate
mortgage mess explained: By now you've seen the stick figure PowerPoint
presentation on the sub-prime mess explained. If you haven't, you must. Click
here. You'll need PowerPoint or a PowerPoint viewer. There's a free
one on Microsoft's
rate preferreds (ARPS) Owner Strategy: No solution yesterday. No
progress. Every issuer -- from Nuveen to Eaton Vance to BlackRock -- is following
their Vanishing Cream Strategy -- named after the teenage girl
who rubs vanishing cream on her stomach hoping her pregnancy will disappear.
The lawyers are circling the carcass. It's too early for them. Right now all
of us who were sold this garbage need to follow Newton's Maximum Research,
Maximum Noise, Maximum Pressure Strategy. To wit:
1. Get evidence.
Get your hands on all the brochures that talk about these things being cash
or cash equivalents. Good words include "Purchase or sale through weekly
auctions" and "A place to park cash before choosing your next longer-term
investment." Both these quotes came from a Nuveen brochure. You need to
find words from your issuer and your broker. Copies of "evidence"
were also on yesterday's
site. When you find something, email me a copy, please.
2. Tell your
broker you hold him responsible. And you expect him to apply pressure up
and across the chain. Brokers are offering to lend their best clients money
against their now locked-up ARPS. But the loans are largely unacceptable. They're
usually for finite periods -- typically a year. And they make no provision for
renewal. You could be up the creek without a paddle in 12 months -- owing your
broker money and no way to pay it. Since he's only lending you 50%, but taking
your entire ARPS security as collateral, he could grab your security and sell
in a firesale for 50% of its alleged worth. And you'd have no recourse since
that was the deal.
3. Tell your
issuer you ultimately hold him responsible. I gave you a great Nuveen name
column -- Tim Hurd. Email him
your concerns if you own Nuveen stuff. Do your own research and find the big
exec responsible at BlackRock, Eaton Vance, Van Kampen, etc. etc. Eaton
Vance has conference calls next week on this stuff on this stuff. The first
one is Tuesday March 4 at 3:00 PM EST. Call 1-866-562-3356. Use the access
When you call
/ contact / email your issuer, refer to their own marketing brochures
and their own words that talk about the preferreds being like cash, being
a "good place to park short-term cash" and all their other words.
column for examples.
4. Write letters
to your local attorney-general and governor. Some are already investigating.
Some need to be prodded. But these people need to know that our April 15 tax
monies are tied up in these ARPS. If you personally know people in power, contact
them directly. Explain to them that this does not need a government bailout.
It needs government pressure and some bending of government rules. After all,
according to the same Nuveen brochure, "every dollar (of my investment)
is backed by at least twice that amount of fund assets." The assets
are there. They just need to be loosened up. There are a zillion solutions,
including the issuers offering to buy back our shares, just as mutual funds
do every day.
5. Call your
financial editors. I'm in touch with Jim Stewart who wrote that recent piece
on ARPS in the Wall Street Journal. He wrote the piece called,"Risks
of a 'Safe' Investment Are Found Out the Hard Way."
And he explained, "They were sold as a liquid, safe, slightly higher-yielding,
tax-exempt alternative to money-market funds. I should know, since I bought
some. For several years I've been parking a good part of my cash in auction-rate
Every owner of
ARPS I've spoken with (and there are many) is staggered that our plight has
attracted so little attention in the financial press. This morning I emailed
We need to keep
writing about these things. Without pressure, Wall Street will never solve
this. There are enormous consequences right through the economy - from homes
that won't be bought, from businesses that suddenly have no working capital
for seasonal needs, from businesses that won't be bought, from taxes that
won't be paid, from personal bankruptcies that will be filed, to job losses
(my Goldman salesperson got canned two days ago). But frankly, the worst part
is the loss of confidence in "the system." There is a myth that
these things were only for rich people - not for working stiffs (like you
and I). We need to keep writing and encourage others to also.
6. Send me
an email explaining your plight. .
Include your phone number. Every conversation I have produces more evidence,
more strategies, more ideas. Obviously, I'll keep your name strictly confidential.
Believe me, we're in this together. And together we're going to have to solve
it. I have $4.5 million of Nuveen ARPS. I'm motivated. I didn't work over 40
years to have my money lost because of Wall Street arrogance, laziness, incompetence
P.S. A good place
to read investor comments is on SmartMoney's
web site. Stewart's piece also appeared there. And a bunch of investors
It Simple, Says Yales Top Investor. In
February 17's New York Times, reporter Geraldine Fabrikant, ran an interview
with David Swensen, one of the world's top investors.
David F. Swensen manages investments for the $22.5 billion endowment
Her article is
worth reading as a piece of sobriety in today's turbulent markets.
IT has been
a time to worry even the savviest investors. The credit markets have been
in a crisis, the domestic stock market has been shaky and overseas markets
havent been much better.
an individual investor do?
anything fancy. Stick to a simple diversified portfolio, keep your costs down
and rebalance periodically to keep your asset allocations in line with your
long-term goals. That is the advice of David F. Swensen, who has run the Yale
endowment since 1988, relying on a complex strategy that includes investments
in hedge funds and other esoteric vehicles. The endowment earned 28 percent
in its last fiscal year, which ended June 30, beating all other endowments.
It finished the year with $22.5 billion.
For most people,
he recommends a very basic approach: use index funds, exchange-traded funds
and other low-cost instruments, and stick to your long-term asset allocation
even when the markets are in tumult.
distracted by market forecasts, he said. You have to diversify against
the collective ignorance, he said. I think nobody is in a position
to react to these big macro-issues. Where is the dollar going to be or what
is G.D.P. growth going to be in China? For every smart person on one side
of the question, there is another smart person on the other side.
For most individual
investors, he said, copying the strategies of institutions like Yale is virtually
impossible: big investors have access to fund managers and arcane strategies
that are beyond the reach of most people.
people who should get involved are sophisticated individuals who have significant
resources and a highly qualified investment staff, Mr. Swensen said.
do not have the resources and time to pick market-beating managers of
hedge funds, private equity funds or funds of funds, he said. And he said
that the techniques used by hedge funds often result in higher taxes than
those of index funds.
So he advocates
another approach, which he outlined in the book Unconventional Success:
A Fundamental Approach to Personal Investment (Free Press, 2005). He
proposes a portfolio of 30 percent domestic stocks, 15 percent foreign stocks,
and 5 percent emerging-market stocks, as well as 20 percent in real estate
and 15 percent each in Treasury bonds and Treasury inflation-protected securities,
The real estate
investment can be made through real estate index funds. Though the real estate
market has declined and your portfolio is below its target allocation to it,
he said, dont try to time the market. Go ahead and rebalance because
no one really knows where the markets bottom is.
will buffer a portfolio from declines in specific asset classes. For example,
he said: If the dollar declines dramatically, you have foreign and emerging-market
equities. And a declining dollar may well be associated with inflation, but
a diversified portfolio would include TIPS, to provide a hedge. That
means if any of these scenarios play out, an investor has sizable chunks of
his portfolio that protect against them, Mr. Swensen said.
he said, rebalancing should be done in a tax-sheltered account, like an I.R.A.
or a 401(k), to avoid tax liabilities. When you are putting fresh money
to work, he said, you put it in an asset class where you are underweight
and take money out of a class that is overweight.
He says it is
fruitless for individual investors to pick stocks. There is no way that
an individual can go out there and compete with all these highly qualified
and compensated professionals, Mr. Swensen said.
the approach of Jim Cramer, the CNBC host, who encourages investors to trade
stocks in strategies that Mr. Swensen says cost heavily in commissions and
is nothing that Cramer says that can help people make intelligent decisions,
Mr. Swensen said. He takes something that is very serious and turns
it into a game. If you want to have fun, go to Disney World.
a spokesman for CNBC, responding on behalf of Mr. Cramer, said Mr. Cramer
had a long history of success as a trader and fund manager. He
added that Mr. Cramer is a proponent of long-term investing and thorough research.
says investors should forget market timing entirely. Once an individual sets
up a program, it should be rebalanced quarterly or semiannually, he said,
but it should be disciplined.
When the markets
decline, try not to pay attention, he said. Let yourself off the hook,
he said. If you pursue the sensible long-term policy, look at it over
a 5- to 10-year period. Dont look at five months.
If all this makes
sense to you, you should pick up a copy of the new book "The Dick Davis
Dividend." Davis' focus is index funds and he argues strongly for them.
I like his book. There's some excellent advice in it. And, to his credit, he
even quotes me on occasion, proving he's smart enough to know I respond very
positively to flattery.
with a Redneck Girl
an Arab, and a redneck girl are in the same bar. When the Mexican finishes his
beer, he throws his glass in the air, pulls out his pistol, and shoots the glass
to pieces. He says, 'In Mexico, our glasses are so cheap we don't need to drink
with the same one twice.'
The Arab, obviously
impressed by this, drinks his beer, throws it into the air, pulls out his AK-47,
and shoots the glass to pieces. He says, 'In the Arab World, we have so much
sand to make glasses that we don't need to drink with the same one twice either.'
The redneck girl,
cool as a cucumber, picks up her beer, downs it in one gulp, throws the glass
into the air, whips out her 45, and shoots the Mexican and the Arab. Catching
her glass, setting it on the bar, and calling for a refill, she says, 'In America
we have so many illegal Mexicans and Arabs that we don't have to drink with
the same ones twice.'
night's Black Swan.
After a long night of making love, The guy notices a photo of another
On the woman's
nightstand by the bed. He begins to worry. 'Is this your husband?'
She replies, snuggling
up to him.
'No, not at all,'
She says, nibbling
away at his ear.
He inquires, hoping
to be reassured.
'No, no, no! You
are so hot when you're jealous!' She answers.
'Well, who in
the heck is he, then?'
She whispers in
'That's me before
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 . You can't
click on my email address. You have to re-type it . This protects me from software
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