Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST Wednesday, February 6, 2008:
Yesterday Dow down by a whopping 370 points (2.9%); Nasdaq down by a whopping
3.1%; S&P 500 down by even more -- 3.2%. And Asian markets even worse --
4% and 5%. I'm so pleased I told all my readers to get out and stay out!
I don't know why it fell yesterday, just as I don't know why it rose last week.
How difficult is this market? A very talented, and a very honest man runs a
hedge fund which has risen a whopping 5,994% since its inception in 1995. He
The fourth quarter
of 2007 continued what has been one of the strangest and most difficult years
for me. In August of 2007 several banks indicated there were significant problems
with sub-prime mortgages and other risky loans. Very often in years when there
are earnings disappointments, companies will announce them in September and
October... We prepared for these earnings disappointments and a bear market
by going net short in September and October. However, September 2007 was a
solid month up ... and October saw the prices finish near their highs. ...
December was a tough month. There we managed to lose money on the long and
short side. ... One consultant told me in November 2007 that I sounded frustrated
the same way I did throughout 2002. He was right: 2007 felt a lot like 2002.
... I would say that volatility in 2007 felt even greater than it did in 2002
and that 2007 was the year of incredible reversals. ...
As I write now, the US stockmarket is in a bear market and the economy likely
is heading into a recession. We have been in this situation in the past and
we do have a clear game plan for what to do. Our average position is a bit
smaller and we adhere to our stopping positions even more tightly. ...What
we are attempting to do is a bit like sailing a boat in a hurricane... I am
not pleased with the performance in 2007 (i.e. 7%). In the end, our percentage
return beat external benchmarks, but came nowhere close to the internal benchmark
I set. My contract with you says I am allowed to charge a 1% management fee
on assets and a 20% incentive fee on profits, but I cannot in good conscience
charge these fees for 2007. For 2007, I have charged a 1/2% management fee
and no incentive fee.
financial crisis explained in simple English. My
favorite financial writer, James Surowiecki, explains in the latest New Yorker
If the ongoing
turmoil in the worlds financial markets has made anything clear, its
that the list of things that can go wrong in those markets is a very long
one. Month after month, it seems, another potentially disastrous problem rises
to the surface. The latest looming crisis is the possible implosion of a group
of companies called monoline insurers. If you havent heard of monoline
insurers, dont worry: until recently, few people, even on Wall Street,
were all that interested in them. Yet their problems have become a serious
threat to global markets. Rumors that monoline insurers, like M.B.I.A. and
Ambac, were in serious trouble helped spark the vast market selloff that prompted
the Federal Reserves interest-rate cut two weeks ago, and, only a few
days later, rumors of a government-orchestrated bailout of these companies
set off a six-hundred-point rally in the Dow.
do a straightforward job: they insure securitiesguaranteeing, for instance,
that if a bond defaults theyll cover the interest and the principal.
Historically, this was a fairly sleepy business; these companies got their
start by insuring municipal bonds, which rarely default, and initially they
confined themselves to bonds with relatively predictable risks, which were
easy to put a price on. Unfortunately, a sleepy, straightforward business
wasnt good enough for the insurers. Like everyone else in recent years,
they wanted to cash in on the housing and lending boom. In order to expand,
they started insuring the complex securities that Wall Street created by packaging
mortgages, including subprime ones, for investors. This was a lucrative businessM.B.I.A.s
revenues rose nearly a hundred and forty per cent between 2001 and 2006but
it rested on a false assumption: that the insurers knew how risky these securities
really were. They didnt. Instead, they gravely underestimated how likely
the loans were to go bad, which meant that they didnt charge enough
for the insurance they were offering, and didnt put away enough to cover
the claims. Theyre now on the hook for tens of billions of dollars in
potential losses, and some estimates suggest that theyll need more than
a hundred billion to restore themselves to health.
is bad news for the insurersat one point, M.B.I.A.s and Ambacs
stock prices were down more than ninety per cent from their all-time highsbut
its also very dangerous for credit markets as a whole. This is because
of a peculiar feature of bond insurance: insurers credit ratings get
automatically applied to any bond they insure. M.B.I.A. and Ambac have enjoyed
the highest rating possible, AAA. As a result, any bond they insured, no matter
how junky, became an AAA security, which meant access to more investors and
a generally lower interest rate. The problem is that this process works in
reverse, too. If the insurers lose their AAA ratingscredit agencies
have made clear that both companies are at risk of this, and one agency has
already downgraded Ambac to AAthen the bonds theyve insured will
lose their ratings as well, which will leave investors holding billions upon
billions in assets worth a lot less than they thought. Thats why so
many people on Wall Street are pushing for a bailout for the insurers. It
may be an abandonment of free-market principles, but no one has ever accused
the Street of putting principle above profit.
companies make bad decisions and fail to deliver value, its just their
workers and investors who suffer. But monoline insurers desire to grab
as much new business as they could, risks be damned, quickly radiated across
global markets and will have huge consequences for millions of people who
have never heard of M.B.I.A. or Ambac. The situation illustrates a fundamental
paradox of todays financial system: its bigger than ever, but
terrible decisions by just a few companiesnot even very big companies,
at thatcan make the entire edifice totter.
In that sense,
the potential collapse of monoline insurers looks like a classic example of
what the sociologist Charles Perrow called a normal accident.
In examining disasters like the Challenger explosion and the near-meltdown
at Three Mile Island, Perrow argued that while the events were unforeseeable
they were also, in some sense, inevitable, because of the complexity and the
interconnectedness of the systems involved. When you have systems with lots
of moving parts, he said, some of them are bound to fail. And if they are
tightly linked to one anotheras in our current financial systemthen
the failure of just a few parts cascades through the system. In essence, the
more complicated and intertwined the system is, the smaller the margin of
Today, as financial
markets become ever more complex, these kinds of unanticipated ripple effects
are more commonthink of the havoc wrought a couple of weeks ago when
the activities of one rogue French trader came to light. In the past thirty
years, thanks to the combination of globalization, deregulation, and the increase
in computing power, we have seen an explosion in financial innovation. This
innovation has had all kinds of benefitsmaking cheap capital available
to companies and individuals who previously couldnt get it, allowing
risk to be more efficiently allocated, and widening the range of potential
investments. On a day-to-day level, it may even have lowered volatility in
the markets and helped make the real economy more stable. The problem is that
these improvements have been accompanied by more frequent systemic breakdowns.
It may be that investors accept periodic disasters as a price worth paying
for the innovations of modern finance, but now is probably not the best time
to ask them about it. ?
the Microsoft bid for Yahoo! stacks: The bid
makes zero sense. Steve Ballmer is no Bill Gates. He has none of Bill's intelligence,
understanding or charm. He's a loudmouthed, uncouth hammer with zero accomplishments
(except somehow getting in Gates' good books). Microsoft's stock will continue
to fall. Google's stock will rise as it garners even more lucrative search business.
I wouldn't gamble on Yahoo! stock. Ballmer may dumbly raise his bid. The man
is pigheaded and rude.
Ask your friends two questions: Have they placed ads with Google and Yahoo!
The answer will not surprise you. Google works. Yahoo! doesn't.
When your cordless says "move closer," it's
telling you it needs a new battery.
great free downloads for your network -- home or office. From Computerworld
I hesitated before I published this cartoon: I
do now want to nag. But it;s true. Exercise keeps your body alive and your brain
off the stockmarket.
Favorite spending of state money. From today's
Feb. 6 (Bloomberg)
-- Nasser didn't think much of Iran's Islamic regime -- until it paid for
him to become a woman. Growing up in the city of Mashhad, Nasser knew he was
different from the other boys, sneaking around in his aunt's skirts and experimenting
with makeup. At age 14, he told his parents he wanted to have a sex change.
that I had a problem and that I needed to solve it through an operation,''
Nasser, now 18, says at a downtown Tehran clinic two days after he became
a she called Hasti. "Even if lots of negative things are said about the
regime, they also do things that are good.''
In Iran, where
men and women are segregated, and homosexuality is punishable by death, the
government plans to spend 6 billion rials ($647,000) this year to help pay
for sex-change operations.
sense to me. In all conscience, I admit I have a male friend who also became
a female. The National Health in England paid for his operations. He/she has
size 12 man's shoes. Feet that large on a woman look weird, but not a weird
as I felt the first time I met her, after knowing him for all those years.
old person joke -- 1
An elderly couple had dinner at another couple's house, and after eating, the
wives left the table and went into the kitchen.
The two gentlemen
were talking, and one said, 'Last night we went out to a new restaurant and
it was really great. I would recommend it very highly.'
The other man
said, 'What is the name of the restaurant?'
The first man
thought and thought and finally said, 'What is the name of that flower you give
to someone you love? You know... The one that's red and has thorns.'
'Do you mean a
'Yes, that's the
one,' replied the man. He then turned towards the kitchen and yelled, 'Rose,
what's the name of that restaurant we went to last night?'
old person joke -- 2
Hospital regulations require a wheel chair for patients being discharged.
However, while working as a student nurse, I found one elderly gentleman already
dressed and sitting on the bed with a suitcase at his feet, who insisted he
didn't need my help to leave the hospital.
After a chat about
rules being rules, he reluctantly let me wheel him to the elevator.
On the way down
I asked him if his wife was meeting him.
'I don't know,'
he said. 'She's still upstairs in the bathroom changing out of her hospital
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
scanning the Internet for email addresses to spam. I have no role in choosing
the Google ads on this site. Thus I cannot endorse, though some look interesting.
If you click on a link, Google may send me money. Please note I'm not suggesting
you do. That money, if there is any, may help pay Michael's business school
tuition. Read more about Google AdSense, click
here and here.