Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST, Monday, June 11:
Weekends can be frustrating. You meet with your friends. Some are doing well.
Some are doing poorly. You want to reach out and help. But they talk about "risk,"
about "lack of capital," "being too late."
you persist in helping, you'll fall into "The Harry Newton Hole."
dig yourself in deeper, requiring more and more of your time
. And, in
the end, youll be blamed because it didnt work. (This also applies
to giving people computer advice.) The hardest thing to learn: You can lead
a horse to water, but you cannot make them drink. The second hardest thing:
most people aren't entrepreneurs and will never be entrepreneurs, no matter
how much work you put in.
It's frustrating for me. I have these stupendous ideas on how my friends can
get rich beyond their wildest imaginations.
been watching my favorite Aussie miner? Kagara
Zinc (KZL.AU) just popped over $AUS7, recouping its losses from earlier this
year. As they say in Australia, that's better than a slap in the belly with
a cold fish. (Australia has its own language.)
with your winners. Lose your losers. This is Dennis Mykytyn's simple
sage advice to me. He runs Modern Capital, one of my favorite hedge funds. I
was thinking of Dennis as I read this piece from the weekend's New York Times.
It's called, "To Pick Winners, Start by Weeding Out the Losers."
want to add a margin of safety when searching for hot growth stocks may want
to consider a grading system developed by Partha S. Mohanram, an associate
professor at Columbia Universitys business school.
says that his method cant reliably pinpoint the next Google, but that
it may help investors avoid some money-losers. For individual investors, the
main insight of his work may be that stocks whose prices far outstrip the
net value of their assets are unlikely to outperform the overall market.
Prudent investors would be advised to do their homework and avoid such risky
outlined his grading system in a paper published in the September 2005 issue
of the Review of Accounting Studies. Using a database of stocks similar to
those in the Dow Jones Wilshire 5,000 index from 1979 to 2001, he found that
his system appeared to be more effective in screening out stocks with poor
performances than in predicting those that would actually beat the market.
the returns of the 14 percent of stocks that received the highest grades
under the professors system outperformed the market by an average of
3.1 percentage points a year. The stocks with the lowest scores
about 13 percent of those considered underperformed the market
by an average of 17.5 percentage points a year.
The paper, Separating
Winners From Losers Among Low Book-to-Market Stocks Using Financial Statement
Analysis, may be found on the Web site of the Social Sciences Research
Network, at papers.ssrn.com, and through links on AlphaSeeker.com, a site
developed by Richard Sloan, now the director of accounting research at Barclays
Global Investors in San Francisco and formerly a professor at the University
of Michigan. (Harry's note: I found the article for $32 on SpringerLink --
developed the grading system by collecting public company reports, then screening
for three measures of profitability the ratio of net income to assets,
the ratio cash flow to assets, and the difference between net income and cash
flow as well as five other variables. These were the consistency of
both sales and earnings growth, and spending in three categories: research
and development, advertising and capital expenditures.
investors began taking notice of his research several years ago. James Montier,
for example, a global equity strategist at Dresdner Kleinwort Wasserstein
in London, wrote favorably about it in a research paper before the final peer-reviewed
version of the paper was published.
through hundreds of company reports and grading all of their stocks may be
beyond the ability of a typical investor, a basic guideline drawn from the
study may be widely useful: stocks whose book value (assets minus liabilities)
is much lower than their market value are unlikely to fare well.
That means its
important to check the balance sheet of a company before making an investment
with low book-to-market ratios dont perform well as a group,
Mr. Mohanram said, adding that their average return is 8.7 percentage points
a year below the market.
generally those whose prices have shot up on investor euphoria that
isnt adequately supported by the net value of the assets stated on the
companys books will often turn out to be a disappointment, Mr.
Mohanrams paper suggested.
As recent examples
of such stocks, he cited Lucent and Yahoo. At the end of 2005, Lucents
book-to-market ratio was 0.03, and it underperformed the market by 19.5 percentage
points in 2006, while Yahoo, with a book-to-market ratio of 0.15, underperformed
the market by 30.5 percentage points for the same period.
in using his grading system to beat the market may want to combine two strategies,
Mr. Mohanram says, by buying high-scoring stocks and selling low-scoring stocks
short. Short-selling, of course, can be a risky strategy and is not widely
recommended for individual investors.
work with brokers might ask for their help in duplicating the system, suggests
Robert Hagin, a former Morgan Stanley research chief who now runs Hagin Investment
dont have to adopt the system completely in order to make use of it,
says Jayendran Rajamony, a portfolio manager at Numeric Investors who is an
admirer of Mr. Mohanrams work. They may simply look at annual reports
and research papers for any growth stocks that interest them and use his criteria
even without peer comparisons as screens in picking or avoiding
about doing fundamental analysis, Mr. Rajamony said. This system
is a way for investors to discipline themselves to pay attention to important
variables because picking growth stocks is not just about buying a stock with
a good story.
In short, dont
buy a stock that holds a world of promise but not much else.
the rich live. The book is called "Richistan: A Journey Through
the American Wealth Boom and the Lives of the New Rich." It's written
by Robert Frank. It's hysterical.
You don't want
to buy it. But you do need to read some excerpts from a review of it in the
New York Times Book Review:
All good journalism
is really travel writing. You prepare for a serious story the way a foreign
correspondent would. You buy the maps, you learn the language, you hang out
with the locals not just the taxi drivers! and then you write.
what Robert Frank has done. He writes the Wealth Report column for The Wall
Street Journal. ... In his new book, Richistan, he posits the
existence of a little-known country within our country. This parallel
country of the rich was once just a village, he argues, but now its
an entire nation.
The data bear
Frank out. It was a huge deal when John D. Rockefeller became the countrys
first billionaire. Adjusted for inflation, he had $14 billion less
than the net worth of each of Sam Waltons five children today. There
were an estimated 13 American billionaires in 1985. Now there are more than
1,000. In 2005, America minted 227,000 new financial millionaires,
men and women with more than $1 million in investible assets. There are as
many millionaires in North Carolina as there are in India. And so on.
that the rich are financial foreigners within their own country.
They have their own health care system, staffed by concierge doctors.
They have their own travel network of timeshare (or private) jets and destination
clubs. For her birthday, one 11-year-old aristokid pleads to
fly commercial, to ride on a big plane with other people. I want to
see what an airport looks like on the inside.
Like an anthropologist
in the Amazon basin, Frank goes native. Except instead of a loincloth, he
dons a white tuxedo to attend the International Red Cross Ball in Palm Beach,
where he meets Jackie Bradley, a buxom blonde squeezed into a jewel-encrusted
Joy Cherry gown. Bradley is chatting up her new book, The Bombshell
Bible. Its really more about my inner life, she says.
Im hoping to use it to help other women like me.
And Frank learns
the lingo. Most Richistanis earn their citizenship through a liquidity
event, when someone buys out their company, rather than through inheritance.
Hedge fundies prowl the nether regions of Manhattan for trendy paintings,
or noncorrelated assets. Affluent is Richistani
code for not really rich. According to Frank, you need about $10
million to be considered entry-level rich.
Frank also plumbs
Richistans secret status codes. You might have thought that a Mercedes
SLK or a Rolex were flash possessions. Wrong! In Richistan, they are reverse
status symbols. The affluent drive Mercedes; the rich drive Maybachs. Franck
Muller hardly advertises their bejeweled watches, which top out around $600,000,
because they might attract the wrong kind of attention. Like yours.
If you experience
status anxiety, this book isnt for you. You cant avoid the conclusion
that everyone is a lot richer than you are, whether he deserves to be or not.
Heres a guy, Ed Bazinet, who got rich making little ceramic villages
with light bulbs inside them. How hard can that be?
On a more reassuring
note, its nice to learn that the rich suffer status anxiety, too. When
Richistanis are asked how much money would make them feel secure, they
inevitably choose a figure that is double their own net worth. Because
so many newly enriched entrepreneurs hail from middle-class backgrounds, they
hate being called rich. Chauffeurs, for instance, are out. Rolls-Royce says
95 per cent of its customers drive the cars themselves. Tim Blixseth, the
founder of the Yellowstone Club and other gated hideaways, tells Frank: I
dont like most rich people. They can be arrogant. This from a
man who owns two Shih Tzus named Learjet and G2. As in Gulfstream G2. If you
were rich, you would get it. ...
In a number of carefully controlled trials, scientists have demonstrated that
if we drink 1 liter of water each day, at the end of the year we would have
absorbed more than 1 kilo of Escherichia coli, (E. coli) bacteria found in feces.
In other words, we are consuming 1 kilo of Poop.
However, we do
NOT run that risk when drinking wine because alcohol has to go through a purification
process of boiling, filtering and/or fermenting.
Water = Poop.
Wine = Health.
Hence, it's better
to drink wine and talk stupid, than to drink water and be full of shit
Scotsman in the new country
moves to the United States and attends his first baseball game. The first batter
approaches the batters' box, takes a few swings and then hits a double. Everyone
is on their feet screaming "Run!!!"
The next batter
hits a single. The Scotsman listens as the crowd again cheers "RUN!! RUN!!"
The Scotsman is enjoying the game and begins screaming with the fans.
The fifth batter
comes up and four balls go by. The Umpire calls: "Walk." The batter
starts his slow trot to first base. The Scot stands up and screams, "Run
ye lazy bastard rrrun!"
The people around
him begin laughing. Embarrassed, the Scot sits back down.
A friendly fan
notes the man's embarrassment, leans over and explains, "He can't run --
he has four balls."
The Scot stands
up and screams: "Walk with pride, Laddie!"
Off to California: I'm off
to San Diego this morning to check up on some investments. I'll be on a big
plane. I had my 65th birthday yesterday. There's an expression in New York:
With my birthday and $2, you'll get a ride on the subway (which costs $2). But,
once you're 65, you qualify for New York's bargain of your lifetime: you ride
the subway for $1. Good things happen when you get old.