Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST Monday, March 3, 2008: While
we remain stuck with illiquid auction rate preferreds, there is a tinge of good
news. First, our holdings are paying increasingly higher interest rates. Second,
the plunge in muni bond prices is attracting new buyers who consider the present,
much higher, muni bond yields to be enormously attractive. Muni bonds are now
paying more than treasurys:
-- finally -- are revolting against the iniquitous bond rating system which
has allowed Wall Street to screw them out of millions of dollars of needless
insurance. The New York Times has an excellent piece today called "States
and Cities Start Rebelling on Bond Ratings."
treasurers, attorneys-general, governors, and other senior officials are focusing
on the mess in municipals and auction rate preferreds (with our help). Ultimately,
this will make the municipal market stronger and make liquidating the holdings
behind our auction rate preferreds easier.
None of this should
detract from our putting pressure on the issuers of our auction rate preferreds
and the brokers who sold them to us. One interesting point: There is a rule
on Wall Street that we were meant (under the law) to have been given a prospectus
before being sold these things. Few of us were. For more on our six-part strategy,
column. If you're stuck in these things, please email me. Collective
thinking works better.
Warren Buffett's annual report:
Some major financial
institutions have, however, experienced staggering problems because they engaged
in the "weakened lending practices" I described in last year's letter.
John Stumpf, CEO of Wells Fargo, aptly dissected the recent behavior of many
lenders: "It is interesting that the industry has invented new ways
to lose money when the old ways seemed to work just fine."
You may recall
a 2003 Silicon Valley bumper sticker that implored, "Please, God,
Just One More Bubble." Unfortunately, this wish was promptly granted,
as just about all Americans came to believe that house prices would forever
rise. That conviction made a borrower's income and cash equity seem unimportant
to lenders, who shoveled out money, confident that HPA - house price appreciation
- would cure all problems. Today, our country is experiencing widespread pain
because of that erroneous belief. As house prices fall, a huge amount of financial
folly is being exposed. You only learn who has been swimming naked when the
tide goes out - and what we are witnessing at some of our largest financial
institutions is an ugly sight.
sick cartoon. This cartoon has its charm. Check
out the comment at the bottom right.
pay too much to have their money managed. From
The Economist, February 28:
other people's money is a fine business. The asset-management industry long
ago managed to secure a deal whereby its fee income rose in line with the
markets; it can earn ever more money by doing nothing. The industry oversees
some $64 trillion of assets and, at a conservative estimate, its costs in
fees, dealing charges, custody and so on are around 1.5-2% a yearso
investors are shelling out $1 trillion a year to the custodians of their cash.
As our special
report in this issue shows, the industry puts a big chunk of this straight
into its back pocket. A survey by Boston Consulting Group found that operating
margins of fund-management firms were more than 40%. People like Steve Schwarzman
of Blackstone and Ken Griffin of Citadel have become billionaires thanks to
the way their private-equity groups and hedge funds look after other people's
You would have
thought such a business would be an easy target for new entrants; competition
would reduce margins and force fees down. But, by and large, this has not
happened. A cheap alternative to traditional fund management arose more than
30 years ago, in the form of index-trackers, portfolios that mimic a benchmark
such as the S&P 500. Trackers have gained a respectable market share but
are much more popular with astute pension funds and insurance companies than
with the general public.
funds entrust money to index-trackers with one hand and to high-charging private-equity
and hedge-fund managers with the other. They appear to believe both that markets
are so efficient that it is hard for fund managers to beat them; and also
that markets are so inefficient that it is still possible to beat them after
paying hedge-fund managers 2% a year, plus a fifth of all positive returns.
stems from the conviction that some special fund managers have skill, or alpha
in the jargon. The fund-management industry has exploited this by persuading
investors to judge it on past performance, rather than price. And you can
always find some managers that have outperformed; in a range of 20 funds,
at least four or five will probably have beaten the market. The industry has
been able to advertise those funds and keep quiet about the rest.
You can see
why investors want more than an average return when they learn
that some managers have made 20% a year. And the records of some of these
managers may indeed be due to skill, rather than luck. The problem lies in
the difficulty of spotting such skillful managers before they have beaten
the market, not afterwhen their run is over.
often been their own worst enemies. If they are to save at all, they typically
take a lot of persuading. Marketing costs eat into investors' returns. Salesmen
have to be paid, and their commission creates an incentive to push higher-charging
funds. If consumers were only willing to look more carefully at these costs,
they could save themselves a lot of money.
There is hope,
however. A relatively new form of tracking vehicle, called exchange-traded
funds (ETFs), has grown its assets even faster than hedge funds have this
decade. Furthermore, as academics have studied the patterns of fund managers'
returns, they have discovered that excess returns, which the managers attribute
to their own skill, may well stem from things like a greater exposure to smaller
stocks. You can design ETFs to mimic these factors cheaply. Even the returns
of hedge funds can be copied.
Yet change will
come slowly. It is hard for the average investor to see through the statistical
fog; easy to be fooled by randomness, in the phrase of Nassim
Nicholas Taleb, a writer and former trader. But small investors really ought
to worry about cost. Figures from John Bogle, founder of the fund giant Vanguard,
show that an S&P 500 index-fund returned 12.3% a year between 1980 and
2005, whereas the average mutual-fund investor, because of costs and poor
timing, earned just 7.3%. That makes an enormous difference to wealth: $10,000
invested in the index fund grew to $170,800; a typical mutual-fund investor
saw his money grow to just $48,200.
In a free market,
regulators should not aim to control fees or even ban the advertising of past
returns. But they should make sure that the full costs of fund management
are clear. And when governments set up their own savings schemesin pensions,
saythey should make sure that costs are controlled. Let hedge-fund managers
earn their yachts the hard way.
great financial quote. It comes from a hedge fund manager who is
(rightly) annoyed that such funds can't market their services on a normal website.
He is suing the SEC.
consequences in Iraq: From the Atlantic.com comes an insightful
piece called, "After
Iraq." Two paragraphs are specially interesting.
to be able to have a website like any other business. The only websites required
to pre-qualify people are hedge funds and pornography . . . gun shops are
allowed to advertise, the Massachusetts state lottery is allowed to have a
website. We want to be treated like any other business.
As America approaches
the fifth anniversary of the invasion of Iraq, the list of the wars
unintended consequences is without end (as opposed to the list of intended
consequences, which is, so far, vanishingly brief). The list includes, notably,
the likelihood that the Kurds will achieve their independence and that Iraq
will go the way of Gaul and be divided into three partsbut it also includes
much more than that. Across the Middle East, and into south-central Asia,
the intrinsically artificial qualities of several states have been brought
into focus by the omnivorous American response to the attacks of 9/11; it
is not just Iraq and Afghanistan that appear to be incoherent amalgamations
of disparate tribes and territories. The precariousness of such states as
Lebanon and Pakistan, of course, predates the invasion of Iraq. But the wars
against al-Qaeda, the Taliban, and especially Saddam Hussein have made the
durability of the modern Middle East state system an open question in ways
that it wasnt a mere seven years ago. ...
All states are
man-made. But some are more man-made than others. It was Winston Churchill
(a bust of whom Bush keeps in the Oval Office) who, in the aftermath of World
War I, roped together three provinces of the defeated and dissolved Ottoman
Empire, adopted the name Iraq, and bequeathed it to a luckless branch of the
Hashemite tribe of west Arabia. Churchill would eventually call the forced
inclusion of the Kurds in Iraq one of his worst mistakesbut by then,
there was nothing he could do about it.
man applies for a job at the Post Office.
The interviewer asks him, 'Are you allergic to anything?' He says 'Yes - just
'Have you ever
been in the service?" 'Yes,' he says. 'I was in Iraq for two years.'
says, 'That will give you five extra points toward employment,' and then asks,
'Are you disabled in any way?
The guy says,
'Yes 100%..an IED exploded near me and blew my testicles off.'
tells the guy, 'O.K. In that case, I can hire you right now. Normal hours are
from 8 AM to 4 PM. You can start tomorrow at 10:00 - and plan on starting at
10 AM every day.'
The guy is puzzled
and says, 'If the hours are from 8 AM to 4 PM, why don't you want me to be here
before 10 AM?
'This is a government
job,' the interviewer says. 'For the first two hours we just stand around drinking
coffee and scratching our balls.
No point in you
coming in for that.'
simple home remedies
1. If you are choking on an ice cube, pour a cup of boiling water
down your throat. Bingo. The blockage will instantly remove itself.
2. Avoid cutting
yourself when slicing vegetables by getting someone else to hold while you chop.
3. Avoid arguments
with the Mrs. about lifting the toilet seat by using the sink.
4. For high blood
pressure sufferers: simply cut yourself and bleed for a few minutes, thus reducing
the pressure in your veins.
5. A mouse trap,
placed on top of your alarm clock, will prevent you from rolling over and going
back to sleep after you hit the snooze button.
6. If you have
a bad cough, take a large dose of laxatives. You'll be afraid to cough.
7. You only need
two tools in life - WD-40 and Duct Tape. If it doesn't move and should, use
the WD-40. If it shouldn't move and does, use the duct tape.
normal until you get to know them.
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
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