Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM Tuesday, March 8, 2005: There
is talk among my savvy traders of an upcoming, short tech rally. I really can't
get too excited. Presently I'm enjoying the perfect weather of California's Coachella
Valley. Another day and I'll be jaded. For now, I'm playing tennis and reading
books next to the pool. The good news is that stocks with recovering management
problems are recovering nicely. Remember I told you about the investment management
firm that finds fallen angels? The firm is Pittsburgh's Snow Capital. I put some
money with them a week ago. They're already up about 1 1/2 per cent -- which surprised
me (and probably them). For more on them, click
good to be true? Remember Friday's column about managed
a fancy name for writing put and call options. I published the company's alleged
returns on their investors' monies:
2004 + 32%
2003 + 66%
2002 + 71%
kept my comments low key. I wondered how many readers would email me the obvious:
"The returns are too good to be true." Sure, enough
a bunch of you did.
The first step in looking at any potential "perfect" investment, is
to ask yourself "Are the returns too high?" And then
ask yourself, "Are they high for a reason?" -- like
to suck you in.
Personally I've had my fill of alleged high returns. In the end, high, unusual,
unreal returns turn out to be exactly that -- unusual and unreal. And, worse,
you often lose all your savings.
Ponzi Scheme: Con Man for the Ages. Roger Lowenstein wrote the brilliant
book "When Genius Failed: The Rise and Fall of Long-Term Capital Management."
In Friday's Wall Street Journal he wrote a review of a new book called
nothing quite like a good Ponzi scheme. A wily promoter pays off existing investors
by raising cash from new ones, announces triumphant results and repeats the cycle
anew. What could go wrong? In practice, just about everything. In recent times,
dot-com ventures tried to subsist on selling stock, the buyers of which were paid
off by later investors. Most of these ventures went bust, of course, but at least
a few had a passing shot at earning genuine profits.
I always wondered how the original Ponzi scheme worked.
Here's Lowenstein's wonderful explanation:
The same cannot
be said of Charles Ponzi, the turn-of-the-century Italian immigrant who gave
this genre of fraud a name. Mitchell Zuckoff's biography of this charming rogue,
"Ponzi's Scheme: The True Story of a Financial Legend" (Random House,
390 pages, $25.95), provokes our wonder precisely because his subject is so
brazen -- and yet so naively captive to his own delusions.
Boston in 1903, Ponzi dreams of gold but fails at job after job and twice lands
in jail (once for forgery). In time, he graduates from manual labor to white-collar
work, where the scent of finance arouses him. In 1920, and with only the barest
outline of a business in mind, the 37-year-old drifter launches the Securities
Exchange Co. For financing, he offers to borrow money on a signed note, payable
in 45 days at the fantastic interest rate of 50%. Compounded over a year, sums
would increase 2,500%.
It is unclear
whether he intended for his financing vehicle to dwarf his presumptive trading
business, but it quickly did. The prospect of spectacular returns spread by
word of mouth, first among Boston's Italian neighborhoods, then more generally
in the Hub, then to more than a dozen satellite cities where Ponzi opened branches.
1920 he sold $5,000 worth of notes; by June, the total had soared to $2.5 million.
Such growth ensured that early investors could be paid in full (though many
chose to reinvest), and as word of their "profits" circulated, more
investors took the plunge. By summer, it was common to see School Street, outside
Ponzi's office, jammed with workers bearing their small but hard-won savings,
soon to be handed over. Mr. Zuckoff does a good job of portraying (and often,
naming) these people: bricklayers, waiters, grocers, trolley drivers.
them to invest? Ponzi's scheme had a slender thread of plausibility, based on
an obscure niche in the world's postal network. By international agreement,
nations issued a common stamp, known as International Reply Coupons, which could
be redeemed for postage in any country. (This was useful for international trade.)
Ponzi, who had clerked for an import-export business, realized that the prices
of these coupons did not reflect the huge currency devaluations that had followed
World War I. Thus $100 translated into lire could buy much more postage in Rome
than the same $100 could buy in New York. Ponzi explained to investors, always
with sufficient vagueness, that his fabulous returns stemmed from buying coupons
in bulk overseas.
the idea might be in theory, Ponzi quickly learned that there was no practical
way to buy and transport large quantities of coupons. Nor was there any way
of turning them into cash (and Ponzi could hardly hope to pay off his investors
in stamps). In fact, there was no evidence that Ponzi actually traded in coupons.
Investors hardly cared. As Mr. Zuckoff observes: "Like a magician who focuses
his audience's attention on one hand while performing feats of prestidigitation
with the other, Ponzi knew the details of the transactions were less interesting
than the promised results."
A master of
the soft sell, he sent cards to investors in advance of their notes coming due,
reminding them to come in and collect -- thus reinforcing his image as a man
concerned with his investors' welfare. Even the police detectives sent to keep
tabs on this financial whiz ended up investing with him.
resentment in tribal Boston bolstered his appeal. A diminutive, ambitious outsider,
Ponzi had found the doors to the Anglo-Saxon establishment shut. When he began
to rake in millions, he had the exquisite pleasure of taking control of a bank,
Hanover Trust, that had coldly rejected his loan application less than a year
before. Mr. Zuckoff notes that Ponzi's investors may not have known for certain
whether Ponzi was on the level, "but they were rooting for him."
With his dapper
Palm Beach suits, silk handkerchiefs and snazzy cars, he exuded confidence.
Even when the tide began to turn, and lines of anxious sellers formed outside
his office, Ponzi refused to run. Rather, he calmly served hot dogs and doughnuts
to the people waiting for their money, as if to confirm his (wholly fallacious)
claim to solvency.
puts us on the trail with the investigators and journalists who track Ponzi
down. (Clarence Barron, owner of this newspaper, was an early doubter.) He tells
the story of the Boston Post, which makes a crusade of catching Ponzi, and recounts,
unnecessarily, the career of James Michael Curley, Boston's colorful and corrupt
mayor. Perhaps the author has in mind a broader social narrative, but this is
a story with only one star.
downfall was brought about chiefly by the man himself. He has the opportunity
to flee with a bundle but dreams of vindicating the faith of his investors and
of Rose, his modest and loyal-to-a-fault wife. So he desperately searches for
some new enterprise -- banking perhaps? international shipping? -- that will
deliver the gains he owes, allowing him to get off the treadmill and go legit.
But in the meantime, to redeem his notes, Ponzi has to keep writing new ones.
In July 1920, the Securities Exchange Co. takes in an astonishing $6 million.
Of course, this means that another $9 million in obligations will soon come
(less than a year after it had all begun), the debonair financier has pleaded
guilty to mail fraud. We are left to wonder, as with the modern, Enron-era crooks,
what it is that makes such people think that they can get away with it all.
Perhaps it is in their genes. Released in 1924, Ponzi made for Florida just
in time for the land boom. He set up a real-estate venture and offered investors
profits of 200%. He returned to jail, was eventually deported and died broke."
dumb can you be? The
chief executive of the Boeing Company, Harry C. Stonecipher, who was brought
out of retirement 15 months ago to clean up the company's tarnished image and
restore its credibility, was forced to resign yesterday after admitting an affair
with a female Boeing executive. Mr.
Stonecipher, married and with grown children, was forced out for having violated
an internal code of conduct that he had imposed on all Boeing employees as he
improve the company's actions and image.
This is Harry C. Stonecipher,
a sex symbol for somebody inside Boeing. It must be the puppy-dog wrinkles.
I'm practicing the expression. I suspect my wife will say, "You look silly,
Sulphur at Whole Foods: They're opening
another Whole Foods store in New York. My local store has 9,000 customers on
average a day! I tried to get Whole Foods to carry Dole raisins, which are the
best. But Whole Foods rejected the Dole raisins because they contained sulphur.
A Whole Foods rep wrote me, "That is just one of the requirements vendors
have to live with to do business with Whole Foods. If the chemical involved
is not naturally occurring in the product it cannot be introduced in any subsequent
processing." Meantime, the stock continues to rise:
Offending another group
Last week it was the Polish. Today's it's Jewish mothers. I figure
I can't possibly be offensive if I insult every group.
have no problem figuring when life begins. It's simple. The fetus is not considered
viable until it graduates from medical school or law school.
Q: Why don't Jewish
A: Alcohol interferes with their suffering .
Q: Have you seen
the newest Jewish-American-Princess horror movie?
A: It's called "Debbie Does Dishes."
Q: Why do Jewish
mothers make great parole officers?
A: They never let anyone finish a sentence .
When the doctor
called Mrs. Liebenbaum to tell her that her check came back, she replied, "So
did my arthritis."
A Jewish boy comes
home from school and tells his mother he has a part in the play.
She asks, "What part is it?
The boy says, "I play the part of the Jewish husband."
The mother scowls and says, "Go back and tell the teacher you want a speaking
Q: Where does
a Jewish husband hide money from his wife?
A: Under the vacuum cleaner .
Q: How many Jewish
mothers does it take to change a light bulb?
A: (Sigh) Don't bother. I'll sit in the dark. I don't want to be a nuisance
Did you hear about
the bum who walked up to a Jewish mother on the street and said, "Lady
I haven't eaten in three days."
She replied, "So, force yourself."
Q: What's the
difference between a Rottweiler and a Jewish mother?
A: Eventually, the Rottweiler lets go.
Q: Why are Jewish
A: Because Jewish women don't like anything that isn't 20% off.
is gaining momentum: More and more readers are posting
comments on why the incompetent Carly Fiorina should not be made president of
The World Bank. Tell your friends about StopCarly.com.
Tell them to tell their friends. This is really important.
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. Thus I cannot endorse any, though some look
mighty interesting. If you click on a link, Google may send me money. That money
will help pay Claire's law school tuition. Read more about Google AdSense,
here and here.