Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM Monday, May 16, 2005: "Who's
preying on your grandparents?" is the title of the New York Times
business cover story. The Times highlights an annuity from American Equity
Investment Life Insurance that proposed to pay 7% on your investment,
but carried a staggering 17.5% surrender charge if cashed in during the
first year. Exit charges were not scheduled to disappear for 17 years after
purchase. That's higher than any mutual fund I know. It's eggregious.
Apart from warning against junk investments like this one, the article contained
this advice: Go on the Internet and check. By checking, the family found
lawsuits going on in California against the compnay. And then "we realized
that we were not making a good decision."
costs are sunk, gone and irrelevant: My sister has
a big investment in a company going awry. She won't let go because of the money
and the time she has invested. I gave her my usual lecture on "What
has gone before has gone. What counts now is the next nickel, the next hour
of time. That's the decision."
two hardest parts to investing are:
1. Falling in love with your investment.
2. Being obsessed with what went before.
new day is the first day of the rest of your life with your investments. Every
day you own something is as if you bought it at that day at that price. Every
day you should -- at least theoretically -- assess the potential rewards going
forward with each investment. Are they there? If not, sell them and find something
it makes serious sense to sell, to close it down, to walk -- if only to stem
the daily mental anguish. After all, you earned the money. You can earn it back.
Is Your Apartment Like a Dot-Com Stock?
Henry Blodgett, ex-Merrill Lynch dot-com analyst, has written a cover story
for New York Magazine: "What the tech-stock boom and bust can
teach us about New York real estate and what it cant." Excerpts:
So are we living
in a bubble? Well, the average New York apartment has more than doubled in
price since 1996, and in some areas, prices have quintupled. New York real
estate certainly looks like a lot of the bubbles weve seen in the past.
Still, many of the commonly cited signs of the topbidding
wars, vertiginous prices, lines outside new condo projects, everyone and their
brother becoming real-estate developers can be deceptive.
When Netscape went public in 1995, it, too, was dismissed as a sign
of the top, but it was only the beginning (and the Internet is anything
but a hallucination). ...
The most compelling evidence that house prices are, if not a bubble, at least
way ahead of themselves is the diverging relationship between prices and rents
and incomes. Most people prefer to own rather than rent, but when prices get
too far out of line, renting becomes irresistibly attractive. Similarly, bigger
salaries allow you to afford more house, but if prices grow faster than incomes,
eventually people get priced out.
over the last few decades, house prices have grown slightly faster than the
rate of inflation and in line with the growth of rents and incomes. In the
past ten years, however, real-estate prices have shot way ahead of all
three. Smaller divergences in the seventies and eighties were followed
by corrections, in which home prices fell in real terms. So, nationally were
probably headed for trouble. ...
So is it a bubble?
As with the rest of the country, the divergence between New York real-estate
prices and incomes and rents over the last decade suggests that it is. Prices
have risen at more than twice the rate of either rents or incomes since 1996,
a trend that even the mayors office believes is unsustainable. The ratio
of prices to rents is also higher than at any time in the past two decades,
including the late eighties. On the other hand, in the longer term, the conclusion
is not so clear. Business360, an economic-research firm, points out
that if you go back to 1981, wage growth in Manhattan has significantly outpaced
real-estate price growth.
purposes, the bubble debate is academic: You can afford what you can afford,
and no one knows what the market is going to do. As Keynes observed, prices
can stay irrational longer than you can stay solvent.
The great error
made in the nineties was not the failure to recognize that the stock boom
might be a bubble: By 1999, in fact, most professionals thought that it might
be a bubble but kept buying anyway, because they didnt know when it
would end. The great error was the belief that before the bubble burst, something
would change that would tell everyone to get outthat somewhere, a light
would turn from green to red.
through that bubble, and looked hard for the signal, I would respectfully
suggest that this is wishful thinking. Lights were flashing yellow, of course
and had been for years but conditions just kept getting better.
Eventually, by the end of the decade, life had been so good for so long that
almost no analyst or strategist on Wall Street saw anything that would bring
the party to a halt. And in New York real estate, life has been good for quite
To read Blodgett's
My own feeling:
I'm not speculating in apartments. My real estate investments are cash flow
based, with reasonable leverage -- sufficient to cushion a 10% to 20% potential
drop in value. I'm also assuming that, as purchase prices ease off -- what with
rising interest rates -- the rental market will strengthen. To me, that seems
like a sound way to play the real estate "bubble."
lesson in the Newsweek story:
for running the story on U.S. troops flushing a Koran down the toilet. But it
seems to be unwilling to deny the story:
"Certainly the fact that the Pentagon and the top Pentagon spokespeople
are denying it and saying we got the story wrong troubles us," editor Mark
Whitaker said in an interview. "This is all we've been able to find out,"
said Mr. Whitaker. "We suggest we may have gotten something wrong, but
we're not entirely sure what we got wrong at this point, frankly."
Michael Isikoff (one of the story's editors) had relied on an unnamed U.S. government
official who had been credible in the past, said Mr. Whitaker. "I know
who the source is and I know this source is in a position to have seen internal
documents and who has been a good and credible source in the past," he
What would you
have a done if you were Newsweek? Run the story based on the source being
credible in the past? Check other sources? Drop the story? Background: you're
in head-on competition with Time. You need "scoops." Your magazine
is on deadline. You don't have time to check. Now what?
A big percentage of Americans no longer trusts the press. They "trust"
the Internet. But it's as rife with mistakes (perhaps more) than the paper press
is. There is even an Internet site (Snopes.com)
devoted to checking out the truth of what it calls "urban legends."
Adobe's PhotoShop software makes "fixing" photos easy, i.e. making
them deceptive. For example, which one of these do you think is real?
This dining room set is for sale. How do you
know that the photo was taken by a male? Look carefully. Remember, I don't make
this stuff up.
The latest scam on the coast
This new scam is being pulled mainly on older men who are apparently
passed the age of giving a running pursuit.
When the intended victim stops for a red light, a nude, beautiful young woman
comes up and with body stretched to its full potential, she starts to wash your
While she is doing
this, another person opens the back door of your car, taking anything you have
on the back seat.
According to my
west coast friend, "They are very good at this. They got me seven times
on Thursday and five
times yesterday. I couldn't find them today."
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 .
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