Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST, Wednesday, May 2:
"There is a total lack of fear," said my friend, the institutional
broker, "Everyone believes the stockmarket can't go down. ... When that
happens, the market will confound us and do what we don't expect. It always
No one can time the market.
No one ever succeeded by betting against the U.S. economy.
3. Corporate profits now being reported are strong, and generally surprising
Wall Street analysts with their strength.
The BIG concern is that government statistics show the economy slowing. Yet
U.S. government stats are increasingly misleading as globalization takes hold.
For a super piece on corporate investment, check out Michael Mandel's "What
spending slowdown" in a recent issue of Business Week. U.S. government
stats show a corporate investment slowdown. But Mandel says "corporate
America is still spending big time, just increasingly outside the U.S."
(P.S. I really admire Mandel.)
If you believe
that the market might turn down, there are some obvious things you can do to
"hedge" your portfolio:
1. Take some profits
off the table, especially in stocks that have gone through the roof. Stock up
2. Sell short
some stocks that look way overpriced. I'd say Dow Jones (DJ) is top of
my list. I can't imagine the Bancroft family will ever sell it. I wouldn't.
3. Take some put options on key indexes like the DIA (Dow Industrials), QQQ
(Nasdaq), and the SPY (S&P 500).
who wrote the book, "A Random Walk Down Wall Street." wrote
a piece in Monday's Wall Street Journal called "Irrational
Complacency." Here's his excellent article:
that the estimated first quarter GDP growth rate fell to 1.3%, the Dow Jones
Industrial Average closed last Friday at 13,121, a record high. The broader
capitalization-weighted S&P 500 stock index, covering 80% of the market,
traded just below its historical high. Only the Nasdaq index is well below
its Internet bubble high. Is the stock market correctly pricing strong growth
in corporate profits and present economic stability? Or are we being irrationally
complacent in the face of substantial risks to the market and the world economy?
economists who offered "on the one hand, on the other hand" advice,
President Harry S. Truman yearned for a one-handed economist who could offer
clear predictions about the future. I fail Truman's test; neither I nor anyone
else knows the proper level of securities prices, and we can never be sure
if today's stock prices are reasonable measures of uncertain future events.
We can, however, evenhandedly assess current valuations in financial markets
and the prospects for likely future long-run returns.
The facts are
that stock prices are high not only in the U.S. but also in the world's developed
and emerging markets. We can estimate long-run annual equity returns by adding
today's dividend yield (just under 2%) to the likely future growth rate of
earnings and dividends (perhaps 5.5%). This calculation suggests that stocks
are priced to produce about 7.5% future returns, well below the 10.5% annual
returns achieved from 1926 through 2006. Treasury bond yields (at just under
4.75%) are historically low, as is core inflation, running close to 2%. The
prospective equity risk premium (the amount by which stock returns are likely
to exceed bond returns) of about two and three-quarter percentage points appears
to be well below the five percentage point equity risk premium earned since
1926. We are not being paid as much to take on the risk of holding stocks.
Not only are
equity premiums low; so are bond risk premiums. The spread between high-yield
bonds (more pejoratively called junk bonds) and safe U.S. Treasuries is just
about at an all-time low. Sovereign emerging-market debt yields are not much
more than two percentage points over U.S. government debt. The VIX index,
measuring expected U.S. stock market volatility, is extraordinarily low. These
measures imply that financial markets are very relaxed about risk and that
the world is a very stable place.
There are reasons
to argue that world economic stability has in fact increased. We have not
endured a world war in over 60 years. The Cold War ended peacefully, and increased
trade has made the world's economies increasingly interdependent. Free market
economies have blossomed throughout the world. As money manager Rex Sinquefield
reminds us, the only people today who don't believe that markets work are
the Cubans and the North Koreans (and some "active" portfolio managers).
Economic activity in the U.S. has become increasingly stable. Depressions
have been avoided, recessions have been mild, earnings variability has moderated
and inflation has been contained. Moreover, despite the rise in the stock
market, and unlike the situation at the 2000 peak, price-earnings multiples
in the mid to high teens are not far from their long-run average values.
But could the
stock market be underestimating geopolitical risks today? We are all painfully
aware of the extraordinarily difficult situation in the Middle East. The conflicts
between Sunnis and Shiites as well as the violence of Hezbollah and Hamas
threaten to destabilize the entire region. Iran poses a grave threat to Israel
and seems determined to become a nuclear power. Unrest in the region has a
direct impact on oil prices.
in energy-vulnerable Europe seem more remote to most observers. But Europe
has a large Muslim population that is experiencing limited social integration,
high unemployment and radical Islamist influence. Beyond that, with slow-growing
economic activity and rapidly aging populations, European governments will
be hard put to fulfill their generous social welfare promises. Could it be,
paraphrasing President Franklin D. Roosevelt, that the only thing we have
to fear is lack of fear itself?
imbalances in the U.S. could trip us up. According to Yale University economist
Robert Shiller, inflation- and quality-adjusted home prices are still more
than 50% higher than their averages throughout most of the 20th century. These
data suggest that the real-estate correction could have much further to go.
Measured savings rates in the U.S. are essentially zero, and the trade deficit
is running at 7% of GDP.
The late economist
Herbert Stein used to say, If something can't go on forever, it won't. Many
observers would also argue that the U.S. income distribution may be unsustainable.
The share of after-tax corporate profits (increasingly influenced by the foreign
profits of multinational corporations) relative to GDP is almost 9%, compared
with an average of about 5% during the 1970s and 1980s. Wages and salaries
as a percent of GDP have fallen from 53% to under 46% since 1970.
have shown strong tendencies to revert to the mean in the past and could do
so in the future. Inflation-adjusted earnings of the S&P 500 stocks showed
zero growth from 1900 through 1947 and again from 1967 through 1987. If we
enter such a period in the future, today's moderate price-earnings multiples
may look far less attractive.
As a believer
in efficient markets, I hesitate to conclude that our markets are being irrationally
complacent. I believe that markets are high and risk spreads compressed because
of massive increases in world liquidity. A world awash in dollar-based purchasing
power has helped to keep our interest rates low and the spreads on risk assets
tight. It has encouraged large flows of money into private equity funds that
are privatizing (and leveraging) some of the "undervalued" companies
in the market, leaving less attractive firms available for public investors.
Flows of money have also continued into hedge funds where leverage is high
and where "accidents" such as the Amaranth collapse are always possible.
In our highly leveraged, narrow-spread markets, shocks to the system -- be
they economic or geopolitical -- can have large destabilizing effects.
So what should
investors do as the Dow rises to new highs? Should they "sell in May
and go away," as one stock-market bromide suggests? As a student of markets
for over 50 years, I am convinced that attempting to time the market is a
fool's game. But new highs in the market should induce investors to review
their asset allocations. If the rising stock market has pushed your allocation
of equities well above the level consistent with your risk tolerances, it
makes sense to consider rebalancing. Rebalancing is an excellent strategy
to constrain your investment risk in a very uncertain world.
risks and potential problems I have outlined, I remain a cautious optimist.
I don't think anyone will make money in the long run betting against the inherent
strength of the U.S. economy. I expect that the economy will adjust eventually
to whatever imbalances exist and that the nations of the world will ultimately
find peaceful solutions to the seemingly intractable problems that continue
to bedevil us.
my optimistic bias, however, I can't help remembering the story of two rabbis
at the time of the creation. One rabbi asked the other whether he was optimistic
or pessimistic. "I'm optimistic," the second rabbi replied. "Then
why are you frowning?" the first rabbi asked. The answer: "Because
I'm not sure my optimism is justified."
best travel tips:
If you must travel, buy yourself a plane and fly it yourself.
More and more of my friends
are. Last night, one called and said he was coming to New York in his Citation
CJ3. He's the second one in the last four weeks flying his own jet into New
York. Much more pleasant than JetBlue.
logs around 400 hours a year in his $7 million Citation CJ3 visiting clients.
It's a legitimate sales tool. Moreover he likes flying it. I stole these
photos off Cessna's site.
2. If you must
travel commercially, get lots of miles by billing everything on your credit
cards. I just booked a business class round-trip flight to San Diego on
American for 45,000 miles. That wasn't too painful since I'd just put $50,000
on my credit card to pay for printing of my dictionary.
3. Always pack
your clothes inside your suitcases in black plastic garbage bags. This tip
comes from a friend whose airline left his luggage on the tarmac during a violent
thunderstorm. The drenching rain destroyed his wife's clothes and his suits.
4, Don't check
your bags at all. What you can't carry on, send them ahead via FedEx. It's
not worth your while to wait around baggage claim areas. Don't leave your shipment
until the last minute. There are penalties:
it costs to ship one 25lb bag from New York to Los Angeles via FedEx
overnight -- before 10:30 AM by FedEx air
overnight -- before 3:30 PM by FedEx air
days by FedEx air
days by FedEx air
days by FedEx ground
awfulness continues: One Verizon employee reader writes:
I can not tell
you how right you are about Verizon. I have been a field technician for over
16 years now. It is so frustrating knowing what you are doing is the "wrong"
way to do things. I am currently working on the FiOS project in Westchester
County. It is a great product. I have it. Sadly, the management is just non
existent. If they would just listen to us, we could get this done so much
better and faster. I just want to cry some days.
One Verizon customer
Funny you should
write about Verizon today. I'm having the most amazing experience with them.
I've been a Verizon Wireless customer (in their various incarnations) since
'92. I have 5 lines with them (for my family), and my partner has another
4. We have another 4 or so employees who all have Verizon cell phones.
last week that they were about to introduce a new Blackberry; the 8830, which
will work on both CDMA and GSM networks, thus enabling one to seamlessly travel
with your Verizon number to Europe and elsewhere. It seemed the perfect solution
for me, but I discovered that only Verizon Wireless Business accounts would
have access to the phone for a while.
So, I decided
that we should convert our lines to a business account, and I began trying
to get someone at Verizon to handle the process. After not finding any useful
contact information on their website, I called customer service to ask for
someone to help me, and they tried to transfer me to a local business sales
rep, but he was on his line, so they gave me his direct number. I tried calling
yesterday morning, and had to leave a voice mail. I have not heard from him
since. I tried twice more, once yesterday afternoon, and once this morning,
and got his voice mail each time.
I then went
back to their website and tried another number. I got lost in voice mail purgatory
and ultimately was disconnected.
is pushing me toward switching to Cingular, which has a longer experience
with international service, and generally, a better selection of hardware
(not to mention far better marketing).
So, for Verizon's
inability to adequately respond to inbound sales inquiries, they are in danger
of losing upwards of 13 wireless accounts!
P.S. My son Michael
switched to Cingular for the same reason. He wanted the international coverage.
He's happy with Cingular.
best late night jokes About Global Warming
to a new U.N. report, the global warming outlook is much worse than originally
predicted. Which is pretty bad when they originally predicted it would destroy
the planet." --Jay Leno
on climate change said that humans are very likely making the planet warmer.
To which Hillary Clinton said, 'Hey, you can't blame me for that one.'"
Bush has a plan. He says that if we need to, we can lower the temperature dramatically
just by switching from Fahrenheit to Celsius" --Jimmy Kimmel.
"Scientists say because of global warming they expect the world's oceans
to rise four and a half feet. The scientists say this can mean only one thing:
Gary Coleman is going to drown." --Conan O'Brien
to a survey in this week's Time magazine, 85% of Americans think global warming
is happening. The other 15% work for the White House." --Jay Leno
say this global warming is serious. They are predicting now that by the year
2050, we will be out of party ice." --David Letterman
Bush said global warming is happening much quicker than he thought, and then
his staff pulled him aside and said 'It's just springtime.'" --Jay Leno
to Time magazine, global warming is 33% worse than we thought. You know what
that means? Al Gore is one-third more annoying than we thought." --Jay
if the warming trend continues, by 2015 Hillary Clinton might actually thaw
out." --Jay Leno, on global warming
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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