Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM Friday, May 27, 2005: The
Dow and Nasdaq are at a six-week high. It's a nice feeling. It's hard to believe
the climb will continue. The economy is slowing. Earnings are tight (though
improving). The budget. The trade deficit. Oil. You know the story. It's time
to take some profits off the table.
Yesterday Rochelle went broke. (See yesterday's column. Click
here.) But my LBO (leveraged buyout fund) sold a a company for four
times what they paid for it. What looks grim at the bottom of the cycle often
looks better at another point in the cycle. In the heady late 1990s I invested
in private equity funds, LBOs, hedge funds, and directly in startups. I wouldn't
do that irrational exuberance again. Most of the startups failed -- lousy management.
It's too hard to make up in earnings on good investments what you totally
lost on bad ones. These days it's preservation of capital. Preservation
of Capital. Repeat after me: Preservation of capital.
more smell more roses. I played tennis for three hours yesterday, all singles.
The old body was sore last night. But this morning, I feel great. Rigorous daily
exercise is good. A friend who's 84 has lost four inches of height in the past
few years and now can barely walk. He's healthy. But he hasn't done a tap of
exercise in 30 years. I have to believe his present aches and pains are due
to inactivity. End of lecture.
Funds Are Stumbling but Manager Salaries Aren't, writes today's New
key to benefiting from technology
is to use it, not to buy tech stocks. Examples (from latest issue of Sync Magazine):
hedge funds, the rich just keep getting richer. Across Wall
Street, fees for businesses from trading stocks to investing in mutual funds
have been falling. But at hedge funds, those exclusive investment partnerships
for the wealthy and institutions like pension funds, fees have stayed dizzyingly
high, even as billions of dollars have poured into the industry and performance,
on average, has faltered.
Last year, the
top-paid hedge fund manager, Edward S. Lampert of ESL Investments, earned
$1 billion, according to a survey to be released today by Alpha,
a magazine published by Institutional Investor that follows hedge funds.
That is the highest sum in the four years the magazine has been tracking these
hedge fund manager on Institutional Investor's list of the top 25 earners
made $251 million in 2004, up from nearly $136 million three
The secret to
the wealth of hedge fund managers is how they get paid. Instead of receiving
a fixed percentage of the funds they manage, as mutual fund managers do, hedge
fund managers generally make "1 and 20" - 1 percent of assets under
management and 20 percent of profits.
That means that
a $1 billion hedge fund manager earns $10 million just for opening the
doors, and a lot more if his fund performs well. Investors are willing
to pay more for these managers' talents because, at a time when stocks are
doing poorly and yields on short-term Treasury securities are low, hedge funds
hold out the hope of a better return.
has become so seductive that the top hedge fund managers can basically name
mind paying higher fees if you are getting rewarded properly," said Michael
Strauss, chief economist for Commonfund, which invests on behalf of foundations
Steven A. Cohen
of SAC Capital Advisors, for example, takes as much as 50 percent of all profits
his hedge funds earn, netting him $450 million last year, according
to Institutional Investor. Even after this big cut, his funds still returned
around 23 percent, not bad in a year when the Standard & Poor's 500-stock
index rose 8.99 percent.
on the list, Kenneth C. Griffin, has a novel twist on the fees he charges.
His firm, Citadel Investment, which managed some $11 billion at year-end and
has close to 1,000 employees -- large for a hedge fund - does not charge a
fixed fee for expenses. Instead, Mr. Griffin bills investors annually for
whatever it cost to run the fund that year, a figure that fluctuates, but
has been as high as 6 percent of assets, according to investors.
Last year, Mr.
Griffin's largest fund returned 9.87 percent, far below its compound average
annual return of 26 percent. Spokesmen for Mr. Cohen and Mr. Griffin declined
longtime investors in hedge funds worry that the steep compensation may make
managers like Mr. Griffin less motivated to perform. Already, overall performance
of hedge funds is faltering. Through April, hedge funds were down 0.7
percent, according to an index by Hedge Fund Research, a data firm. That
is better than the S.&. P. 500, which was down about 4 percent in the
period. But hedge fund investors are bracing for further losses for the month
of May, after some complex derivatives trades went against a number of fund
were earning double-digit returns, high expenses did not matter as much,"
said Antoine Bernheim, publisher of the U.S. Offshore Funds Directory. "But
when you are in a low single-digit return environment, investors can end up
breaking even or losing money. This is not a sustainable situation."
hedge fund managers continue to attract huge sums under ever richer terms.
Investors were clamoring to get into Eton Park, the $3 billion hedge fund
started last November by Eric Mindich, a former Goldman Sachs executive. Investors
in the new fund agreed not to withdraw any of their money for as long as
three and a half years. Another recent start-up, by the financier Carl
C. Icahn, charges a 2.5 percent fee for expenses and 25 percent
of the profits.
Many of the
25 managers on the Institutional Investor list of top earners had outstanding
returns. Mr. Lampert's estimated $1 billion profit, for example, came after
returning some 69 percent to his investors, who benefited from the spectacular
rise in the price of Kmart, the discount retailer that Mr. Lampert has merged
with Sears, Roebuck.
performer on the list, James H. Simons of Renaissance Technologies, made $670
million after posting a 24.9 percent return last year, even after
deducting his 5 percent management fee and 44 percent cut of
for Mr. Lampert declined comment; executives at Renaissance did not return
But other celebrated
managers had disappointing results, yet continued to earn hundreds of millions.
Last year, George
Soros made $305 million, even as his Quantum Endowment Fund rose just
4.6 percent. Mr. Soros's large earnings reflects the fact that much
of the money managed by his firm now represents his own capital.
pulled money from Soros Fund Management in recent years, after Mr. Soros announced
that he would be investing more conservatively. His goal is to earn enough
to support his charitable efforts, rather than to make big, risky bets like
his famous multibillion-dollar gamble against the British pound in 1992.
Mr. Soros is
not the only manager aiming for lower, less volatile results. Much of the
vast sums flowing into hedge funds these days comes from pension funds and
other institutions, which prize predictable performance over outsize returns.
pension fund is looking to make just 8 percent, after deducting fees,
on its hedge fund investments, according to a recent study by the Bank of
New York and Casey, Quirk & Associates, a consulting firm. That is a far
cry from the returns of more than 25 percent generated by celebrated
managers like Mr. Soros and Michael Steinhardt at their peaks.
Now that the
performance bar has been lowered, there is less incentive for managers to
make more aggressive bets, consultants said, especially when they can still
charge the same steep fees they did in the past.
hedge funds say they are resigned to paying dearly for top hedge fund talent.
"It's the law of supply and demand," said William Lawrence, chief
executive of Meridian Capital Partners, which manages portfolios of hedge
funds. "Over time, if the fees are not borne out by performance, the
market will react."
+ Cows at Colleen Pank's farm in Sprakers, New York, have wireless transponders
on their ankles. The devices contain a pedometer and a transmitter. Pank gets
reports that tell her which cows are taking the most steps. A low number of steps
signals trouble -- the cow may be sick. A high number of steps means the cow may
be on heat. The software tells Pank which cows should be bred. The devices also
measure and transmit the electrical conductivity of the cows' milk -- an early
warning for udder infections.
+ Tim Miranda drives a Bombardier snow cat to clear 40-foot deep snowdrifts off
the roads in California's Cascade Mountains. To keep from barrelling off a death
drop, Miranda uses a custom-installed, military grade Ashtec GPS naviation system
to locate the buried roads. His system pinpoints Miranda's location and elevation
to within a centimeter. His position is superimposed on a detailed map
on his onboard laptop. A red X precisely corresponds to the plow blade,
which Miranda aligns with the edge of the pavement buried beneath.
wretchedness of Excel and Powerpoint: They
do well for Microsoft, but, for the rest of us?
+ Excel: Beware of promoters who fall in love with the fantasy of their
Excel projections. Kristin Zhivago, a reader and author of "Rivers of
Too bad those
spreadsheets never show the real truth: the geeky company founder who is deathly
afraid of public exposure, because things aren't "perfect enough,"
and so sabotages every attempt to get publicity; the entrepreneur who doesn't
understand the importance of distribution, so fails to support it in any way;
the CEO who ignores the conflicting messages sent by the two versions of his
logo and company name that he uses in print and on the Web; the board members
who never talk to customers, but who think they know everything about running
the company; the guy who gets the loan for a half a million dollars, hires
people and vendors, spends about $100,000, then one day disappears with the
remaining $400,000...all real-life examples that I either witnessed close
up and all had wonderful Excel projections, on paper.
Powerpoint: Beware of Powerpoint presentations.
They contain snippets of facts, with often extravagant unsupported claims. They
look "official." They're pretty. They confuse investors. Personally,
I'd rather a detailed Word
doc with real facts. Try not to use Powerpoints when giving speeches. Powerpoint
makes you think and speak serially -- one point after another. That's not the
way the brain works. It jumps around. It can follow several threads at once.
It's more interesting that way. Powerpoint can't. A Powerpoint presentation
puts the audience to sleep.
don't make this stuff up:
+ 15% of Americans say they've interrupted sex to answer a cellphone call.
+ $400 million is how much ws spent in 2004 on adult films and pornographic
images formatted for cellphones.
+ Cool whip will condition your hair in 15 minutes.
+ Salve suburn by emptying a large jar of Nestea into your bath water.
Should you buy a satellite radio? Yes,
if you're using just in your car. No, if you want to buy a portable system and
use it everywhere. Sync Magazine tested portable XM satellite
radios in a bunch of locations -- from mountains, to the Empire State Building,
to stadiums, to on the street, to open fields. Their conclusion:
signal loss in the mine shaft and the subway, but in an open field and at
high altitude? Spotty service mars an otherwise great idea.
exchanges during court cases:
Judge: I know
you, don't I?
Defendant: Uh, yes.
Judge: All right, tell me, how do I know you?
Defendant: Judge, do I have to tell you?
Judge: Of course, you might be obstructing justice not to tell me.
Defendant: Okay. I was your bookie.
From a defendant
representing himself . . .
Defendant: Did you get a good look at me when I allegedly stole your purse?
Victim: Yes, I saw you clearly. You are the one who stole my purse.
Defendant: I should have shot you while I had the chance.
Judge: The charge
here is theft of frozen chickens. Are you the defendant?
Defendant: No, sir, I'm the guy who stole the chickens.
Lawyer: How do
you feel about defense attorneys?
Juror: I think they should all be drowned at birth.
Lawyer: Well, then, you are obviously biased for the prosecution.
uror: That's not true. I think prosecutors should be drowned at birth, too.
Judge: Is there
any reason you could not serve as a juror in this case?
Juror: I don't want to be away from my job that long.
Judge: Can't they do without you at work?
Juror: Yes, but I don't want them to know it.
us about the fight.
Witness: I didn't see no fight.
Lawyer: Well, tell us what you did see.
Witness: I went to a dance at the Turner house, and as the men swung around
and changed partners, they would slap each other, and one fellow hit harder
than the other one liked, and so the other one hit back and somebody pulled
a knife and a rifle that had been hidden under a bed, and the air was filled
with yelling and smoke and bullets.
Lawyer: You, too, were shot in the fracas?
Witness: No sir, I was shot midway between the fracas and the navel.
I want you to appoint me another lawyer.
Judge: And why is that?
Defendant: Because the Public Defender isn't interested in my case.
Judge (to Public Defender): Do you have a comment on the defendant's motion?
Public Defender: I'm sorry, Your Honor. I wasn't listening.
Judge: You are
charged with habitual drunkenness. Have you anything to say in your defense?
Defendant: Habitual thirstiness?
May everyone have
a great weekend. Get lots of exercise. Don't eat too much. Hug the kids and
the spouse. Check out your portfolio allocation. We'll talk about it when I
see you next on Tuesday.
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.