Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST Wednesday, November 22, 2006:
There are more than 8,000+ hedge funds. They typically charge a 2% annual fee
and a 20% incentive fee. This is a lot more than mutual funds. The theory is
that hedge funds attract the best and brightest money managers and therefore
perform better for their investors. That's the theory.
In reality, two of my hedge funds have performed significantly worse
than all my Vanguard mutual funds -- which typically charge around 0.25%
annual fee and no incentive fee. One of my hedge funds is down 38%
and one is down 7.5%.
Hedge funds are
so called because they're meant to "hedge" their bets. This means
they're meant to have part of their funds invested in longs and part invested
in shorts. Somehow this means the riskiness of their portfolio is reduced. If
the market goes up, they benefit. If the market goes down, they benefit. There
are problems with this:
1. It's really hard to think long and think short simultaneously. It's a different
2. So called funds-of-funds often also invest in the hedge funds which you might
invest directly in. The fund-of-funds bring their own demands -- and one of
which often is "You will be this percentage short all the time."
This ties the hedge fund manager's hands, forcing him to search for shorts at
the wrong time -- when the market is going up or his brain is simply into searching
for undervalued companies.
I bring all this
up because hedge funds have lately achieved a glamor -- the press is rife with
stories of hedge fund managers (like Stevie Cohen) who earn hundreds of millions
each year and live like kings in castles that put Buckingham Palace to shame.
Fact is there is a handful of hedge fund managers who are geniuses. But the
bulk are like you and I -- scrounging their next stock idea, praying they'll
get in before it turns and trying to predict the unpredictable (like the FDA).
Hedge fund rewards
are potentially so high and the competition for investors' money so intense
that it makes many hedge fund managers desperate. They churn their portfolios,
trying to catch every little bounce or plummet in the market. Eventually, some
mature and learn they're driving themselves nuts and hurting their fund's performance.
And eventually most (at least the good ones) calm down and search out value.
They do their research, visit the companies, stay close to management and hope
for the best. In this way, they begin to look like mutual fund managers and
standard 1% to 1.5% money managers.
I spent an hour on the phone yesterday with a hedge fund manager who's lost
me 7.5% so far this year. He patiently went through every position in his portfolio,
why he owned them and what he hoped for each of the stocks. He explained what
he'd learned this year -- chasing gyrations is a fool's game, staring at Bloomberg
screens all day is a gigantic waste of time. Some of his new hires were not
suited for the hedge fund world. He has to do a better job of dealing with the
demands of the funds of funds, etc.
In contrast, my 38% down fund is staying secret, refusing to divulge his holdings
(despite promises) or its strategies. It's feeding its investors the Mushroom
Strategy, defined in my dictionary as:
for dealing with dissident shareholders, recalcitrant employees, difficult
families and hedge fund investors. The strategy is threefold: Keep everyone
in the dark, feed them a lot of organic bovine waste (i.e. bullshit) and harvest
them (i.e. bring them into the real world) when they are truly ripe, i.e.
when you're ready to bring them out of their misery, or ignorance.
I have one hedge
fund I love. I'm close to the manager. He explains what he's doing and why.
I feel comfortable that he's my "kind of guy" -- believes in capital
preservation, low risk, broad diversification and, most importantly, has a lot
more of his own money in his fund than my money.
In short, finding
money managers is not easy. If someone were to ask me this morning, "Give
me the least aggravation way to invest my money," I'd answer, "Put
half in Vanguard funds and half in muni bonds, especially if you live in a high-tax
state. And go play tennis."
My Vanguard funds are doing splendidly. Thank you very much. My favorites: the
International Value Fund, the Total International Stock Index, the Emerging
Markets Stock Index, and the Mid-Cap Index Fund.
In short, the
big tradeoff in investing is not risk for reward. It's aggravation for
peace. With tomorrow Thanksgiving, I'll opt for peace.
But on Friday, I will probably feel different... (See yesterday's column. Click
Is the Worst Over for the Housing Bust? In
today's Wall Street Journal, economists surveyed say "Yes."
But they still predict that the average selling price of a house will fall next
year. Of course, all real estate is location, location, location. I've been
surveying my own friends who are in real estate. They say:
1. After a total drought for several months, residential in erstwhile "hot"
places like California is now -- remarkably -- picking up. Houses and condos
2. Commercial rents continue to firm. Commercial office buildings -- especially
in "hot" cities like New York, Washington and Los Angeles -- continue
to rise in price.
waste your time with this movie:
It's boring. End of story.
I screwed up: I recommended Dyson's new hand
vac, the Dyson Root 6
because I loved their upright, the DC-07
which I have two of. I also recommended the hand vac because the trade press
had recommended the hand vac. But I hadn't personally tested it. Wrong! All
the user reviews on the Internet (Amazon and mySimon, etc.) talk of great suction
-- but horrible 5 minute battery life. Yes, you read right. Fully charged, the
thing only lasts five minutes. In short, stick with the corded DC-07.
vows never to recommend anything he personally hasn't personally tested.
also not to believe the magazines and the 2006 Gift Guides. Most of them have
never seen the product and are simply filling their magazines with press releases.
logic of technology:
After having dug to a depth of 1000 meters last year, Scottish scientists
found traces of copper wire dating back 1000 years and came to the conclusion
that their ancestors already had a telephone network more than 1000 years ago.
Not to be outdone
by the Scots, in the weeks that followed, English scientist dug to a depth of
2000 meters and shortly after headlines in the UK newspapers read; "English
Archaeologists have found traces of 2000 year old thin glass." They concluded
their ancestors already had an advanced high-tech digital fiber optic communications
network a thousand years earlier than the Scots.
One week later,
Irish newspapers reported the following: 'After digging as deep as 5000 meters
in a County Mayo bog, Irish scientists have found absolutely nothing. They have
therefore concluded that 5000 years ago Ireland's inhabitants were already using
forget to try this tomorrow:
One year at Thanksgiving, my mom went to my sister's house for the traditional
Knowing how gullible
my sister is, my mom decided to play a trick.
She told my sister
that she needed something from the store.
When my sister
left, my mom took the turkey out of the oven, removed the stuffing, stuffed
a Cornish hen,and inserted it into the turkey, and re-stuffed the turkey. She
then placed the bird(s) back in the oven.
When it was time
for dinner, my sister pulled the turkey out of the oven and proceeded to remove
When her serving
spoon hit something, she reached in and pulled out the little bird.
With a look of
total shock on her face, my mother exclaimed, "Patricia, you've cooked
a pregnant bird!"
At the reality
of this horrifying news, my sister started to cry.
It took the family
two hours to convince her that turkeys lay eggs!
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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