Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST Friday, November 3, 2006: Is
art a good investment? My knowledgeable friends say "Buy if you enjoy it,
but don't buy it for investment." The art market is hot. It's setting records.
The New York Times referred to this 4 x 8 feet canvas by Jackson Pollock
as a "classic drip painting." It sold for $140 million -- the
highest price paid for any "painting" ever.
Ronald S. Lauder
(of Estée Lauder fame) paid $135 million in June for Gustav Klimt's
portrait of Adele Bloch-Bauer II -- the previous top seller.
What about art
as an investment? According to the Times, a Cézanne which goes
to auction shortly and should get between $28 million to $35 million, was bought
six years ago for $!8.1 million. That gives an annual compound return of 7.54%
to 11.62%. A Picasso bought by Andrew Lloyd Weber 11 years ago for $29.1
million is now expected to sell for between $40 million and $60 million. That
gives it between a 2.93% and 6.80% compounded annual return. I
suspect these rates might be even lower since there may have been (probably
was) a "buyers' premium" (a 20% commission added to the sales
price at auction) and local sales tax. In short, art is a pretty lousy investment
-- even in hot markets.
My personal preference
is buy art I like from young artists who have a flair for self-promotion. I
enjoy the art on my wall. I hope my artists spend lots of time promoting themselves
and their art -- by getting into museums, galleries, etc.
The real story on hedge funds:
I was a little harsh on hedge funds yesterday -- if only to make a point that
they can be dangerous animals and to reiterate my basic rule -- if returns are
huge one year, take some (or all) of your money back. Chances are the
following year won't be that big. In fact, the following year may be negative.
My rule starts at 40% up one year and ends with "it's better to
play with the bank's money."
Wolgemuth runs a hedge fund called Insight Fund in Wheaton, Il. His returns
* to end October
writes: I disagree with your generalizations of Hedge Funds. You wrote:
are unregulated gambling machines. They were originally called "hedge"
because they're meant to hedge their bets by selling short as well as going
long. (Most mutual funds can't sell short.)
The fact is there
are literally hundreds of hedge fund strategies out there - so trying to generalize
or say they have similarities is inaccurate in my opinion. Any more, the term
hedge fund refers to structure (private, limited partnership) and that is where
the similarities between many funds stop -- except within certain specific strategies.
I think when making your generalizations, you are referring more to long/ short
funds than any others. We run a long/ short fund but it is quite different than
what you described. In fact, some long/ short funds use little to no leverage
(potentially decreasing volatility) and still produce consistently outstanding
returns not necessarily correlated to the overall market (like ours). To group
all hedge funds together (or even all long/short funds) and consider them gambling
machines is irresponsible. Of all journalists, I would think you would be a
little more savvy than to make that sort of generalization. A few bad apples
doesn't mean the whole bushel is rotten. You are a real estate investor. If
you heard that one or two real estate partnerships blew up recently, does that
mean that you encourage all your readers to exit all real estate investments?
Don't you agree that HF 's naturally attract the best talent (due to the compensation
model)? Yet every one of them is a gambling machine? Is SAC Capital a gambling
machine? Is Eddie Lampert's fund? What about Michael Steinhardt's back in the
day? Or George Soros'? Or Julian Robertson's? Or Citadel here in Chicago (run
by Ken Griffin)? Or take a smaller Fund like the $1 bil Libra Fund in NYC. They
have averaged over 30 % (net of fees ) a year since inception in 1990. Sounds
to me like skill not gambling.
Once again you're
generalizing. Our fund has about 33% of its portfolio short and yet has a return
over 250% (net of fees ) since inception 3.5 years ago . If you are skilled, you
can make money shorting stocks - though it is challenging. Doug Kass is out in
the media a lot and seems to know what he is doing (runs a short only fund) -
not sure about his overall performance though.
selling short -- can go disastrously wrong. You can lose gobs of money. And
since the hedge fund biz has become super-competitive -- with money flowing
fast to the best-performers -- there's huge pressure on hedge funds to take
concentrated bets (i.e. no diversification). When things go bad, well, they
really go bad.
This statement to
me is the most inaccurate piece of information I have ever seen in your column.
We were up 156% (net) in 2003 and followed that with a positive year in 2004.
We were up close to 27% (net) in 2005 and this year we are positive again. We
attempt to get great returns for our investors but we spend a lot of time making
sure that we don't subject our investors to too much negative volatility and drawdown.
If you are a skilled money manager you should be able to manage drawdown and being
up a lot one year should not necessarily lead to negative returns the next year.
is emerging -- A hedge fund does incredibly one year with a handful of successful
(i.e. lucky) bets. The following year it falters badly and often goes out
I am sorry Harry,
but this is bad advice and you are smart enough to know it. It all comes down
to the talent and strategy of the asset manager . There have been a number of
hedge funds that have achieved exceptional returns over time- blowing away any
ETF or mutual fund. Like any long range investment hedge funds should be measured
over years not months and though all managers have periods of time when they underperform
-- the great ones will have great returns over time. Your argument also doesnt
hold water- because hedge funds are in every asset class and have such a wide
variety of strategies / risk tolerances you cant group them together like you
are attempting to. Maybe we should not invest our money in anything? It is all
risky! And heaven forbid our investment appreciate - then it becomes ultra risky!
Rule: When the fund does well one year, take most of your money out. If you
want to k eep playing, play with the bank's money. No hedge fund can consistently
achieve huge annual returns -- I'd say over 40% up one year is likely to lead
to a significant drop the following year.
Bottom line, if
you want to invest in hedge funds know the risks -- but also know that the most
talented money managers are running hedge funds -- and that is because they
get paid based primarily on their performance. If they have handsome returns
they get paid handsomely. Steven A. Cohen (started SAC Capital) got rich because
he is a talented stock picker. My guess is he didn't want to waste his time
running a mutual fund or a desk at Goldman Sachs -- rather he wanted to run
a hedge fund because that was the best way to be compensated for his skill.
In my opinion,
if you decide not to invest in hedge funds (assuming you are accredited) you
are turning your back on some of the world's most talented money managers. And
for heaven sakes don't get intimidated by good returns -- they are often an
indication of skill and solid volatility management. Always be alert and as
you, Harry like to say have your stop losses in place (even when investing in
hedge funds)- but let your winners run.
America slows, Europe is picking up, finally. My friend returned
from an investor meeting in Germany. He's psyched. This chart is from the Economist.
The Economist wrote:
European Commission's indicator of business and consumer economic sentiment
in the euro area rose in October to its highest level in more than five-and-a-half
years. Among the bigger countries in the currency block the uptick in optimism
was particularly strong in Germany and France (where the unemployment rate is
at a five-year low), but in Italy confidence fell.
Tuesday is Election Day. But you can vote earlier
-- like today -- if you're going to be out of town next Tuesday. It's called
casting an absentee ballot. You can vote in person. I'll be doing that today.
These elections will be close. Your vote is needed.
to avoid the flu
Miss Beatrice, the church organist, was in her eighties. She was
admired for her sweetness and kindness to all. One afternoon the pastor came
to call on her and she showed him into her quaint sitting room. She invited
him to have a seat while she prepared tea.
As he sat facing
her old Hammond organ, the young minister noticed a cut-glass bowl sitting on
top of it. The bowl was filled with water, and in the water floated, of all
things, a condom! When she returned with tea and scones, they began to chat.
The pastor tried
to stifle his curiosity about the bowl of water and its strange floater, but
soon it got the better of him and He could no longer resist. "Miss Beatrice",
he said, "I wonder if you would tell me about this?" pointing to the
she replied, "Isn't it wonderful? I was walking through the Park a few
months ago and I found this little package on the ground. The directions said
to place it on the organ, keep it wet and that it would prevent the spread of
disease. Do you know I haven't had the flu all winter?"
nuns go painting
nuns are ordered to paint a room in the convent, and the last instruction of
the Mother Superior is that they must not get even one drop of paint on their
about this for a while, the two nuns decide to lock the door of the room, strip
off their habits, and paint in the nude.
In the middle
of the project, there comes a knock at the door. "Who is it?" says
one of the nuns.
" replies a voice from the other side of the door.
The two nuns look
at each other and shrug, and deciding that no harm can come from letting a blind
man into the room, they open the door.
says the man, "Where do you want the blinds"?
The weekend is about to be glorious. Thank
the Lord you're not going to prison for 12 years -- like this man, Sanjay Kumar,
ex-chief of Computer Associates:
Mr. Kumar, center, is going to jail for fraud. His gorgeous, pricey suit won't
do him any good for the next 12 years.
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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