Harry Newton's In Search of The Perfect Investment
8:00 AM EST, Monday, November 3, 2008: The
brain. The temperament. Those little psychology's we all have to make peace
with. Learn how they work. I've learned I fear losing money far more
than I enjoy making it. I've learned I don't enjoy figuring something out --
a prediction of great growth or great no-growth built on elaborate "brilliant"
logic -- and then being totally wrong.
year has been nerve-wracking. I've largely been out of the stockmarket. But,
stockmarkets' "saving grace" is speed. You can set a stop loss percentage
and dump your holdings instantly. You feel good. You move on. The harder emotional
investments are the ones you're stuck with -- private equity funds, leveraged
buyout funds, real estate syndicates, real estate lending and hedge funds with
long lockup periods. I invested in these places to diversify my risk away from
the stockmarket. Yet it's precisely these places which have hurt me hardest
not the money losses. The problem is with most of them I have no idea what --
if anything -- they're worth. A Manhattan office building looks physically great
and still has paying tenants. But vacancies are filled slowly, and rents are
falling. Moreover, there are no comparables. I'd like the precision of valuation
that the stockmarket produces. It's not to be. One starts talking about "five
years from now." That's more of a prayer than a sound strategy. It wears
on the emotions.
biggest savior remains cash. And I mean real cash. Last week I got redeemed
out of my final auction rate preferreds securities. I asked my broker who sold
me them back in February and now had fully redeemed them at par "What should
I do with the cash?" He sent me a selection of money market funds which
were popular with his clients. I studied them on the weekend and emailed back:
I have to say
none of these money market funds grab me as being excessively safe.
They seem to
be following the trap many money markets fall into grabbing yield by
buying anything and everything, some of which doesnt sound as safe as
it should be and some of which sounds positively vague.
to be an element of risk in these that isnt compensated by the returns,
which arent high. Also, theres no mention of insurance.
What am I missing?
You have any
others? Sorry to be a pain. Maybe Ive become unduly super cautious?
emailed me back this morning, "I love it that you're being unduly cautious.
Which brings me
to cash. Please take home some cash. That's the advice
a remarkable number of financial advisers are giving their customers. They mean
cash. Like $10,000 in crisp $100 bills. I don't consider this cash an "investment."
I consider it "safety money" in case something awful happens to our
banks. Like what? You can fantasize horrible scenarios. Fact is you may be right
for the wrong reasons. And then you may not be. If we've learned anything in
2008, it's the impossibility of making accurate predictions and the speed at
which horrible things happen.
look at the last few months, with the collapse in oil, base materials, commodities,
the bankruptcy of Iceland, Hungary Argentina etc. Who was not worried about
the U.S., with its obscene deficit, huge current account deficit and ridiculous
credit card debt? I've been fretting for years. Yet, the dollar is now strong.
The Euro and the Australian and Canadian dollars have slipped to levels we didn't
think possible. And contagion is worldwide.
Despite last week's
buoyant stockmarket, I remain out. That may not be right. Perhaps we've reached
bottom? Here's Floyd Norris from Saturday's New York Times:
Off the Charts
A Monthlong Walk on the Wildest Side of the Stock Market
month in the history of Wall Street ended on Halloween with both scary and
thrilling price movements.
the worst month for the Standard & Poors index of 500 stocks in
21 years since the 1987 stock market crash.
But the final
week was the best week for the market in 34 years.
As befits such
a wild month, it was the most volatile in the 80-year history of the S.&
The huge gains
of the final week were reminiscent of the sharp recoveries from bear market
lows in 1974 and 1982. Both of those moves came while the economy was mired
in recession, as it almost certainly is now.
stock market lows prove to be the low prices for this cycle, the bear market
will have ended with the S.& P. 500 down 46 percent from the peak it reached
in October 2007.
That would make
the bear market almost, but not quite, as bad as the 1973-74 bear market,
which ended with the index down 48 percent.
In the 2000-2
bear market, the fall was 49 percent.
The hectic market
action in October spread across most of the globe. Remarkably, the American
market was one of the calmer markets during the month. Several had more volatility
and larger swings in prices.
Nor was the
volatility limited to stock prices. Oil prices fell 33 percent during October,
making this the worst month for that market since oil futures began trading
in 1983. Oil is down to just under $68 a barrel, from a peak over $145 in
measure, shown in the accompanying charts, is the number of days in which
an index closes up or down at least 4 percent.
In normal times,
the market goes years without having even one such day. There were none, for
instance, from 2003 through 2007. There were three such days throughout the
1950s and two in the 1960s.
there were nine such days.
chart shows the months, from 1928 through the present, when the S.& P.
500 had at least five days with 4 percent moves. Most of them were during
the 1929 crash and the Great Depression. ...
My friend Dan
Good sent me this chart this morning. As you read it, you'll notice:
1. No overseas stockmarket was immune to the contagion.
2. Most markets did far worse than we did. So much for diversifying overseas.
3. China (Shanghai) was the worst. Yet you'd think that because they're growing
their economy the fastest, they'd do the best. Some would say they had done
well, better than most others. Hence they had further to fall.
was Black Swan month. Not everyone did shabbily.
You must read this piece from today's Wall Street Journal:
Was 'Black Swan' Gain
For most of October, it seemed nearly everything that could go wrong with
the markets did. But the rout turned into a jackpot for author and investor
Nassim Nicholas Taleb.
Mr. Taleb last
year published "The Black Swan," a best-selling book about the impact
of extreme events on the world and the financial markets. He also helped start
a hedge fund, Universa Investments L.P., which bases many of its strategies
on themes in the book, including how to reap big rewards in a sharp market
downturn. Like October's.
Separate funds in Universa's so-called Black Swan Protection Protocol were
up by a range of 65% to 115% in October, according to a person close to the
fund. "We're discovering the fragility of the financial system,"
said Mr. Taleb, who says he expects market volatility to continue as more
hedge funds run into trouble.
of mathematical finance at New York University, Mr. Taleb believes investors
often ignore the risk of extreme moves in the market, especially when times
are good and volatility is low, as it was for several years leading up to
the current turmoil. "Black swan" alludes to the belief, once widespread,
that all swans are white -- a notion that was proven false when European explorers
discovered black swans in Australia. A black-swan event is something that
is highly unexpected.
management at Universa have neared $2 billion since the fund launched early
last year with $300 million under management. While Mr. Taleb frequently consults
with Universa's traders, the Santa Monica, Calif., fund is owned and managed
by Mark Spitznagel, who worked for several years in the 1990s as a pit trader
on the Chicago Board of Trade.
To execute its strategy, Universa buys far-out-of-the-money "put"
options on stocks and stock indexes. These are bets that the market will see
a sharp, sudden downturn. They become extremely valuable in a market decline
of 20% or more in a one-month period.
When times are
good, such options are cheap and Universa gobbles them up, taking small losses
along the way. When the market makes a quick, steep turn south, as it has
recently, Universa's positions gain value as investors scramble to protect
themselves in the downturn by buying puts. The strategy, which keeps more
than 90% of assets in cash or cash equivalents such as Treasury bonds, either
breaks even or loses small amounts in most months while waiting for periodic,
infrequent spikes in volatility.
Here's an example
of a trade the fund made recently. In late September, when the Standard &
Poor's 500-stock index was trading around 1200, Universa purchased put options
that would pay off if the index fell to 850 by late October. Since such a
plunge was considered highly unlikely, such options cost only 90 cents. On
Oct. 10, those options cost $60 as the S&P 500 tumbled sharply. Universa
sold most of its position in the high-$50 range.
purchased a number of puts on financial stocks, such as Goldman Sachs Group
Inc. In late July, it paid $1.29 apiece for options on American International
Group Inc., the insurance giant that by September was on the brink of bankruptcy.
The puts were priced to pay off if AIG dipped below $25 a share by September.
Universa eventually sold them for about $21 apiece.
The fund has
"done what it was supposed to do for us," says John Salib, a partner
at Landmark Advisors, a New York fund that invests in other hedge funds and
that invested in Universa in July. "We wanted to protect our portfolio
against this kind of environment."
Mr. Taleb made
his first killing on Black Monday, the crash of Oct. 19, 1987, as a trader
with the investment bank First Boston (now a part of Credit Suisse), with
a large position in out-of-the-money Eurodollar contracts. Investors fled
into the highly liquid contracts as the market crashed, causing their value
While the black-swan
strategy has paid off handsomely this year, it hasn't always. Mr. Taleb's
previous fund, Empirica Capital, which used similar tactics, shut down in
2004 after several years of lackluster returns amid a period of low volatility.
The strategy may face another test after the current bout of market turmoil.
The task for
the fund's managers is to persuade clients to stick around after their big
gains. Historically, such dramatic downturns have been rare events, occurring
only once or twice a decade.
cautions against optimism. "You could say that so much value has been
destroyed that there just isn't much left," he said. That is "a
dangerous assumption, since things can always get worse."
to some really good news. This is from Bloomberg.
California Home Sales Rise Record 65 Percent (Update3)
Oct. 20 (Bloomberg)
-- Southern California home sales rose 65 percent in September, the biggest
year-over-year increase in at least two decades, as buyers took advantage
of foreclosures to purchase properties at discounted prices, MDA DataQuick
A total of 20,497
new and existing houses and condominiums sold last month in Los Angeles, Riverside,
San Diego, Ventura, San Bernardino and Orange counties. The rise from a year
earlier was the biggest in MDA DataQuick's records, which go back to 1988,
and September's sales count was the highest since December 2006, the San Diego-based
company said today in a statement.
the most in areas where rising foreclosures drove down prices, MDA DataQuick
said. Half of all the homes sold in Southern California last month had been
foreclosed upon in the previous 12 months, up from 13 percent a year earlier.
are low enough that people who would normally not be able to purchase are
buying,'' said Stephanie Martin, owner of Champion Realtors, a San Bernardino-based
home with three bedrooms and 2 1/2 bathrooms in Fontana, California, that
Martin sold for Ocwen Financial Corp. this month attracted more than a dozen
offers and sold for $25,000 more than its asking price, she said. ``The buyers
are out there. They're looking.''
Sales of foreclosed
homes were highest in Riverside County, where they accounted for 69 percent
of the homes sold, MDA DataQuick said. Riverside also had the biggest increase
in the number of homes sold, more than doubling from a year earlier to 4,551.
San Bernardino had the second-highest percentage of foreclosure sales, at
63 percent, and had the second-largest rise in sales, at 88 percent.
sales increase was driven ``largely by bargain shopping -- price reductions,''
said Andrew LePage, an analyst with MDA DataQuick, a unit of Richmond, British
Columbia-based MacDonald, Dettwiler and Associates Ltd. ``In some inland markets,
you have double, triple, or more of a year ago, thanks to large declines in
the home prices. There's this unfailing correlation between big price declines
and big sales increases.''
The surge in
foreclosure sales, which tend to be discounted, pushed the median price down
33 percent from a year earlier to $308,500. The September median was 39 percent
below the record $505,000 median reached in Southern California last year,
said MDA DataQuick, which compiles its surveys using county records and supplies
real estate information to public agencies, lenders, title companies and other
in all six Southern California counties the company tracks, dropping the most
in San Bernardino and Riverside, down 37 percent in each, followed by San
Diego County, which was down 30 percent to a median $328,000.
It isn't yet
clear whether September's sales increase will be repeated this month, LePage
came ``before the financial meltdown of the last few weeks,'' he said. ``It
was a strong month, period, right before we had some of the worst news on
the economy and financial markets since the Great Depression.''
Fusion is a great shave. Five blades are definitely
better than three. It's cheapest at Wal-Mart.
don't forget to vote tomorrow. I repeat my favorite
political cartoon. It's from the New Yorker.
That's it for
today. I'm off to Pennsylvania for two days to help get out the vote.
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
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