Harry Newton's In Search of The Perfect Investment
EST, Thursday, November 6, 2008: Yesterday U.S. stockmarkets
fell 5%. That erased some of the gains since late October. There are now serious
"bargains" out there. But many "bargains" keep falling and
falling and falling. Who knows how much farther Citigroup ($12.41), GM ($5.56),
Cisco ($16.57), Research in Motion ($52.25) and the New York Times ($9.94) will
My personal belief is that stocks will fall further. There are only two
ways to play this market --
Selectively short drecky stocks (and a Ultra-Short index) with a tiny part of
Stay out with the rest of your portfolio, in cash. I'm still mulling the best
place for cash. Ideas welcome.
started this column this morning with an essay about "50% of a stock's
value is in its industry." You had picked booming industries to pick booming
stocks. This was a brilliant thesis. I could find booming professions -- like
bankruptcy lawyers and repo men (see below). But I couldn't find any booming
industries. I even checked listed pawnshops -- XPOI and FCFS -- but they weren't
setting the world on fire.
desperation, I did some charting. This is the Dow for the past month. I drew
a red line, thinking this was some sort of floor. We've above it for now. But
we're getting closer after yesterday's huge 486 point drop. Hedge funds are
still dumping stocks to meet redemptions.
This is the Dow
charted by day, falling consistently and then hugely volatile in October and
now November. As we say in Australia, the market goes up and down faster than
a whore's drawers.
My favorite financial
writer is the New Yorker's James Surowiecki. This morning he wrote:
So much for
Well, that didnt
last long. After yesterdays Election Day rally, in which just about
everything went up, today we had a post-Election-Day sell-off, in which just
about everything, across the board, went down, and which featured yet another
of those late-day indiscriminate dumping of stocks. I dont think theres
anything interesting to say about the sell-off, which put the market back
where it was late last week, but I remain astonished at how inured we have
become to extraordinary volatility. There were big banks and major cyclical
stocks that were down ten to fifteen per cent today, which should be moves
that provoke amazement, rather than ennui. (The huge sell-off in the banks
seems particularly extraordinary.)
suggested before, what were seeing is that volatility tends to feed
on itself: because the moves up and down are so big and so fast, no one feels
like they can trust the markets valuations, which in turn leads to buying-and-selling
panics, accentuated, of course, by the program trading that dominates the
exchanges. What we really need, I think, are three or four days in a row when
the market moves by less than one per cent. But while that would be rational,
its also, at this point, hard to imagine.
all this, I want to make an obvious point that for some reason really hit
home to me today, which is that peoples decisions to buy and sell stocks,
and particularly when they decide to buy and sell, are downright peculiar.
Lets take Citigroup, which was down fourteen per cent on the day (oh,
is that all?). It got as high as $14.68, but it traded for most of the day
between $13.50 and $14 a share. And during that time, the vast majority of
Citigroup shareholders could have sold their shares and gotten a price between
$13.50 and $14. (I told you this was obvious.) Yet there were literally millions
of shares which were not sold at that price that were instead sold, late in
the day, for significantly less. People (or programs) that werent interested
in selling Citigroup shares at $13.50, later decided that they did want to
sell them at $12.75, even though, at the lower price, Citigroups valuation
was more reasonable, its dividend yield was higher, and its upside reward
was obviously greater. Usually, in markets, when prices fall, demand rises.
But in the stock market, particularly on days like today, lower prices actually
This is precisely
what Warren Buffett finds so mystifying about the way most people, including
arguably many money managers, approach stocks. For Buffett, investors should
be much happier buying when stocks are down, because that means you can get
more shares for your money. But it seems clear that this is not how most investors
are psychologically built. Instead, we like to buy when stocks are rising,
and we feel the need to sell when theyre falling. The impulse to do
this is very hard to resist, and it is one of the biggest reasons why people,
whether theyre investing in individual stocks or mutual funds, find
it so hard to make money in the market.
So, is Buffett
any better at catching a falling knife in this market than you or I? He has
options on Goldman Sachs at $115. It closed last night at $85.77. He has options
on GE at $22.25. Last night it closed at $19.64. To give him credit, he hasn't
lost money. He bought preferred shares on which he 's getting 10%. And he has
free options at those prices. He, smartly, didn't buy the falling common.
I wonder why these
two companies don't open this "Buffett Deal" to you and I? I would
buy in. 10% on my money and an option to buy the common at today's prices. Good
there are booming "industries." Stephen Colbert has found
one -- the repo man. Watch the video. It's wonderful. Click
here. There are videos and full episodes on The
Colbert Report. You can also view full episodes of Jon Stewart's The
Daily Show by clicking here.
More and more
of Americans are getting their daily "news" from these two shows.
For us in New York, they're on Comedy Central (channel 45), starting each evening
at 11 PM. They've become a ritual around our house. Their timing is superb.
If the jokes are good, we laugh. If the jokes are not, we fall asleep. It's
win-win for us.
key priorities for Obama: I have a minor "in"
with the new administration. Yesterday I sent in my five priorities:
+ Get out of Iraq
and Afghanistan ASAP. Save money. Save lives.
+ Send money to municipalities, with serious conditions especially deleveraging.
+ Repair Americas
infrastructure especially the air traffic control system, bridges and
highways. These monies will put people back to work.
+ Stop wasting money on the financial bailout. It isn't causing more lending,
or boosting the economy. It's simply helping the big, successful banks buy more
+ Give all children up to age 19 health insurance. Thats financially do-able
now. Healthier children will save hugely on health bills in future years.
Any other thoughts?
Email me, please.
Nancy's Pet Goldfish
Little Nancy was in the garden filling in a hole when her neighbor peered over
you up to, Nancy?"
died," replied Nancy tearfully, without looking up, "and I've just
The neighbor was
concerned, "That's an awfully big hole for a goldfish, isn't it?"
Nancy patted down
the last heap of earth and then replied, "That's because he's inside your
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
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