Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM Thursday, October 13, 2005: There
are two schools of thought. There are ALWAYS two schools of thought. One says
all sorts of nasty things are brewing and there'll be more declines. The other
says the bottom
is about to be reached and happy days will soon reappear. And there's
a third school: Sell on Rosh Hashanah, buy on Yom Kippur. Today is Yom Kippur.
Your guess is as good as mine, though mine tends to be negative. My main concern:
energy costs this winter will eat consumers alive.
The ONLY thing we know is that in trying times like these you can't sit there
and do nothing. What can you do?
* Sell all
your stocks that are down 15% or more. No exceptions.
* Fire managers or mutual funds that are down 10%. No exceptions.
* Pick some highflyers and cockroach stocks to short. But don't be too
greedy. When you've made some profits, take them. Areas I like for shorting
include technology, housing, automobile, transportation and some high-flying
* Don't be
too tempted. My son believes Refco's troubles are due to one man. He's gone.
Therefore the stock will recover strongly. His father thinks Refco smells like
a classic Cockroach stock. Further, his father doesn't like catching falling
* Stay away
from the stockmarket. Look for investments elsewhere. Soon there'll be decent
distress buys in real estate.
* Stay in cash. The name of this game is not protecting yourself against
inflation. (There's actually very little.) The name of this game is capital
which Fred Hickey has: His October newsletter shows he is short (or
has puts on) Intel, Best Buy, CDW, IBM, Google, KLA-Tencor, Netlogic Microsystems
(NETL), Dell, Amazon, Apple, Texas Instruments, Business Objects (BOBJ), Hyperion
Solutions (HYSL), Toll Brothers (TOL), Goldman Sachs, Lehman Brothers (LEH),
Capital One Financial (COF) and Countrywide Financial (CFC).
His largest put option is Research in Motion (RIMM), whose management
has recently become desperate -- and announced a big share buyback. I say "desperate"
because it means the poor management doesn't have the imagination to think of
ways to improve their product. I wish they'd ask their customers (like me).
I'd give them 734.
The Wall Street Journal muses: How to
Prepare Your Portfolio to Handle Three Potential Investment Nightmares.
meet event risk.
Oil above $60
a barrel, the specter of economic weakness and fears of inflation have combined
to spook investors. Indeed, thanks to the recent stockmarket slump, both
the Dow Jones Industrial Average and the Standard & Poor's 500-stock index
are underwater for the year. Yet such turmoil is par for the course.
I got my first job in financial journalism 20 years ago, and I am still waiting
for things to calm down. Consider what's happened:
The Dow industrials plunged 22.6% on a single day in October
Japanese stocks peaked in 1989 -- and today are 65% lower.
Twice in a dozen years, stock investors were rattled when the U.S.
went to war with Saddam Hussein.
The largest one-day point drop ever in the Dow industrials occurred
when the market reopened after the September 11 terrorist attacks.
The S&P 500 posted 20%-plus gains in five consecutive
calendar years in the late 1990s -- and then immediately got whacked with
three consecutive losing years.
all this turmoil, many folks continue to insist that 10% is the typical annual
return for stocks. Sure enough, the S&P 500 did indeed clock 10.9% in
2004. But a "normal" year like 2004 is, in truth, far from normal.
Over the past 20 calendar years, there have been just three years when
the S&P 500's annual return was above 6% but below 16%, according to Chicago's
What about the
other 17 years? Among them were nine years when the S&P 500 soared
20% or more and four years when it lost money.
Thanks to this year's lackluster market, stock valuations don't look so terrible.
The S&P 500 is at less than 19 times trailing 12-month reported earnings
and the dividend yield now hovers around 2%. While that may be rich by historical
standards, stocks look reasonable compared with 10-year Treasury notes, which
yield less than two percentage points above the likely inflation rate.
That said, if
we get a single scary headline, stocks could easily tumble 20% or more.
Experts in behavioral finance have found that investors tend to be far too
investment trusts? Gold shares? Florida condos? Energy stocks? Overconfident
speculators are convinced these highflying investments are a one-way ticket
But a few years
from now, we could be lamenting these investments the same way we now lament
tech stocks bought in the 1990s. My advice: Never forget what happened to
dot-com investors -- and build your portfolio with well-informed trepidation.
To that end, consider three key investment pitfalls: resurgent inflation,
recession and sudden crises that shake investor confidence. In that last category,
include the fallout from events like currency devaluations, political turmoil
and terrorist attacks.
How would your
investments perform in each scenario? In all three situations, money-market
funds, Treasury bills and other "cash investments" would be the
model of stability. But loading up on cash investments is no solution, because
you won't make money over the long run, once you figure in inflation and taxes.
You might spread your holdings across a mix of high-quality corporate and
government bonds, inflation-indexed Treasuries, high-yield "junk"
bonds and foreign bonds, knowing that only some of these sectors will do well
at any one time. For instance, if recession hits, junk bonds will get crushed
as investors fear defaults. But your high-quality bonds should post gains,
thanks to the likely fall in interest rates. Investors will also tend to flock
to high-quality bonds, especially Treasuries, during crises of confidence.
On the other
hand, conventional Treasuries would get pummeled by resurgent inflation. But
in that environment, your inflation-indexed Treasuries should hold their own.
And if the renewed inflation is sparked by an overheated economy, your junk
bonds could notch impressive gains.
for their part, are a wild card, because currency moves are impossible to
predict. That, however, is part of their allure.
else fails, your foreign bonds may ride to the rescue, helping to prop up
your portfolio's performance. That will be especially true if the next crisis
is triggered by worries over U.S. debt levels.
You can apply
the same analysis to various classes of stocks, except the potential gains
and losses are far larger. While an inflationary spike might dent stocks initially,
shares should fare well longer term, as corporate earnings climb with inflation.
also cause short-term trouble for stocks. Meanwhile, it's hard to know how
shares will react to the next crisis. Given all that, you should spread your
bets widely, always owning at least some bonds and allocating maybe 25% of
your stock portfolio to foreign shares, 5% to real-estate investment trusts
and 5% to gold stocks, commodities and other natural-resource plays.
REITs and natural
resources should perform well if inflation picks up, and foreign stocks could
save your portfolio if the dollar nose-dives. But who really knows? Investing
is racked with uncertainty -- and broad diversification is your best defense.
Street Journal's TRIPLE THREAT
three possible pitfalls facing investors -- and the investments that are
likely to flourish in each scenario.
Recessions: Bonds -- especially long-term government, municipal
and high-quality corporate bonds.
Inflation: Gold stocks, commodities, real estate, inflation-indexed
Crises of confidence: Treasury bonds, gold stocks.
Instead, to score decent gains, you've got to take more risk, and that
means tapping into the stock and bond markets. But keep your overconfidence
-- and your portfolio's risk level -- in check.
Service's tracking system sucks: Contrary to what I wrote, the Post
Office does have a tracking system. But it's useless. It only tells you when
your package was delivered. You can't find out where it is or when it will be
delivered. In other words, you can't trace it.
Today is Yom Kippur:
A priest and a rabbi are discussing the pros and cons
of their various religions, and inevitably the discussion turns to repentance.
The rabbi explains Yom Kippur, the solemn Day of Atonement, a day of fasting
and penitence, while the priest tells him all about Lent, and its 40 days of
self-denial and absolution from sins.
After the discussion
ends, the rabbi goes home to tell his wife about the conversation, and they
discuss the merits of Lent versus Yom Kippur.
She turns her head and laughs.
The rabbi says,
"What's so funny, dear?"
She replies: "40
days of Lent - one day of Yom Kippur . . .so, even when it comes to sin, the
goyim pay retail!"
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+ Steve Jobs Commencement Address. The text is available:
Click here. The full audio is available. Click
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+ When to sell stocks. Click
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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