Harry Newton's In Search of The Perfect Investment
9:00 AM EST, Friday, October 17, 2008: Let
me make several things perfectly clear:
I don't like this market. I don't believe it's possible to make real money investing
in stocks today. My "recommendations" on ultra-short ETFs, shorting
and other plays are what they are -- "plays." What other people call
speculation, or gambling. They're for 1% to 2% of your money, for play, for
amusement. That said, we lost money on our ultra-shorts yesterday -- but not
enough to wipe out the gains from the previous day. This is what they look like
early this morning:
Put them on your
screen and watch them gyrate. Remember we're looking for them to go up,
i.e. as the market goes down.
Though there are more and more articles are appearing that "we have hit
bottom," I see them as less reality and more the press's need to write
headlines that sell. USA Today newspaper has a piece today "Signs
grow that stock market may have hit bottom." Their reasons: rising
fear, big and small investors bail, large swings during the day. Barrons' last
cover was "Closer
to the Bottom." Barrons said:
Warren Buffett had
an OP-ED piece in today's New York Times headlined "Buy
American. I Am." He explains why he's buying equities today.
to believe that the stockmarket averages will hit bottom sometime in the next
few months, even if the economy is still in the middle of a recession. The
buy-and-hold approach still applies.
Everyone who predicts the market has an ax to grind. That includes Warren Buffett,
who clearly would like investors to follow him into the market and make his
recent purchases look good.
I am prepared to miss the bottom and become fully invested once I feel more
comfortable with the economy and where it's headed. The bailout has saved a
handful of favored banks, but it has not made them lend (that part is missing
from the bailout plan), earnings still stink and we're still losing jobs.
I don't like catching falling knives. Buffett says, "Be fearful when others
are greedy and be greedy when others are fearful," i.e. buy today..
Buffett could have bought his shares in GE and Goldman Sachs cheaper yesterday,
despite yesterday's big 400 point bounce.
stockmarket timing make sense? Academic studies
say No. I recommended getting out of equities last November. That made huge
sense. Does it make sense to get out of them now? It depends. Here's the recent
The BIG thing
to know about boom/bust cycles is that a whole category (or categories) of stock
crash. Had you stuck with your portfolio of last November, you'd probably still
own stocks that have suffered horrendously -- the financials, the car makers,
the house builders. One big advantage of piling out of the market completely,
is that it forces you to affirm what you really want to own going forward.
I'm not sure that I really want to own GE or Goldman Sachs -- both heavy financials
with problems still to be revealed. I don't want to own oil stocks. I don't
want to own most technology stocks -- though Apple and Google looking interesting.
Frankly, at this point, I'm not sure what I want to own going forward.
What got me started
is a New York Times piece on stockmarket timing. It's one of their top five
most viewed pieces. See what you think:
to Cash May Feel Safe, but Risks Remain by Ron Lieber
question weve all asked in our darker moments of late: Why not just
put all of our investments in cash, 100 percent, just for a little while,
until things calm down?
already seem to be acting on that instinct. In the first six days of October
(through Monday), investors pulled $19 billion out of mutual funds that invest
in United States stocks, matching the outflows for the entire month of September,
according to TrimTabs Investment Research.
are looking for is safety, said John Bunch, president of retail distribution
at TD Ameritrade. They are seeking solutions that are backed by the
federal government. Specifically, F.D.I.C-insured money funds and certificates
of deposit. All of it is under the umbrella of, Am I safe and insured?
By fleeing for
the comfort of safe and insured, however, investors with a time horizon beyond
a few years may be doing real damage to their long-term finances. If youre
tempted to make a big move to cash right now, youre doing something
called market timing. Its an implied statement that youve figured
out the right moment to get out of stocks and will also know the right
time to get back in.
dispense with the first part straight-away. The right time to move out of
stocks was a year or so ago, before various stock indexes the world over fell
by one-third or more.
If you missed
that opportunity, youre hardly alone.
But if you sell
now, youll be locking in your losses. And once youre in cash,
there isnt much upside. In fact, with interest rates low, youre
likely to lose money in cash, because inflation will probably eat up the after-tax
returns you earn from a savings or money-market account.
of a small loss may sound good right now. But if youre not bailing out
of stocks once and for all, how will you know when its time to get back
in? The fact is, any peace of mind you gain by being on the sidelines now
will turn into a migraine once you see how much you can harm your portfolio
over time by missing just a bit of any rebound.
H. Nejat Seyhun,
a professor of finance at the Ross School of Business at the University of
Michigan, put together a study in 2005 for Towneley Capital Management, where
he tested the long-term damage that investors could do to their portfolios
if they missed out on the small percentage of days when the stock market experienced
From 1963 to
2004, the index of American stocks he tested gained 10.84 percent annually
in a geometric average, which avoided overstating the true performance. For
people who missed the 90 biggest-gaining days in that period, however, the
annual return fell to just 3.2 percent. Less than 1 percent of the trading
days accounted for 96 percent of the market gains.
This fall, Javier
Estrada, a professor of finance at IESE Business School in Barcelona, published
a similar study in The Journal of Investing that looked at equity markets
in 15 nations, including the United States. A portfolio belonging to an investor
who missed the 10 best days over several decades across all of those markets
would end up, on average, with about half the balance of someone who sat tight
So moving to
cash right now is just fine as long as you know precisely when to get back
into stocks (even though you didnt know when to get out of them).
At some point,
stocks will indeed fall enough that investors will remove the money from their
mattresses and put it to work, causing prices to rise significantly. But,
as Bonnie A. Hughes, a certified financial planner with the Enrichment Group
in Miami, put it to me, there wont be an e-mail message or news release
that goes out when this is about to happen. It will be evident only afterward,
on the few days when the market surges.
And it gets
worse for those who think they wont have any trouble investing in stocks
again later. Medium- or long-term investors who are considering a big move
into cash right now are probably making an emotional decision, at least in
part. For those who follow through, the same instincts will probably hurt
when trying to figure out when to reinvest in stocks.
forces that drove them out of the market arent likely to let them back
in until things are better, Dan Danford of the Family Investment
Center in St. Joseph, Mo., said in an e-mail message. And for most people,
things wont feel better again until the market has already moved back
up. In fact, he added, plenty of people may not allow themselves to
get back in until the market has already risen significantly.
is worth considering if you think your mood, or returns, cant get any
worse. People feel worse missing out on the bounce-back that will inevitably
come than they do hanging in there through the down period, said Elaine
D. Scoggins, a certified financial planner with Merriman Berkman Next in Seattle.
The truly downbeat
do not see the bounce as inevitable. This outlook is essentially a bet that
our current predicament is so different that the equity markets wont
bounce back at all, even though they survived 1929, the Great Depression,
1987 and a major terrorist attack. I do not believe that the markets are in
some kind of permanent decline, and I havent found an expert who does.
That said, some
retirees, or those close to leaving the work force, may be well-off enough
to leave stocks behind for now. If the tumult in the economy and the decline
in the markets have altered your risk tolerance, then it may make sense to
move to a portfolio of Treasury bills, certificates of deposit and money market
Michael G. Coli,
56, of Crystal Lake, Ill., decided to take his 401(k) money out of the market
in February. As an investor in his sons pizza restaurants, he noticed
that an increasing number of customers were relying on credit cards. And as
the owner of a winter home in Naples, Fla., he witnessed the housing market
dive. Taken together, he decided to pull his retirement money, which he would
need in five years, from the Vanguard Balanced Index Fund and move it all
into certificates of deposit.
the feeling the economy was not on real firm ground, Mr. Coli said.
I decided to get out and put it all in C.D.s, and that is where
Ive been ever since.
If you cant
afford to live off the proceeds of cash investments (or dividends from your
investment in your kids pizza joints), you may have no choice but to
hold on to whatever stocks you have left. Then, you can hope for a rebound
that will allow you to live out your later years more comfortably. Selling
now and moving to cash could mean guaranteeing a lower standard of living
for the rest of your life, because youd be locking in your losses.
But if youre
a bit younger, try to think of your investment portfolio in the same way you
consider the value of your home, if you own one. After all, if youre
not moving anytime soon, your home is a long-term investment, too.
price is not your price. Your price is 10 or 20 years from now, said
Thomas A. Orecchio, of Greenbaum & Orecchio, a wealth management firm
in Old Tappan, N.J. Unfortunately, stock market investors dont
always see things that way.
profound change in banking and lending. One
of my favorite financial writers does an occasional piece called The Financial
Page for the New Yorker. This is good weekend reading.
by James Surowiecki October 20, 2008
1912, J. P. Morgan testified before Congress in the so-called Money Trust
hearings. Asked to explain how he decided whether to make a loan or investment,
he replied, The first thing is character. His questioner skeptically
suggested that factors like collateral might be more important, but Morgan
replied, A man I do not trust could not get money from me on all the
bonds in Christendom. Morgans point was simple but essential:
systems of credit depend on trust. When trust is present, money flows smoothly
from lenders to borrowers, allowing new enterprises to start, existing ones
to expand, and daily business to move along without a hitch. When its
absent, we find ourselves in a world where lenders hoard capital, borrowers
are left empty-handed, and the economys gears grind to a halta
world, in other words, like the one were now living in.
A few years
ago, banks and other lenders seemed indifferent to risk, as they doled out
loans to people with dubious incomes and poor credit records. Today, they
are positively paranoid, distrusting even the best borrowers and forcing companies
to pay far more interest on money borrowed. The interest rate on the most
highly rated two-year corporate bonds has risen by fifty per cent in the past
month, even as the interest rate on government bonds has fallen.
the current stock-market drops have been, the freezing up of the flow of credit
is far more damaging to the health of the U.S. economy. So, during the past
few weeks, the Treasury Department and the Federal Reserve have been desperately
trying to fight that freeze. Scarcely a day goes by without some dramatic
new initiative, even as market chaos makes each new idea soon seem like ancient
history. (Its been just over a week since the Treasurys plan to
buy seven hundred billion dollars worth of toxic assets
became law, but already it feels like a year.) Last week, in a potentially
crucial move, the Fed announced that it would start buying billions of dollars
in commercial paperwhich means that it will be issuing short-term unsecured
loans to corporations. The Fed has historically been the lender of last resort
to banks. Now its becoming the lender of last resort to everyone.
is the name for short-term promissory notes that companies sell to raise money
for daily operations, to meet payroll, and to bridge the gap between when
they spend and when they get paid, while keeping their own cash in higher-yield
investments. Commercial paper is not a new innovationGoldman Sachs actually
started as a commercial-paper firm, in the late nineteenth centurybut
it has become essential in day-to-day business in the U.S. Since 1980, annual
commercial-paper issuance has gone from $124 billion to $1.6 trillion. Most
of these loans are unsecuredcompanies dont put up collateral but
simply promise to pay the loans back out of cash flowso only well-established,
financially solid companies can tap the commercial-paper market.
loans are short-term and are made only to companies with sterling credit ratings,
theyve always been assumed to be practically riskless, and lenders (most
notably money-market funds) have been willing to lend at low interest rates.
But the past year has called into question the very idea of a low-risk loan.
Lehman Brothers, after all, still had an A2 credit rating when it went under,
taking down with it billions in commercial paper. Since its failure, lenders
have adopted a gimlet-eyed approach to everyone, making it hard for key companies
to perform basic transactions, and thereby exacerbating the market panic.
A company like A. T. & T. is hardly likely to go bankrupt in the foreseeable
future, but, after Lehmans collapse, lenders were so skittish that A.
T. & T. couldnt get commercial-paper loans that lasted longer than
The fear that
has overpowered lenders is not just about the current market chaos. It also
reflects their lack of faith in the models and systems that they rely on to
evaluate risk. For Morgan, that process of evaluation was all about relationships.
In the modern financial system, by contrast, risk evaluation involves two
things: impersonality and outsourcing. Personal judgments about the reliability
of a borrowerthe sort of judgment that Morgan, or a small-town banker,
would make before issuing a loanhave been replaced by mathematical models.
And lenders have delegated much of the responsibility for evaluating borrowers
to other players, such as credit-rating agencies. In many cases, an AA rating
was all a company needed to get a loan.
no doubt that this system has had huge benefits. It has made it easier for
money to connect lenders and borrowers. It has removed the kinds of personal
bias that kept capital in the hands of people whom men like J. P. Morgan approved
of. And it has vastly expanded the amount of lending as well. But all those
benefits have come at an exorbitant price. The problem with an impersonal
system is that when the models fail, and when companies ratings become
suspect, everything is called into question. Lenders cant fall back
on their own judgments of a specific company or individual, because such judgments
arent part of their typical decision-making process. Instead, theyve
adopted a deep-seated distrust of all borrowers, even financially secure ones.
If the Fed is now taking corporate I.O.U.s, its because everyone else
is acting according to that old motto: In God we trustall others pay
Italian says, 'I'm tired and thirsty. I must have wine.'
says, 'I'm tired and thirsty. I must have cognac.'
The Russian says,
'I'm tired and thirsty. I must have vodka.'
The German says,
'I'm tired and thirsty. I must have beer.'
The Mexican says,
'I'm tired and thirsty. I must have tequila.'
The Jew says,
'I'm tired and thirsty. I must have diabetes.'
May all your teeth fall out - except one, so you can have a toothache.
the El Al pilot
"Ladies, gentlemen and children. Shalom to you all. This is your pilot,.
I welcome you on board this flight to Tel Aviv. We will do all we can to make
sure you have a great flight with us this afternoon.
"But if, God forbid, by some remote chance, we run into trouble, keep calm,
dont panic. Your life jacket is under your seat. Please wear it in the
best of health."
short video clip is hysterical.
A sad, funny commentary on today's hard economic times. Use Internet Explorer.
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,
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