Prior Columns of Harry Newton's In Search of the Perfect Investment / Technology Investor
8:30 AM Monday, October
24, 2005: It's confusing times.
We're into earnings season. The results look bright. If companies continue to
report as they have been doing, earnings should be up 15.8%. The stockmarket hasn't reacted with
glee. The S&P 500 is down 2.7% this
year; Nasdaq is off 4.3%. The stockmarket
is a prediction machine, usually eyeing nine months into the future. Is it telling us that it expects
things to be awful in 2006?
I don't know. Frankly, no one does. It's hard
to be sanguine when factors such as rising interest rates, high energy
costs and surging commodity prices are hurting earnings. I spent much
time reading over the weekend. Mostly a lot of silly stories to fill space,
like how much is Donald Trump really worth? (Answer: Who cares.)
This morning I'm feeling humble. I missed Google
(GOOG) and SanDisk (SNDK)
and fell for the "Triangle of
Life" semi-BS by Doug Copp. This morning's mantras: "CHECK.
CHECK, CHECK." and "When in doubt, stay out." (My RIMM
short is a glimmer of sunshine.)
The big highlight of this week is The C. E. Unterberg, Towbin,
Life Sciences Conference, which runs tomorrow through Thursday
at New York's Palace Hotel (where rooms are a modest $385 a night!). Some of my favorite life science
companies are presenting: Manhattan
Pharma (MHTT), VioQuest (VQPH), InSite Vision (ISV), Novadel (NVD)
and Ziopharm. I'll post a
full schedule shortly. (It's not on their web site.) Meantime, I'm betting
most of the presentations will be available via Webcast. Check the company's
own web site.
Punishing Success at Harvard. This piece by Joseph Nocera in Saturday's New York Times
was among the most interesting pieces I read this weekend:
American Red Cross response to
"Triangle of Life" by Doug Copp (which I stupidly published bits of on Friday). Rocky
Lopes, Manager, Community Disaster Education for the American Red Cross writes:
THERE is a story - apocryphal, I suspect - that
Boston-area hedge fund types like to tell about Jack R. Meyer's predecessor
as head of the Harvard Management Company.
Harvard Management exists to do one thing: manage
Harvard's assets. The head of the company in the 1970's and 1980's was
a bearish sort who never warmed up to the bull market that began in August
1982. In late 1989, the story goes, Harvard's president, Derek Bok, began
scribbling on a yellow notepad during a Harvard Management board meeting.
When he was done, he ripped the sheet of paper out of his notepad, put
it down in front of the man, and walked out of the room. It was the man's
What brings the story to mind, of course, was
the news late last week that Harvard had named a successor to Mr. Meyer.
During Mr. Meyer's storied 15-year tenure, Harvard's assets increased
from $4.7 billion to $26 billion, with about $22 billion of that its endowment
- making it the largest university endowment in the country. Posting average
annual returns of almost 16 percent, Mr. Meyer consistently outperformed
not only the market, but virtually every other institutional money manager
in the country, with the sole exception of David Swensen, who runs Yale's
endowment. Within the world of institutional investors, Mr. Meyer is a
So it's not as if the current Harvard president, Lawrence H. Summers,
was scribbling out Mr. Meyer's resignation letter. "Jack Meyer did
a great job for Harvard," Mr. Summers said the other day. Although
Mr. Meyer declined to comment for this column, he has told friends that
he was leaving of his own volition; he plans to start - what else? - a
hedge fund with two Harvard Management fixed-income managers who departed
And yet to talk to people in both the Harvard and the Meyer camps, you
come away with the feeling that Harvard is not all that terribly sorry
to see him go - and that Mr. Meyer had come to feel that, if he wasn't
exactly being pushed out the door, he was certainly not getting the deference
or leeway he was used to. At a minimum, his successor, Mohamed A. El-Erian,
an emerging markets specialist from the bond powerhouse Pimco, has his
work cut out for him repairing the damage that has been done by the quiet
rift between a great investor and a great university.
THERE are two models for managing endowment money: the Harvard way, and
the way everybody else does it. Although virtually all endowments believe
in the virtues of asset allocation, most search for talented outside fund
managers who specialize in different asset classes, hedge funds very much
included, and give them a small portion of the endowment to manage.
Harvard, by contrast, has historically managed its money itself. Especially
in the 1990's, Harvard Management under Mr. Meyer had the feel of a big-time
hedge fund, with a handful of its own talented fund managers who knew
all of Wall Street's tricks. They employed complex derivative strategies,
sold stocks short, searched for arbitrage opportunities, used leverage
to bolster returns, and so on. They were a tight-knit group who operated
out of an office in downtown Boston, several miles from the Harvard campus.
They saw themselves not as Harvard employees but as Harvard Management
Except they were Harvard employees, which created
a problem. As a nonprofit, Harvard is required by law to publicly identify
its most highly paid employees each year. Invariably, Jack Meyer's fund
managers were at the top of the list.
In 2003, for instance, Maurice Samuels and David Mittleman, the two fund
managers who are departing with Mr. Meyer, made $35.1 million and $34.1
million, respectively. (Mr. Meyer was paid in the millions as well, but
not nearly as much as his top performers.) This in turn created an annual
firestorm, led by a small group of alumni from the class of 1969. Their
leader, William Strauss, believes that it's unseemly for Harvard employees
to make that kind of money. "This is a nonprofit university,"
he told me recently. "It's just inappropriate."
Just about everybody in hedge fund land takes exactly the opposite view
and thinks that the criticism is the height of foolishness. They point
out, for starters, that Mr. Meyer saves the university money. After all,
outside hedge fund managers who turn in investment performances like that
of Mr. Mittleman and Mr. Samuels make far more than $35 million.
In addition, the compensation system Mr. Meyer set up included an extraordinary
provision. When a fund manager outperformed his benchmark, he received
only a certain percentage of his bonus. The rest was carried forward.
If the fund manager beat his benchmark the next year, he got the rest
of his "carry forward." But if he underperformed, he would have
to give part - or all - of it back.
"I think Jack's compensation system was right on," said Scott
C. Malpass, who manages Notre Dame's endowment, which has its own stellar
record. "The incentives were aligned." That's what fund managers
at Harvard Management believed as well.
Over the last half-dozen years, two things happened
that began to change Harvard Management. First, the old gang broke up,
as many of Mr. Meyer's protégés left to open their own hedge funds. Instead
of replacing them, Mr. Meyer put Harvard endowment money in their funds,
in amounts that started at $500 million. In return, he got special breaks
for Harvard Management.
As a result, today about half of Harvard's money is managed by outside
fund managers, though, of course, they are exactly the same people who
once managed it internally. But now, the newspapers don't report their
And the second change? That would be the arrival,
in 2001, of Mr. Summers, the former Treasury secretary, as president of
Harvard. One of the raps on Mr. Summers is that he always has to be the
smartest guy in any room, tossing off questions he means to be provocative,
but which often have the effect of alienating the people he's questioning.
And so, at Harvard Management board meetings, Mr. Summers began questioning
Mr. Meyer about everything from the positions in the portfolio to its
level of risk. In addition, Mr. Summers's old boss, the former Treasury
secretary Robert E. Rubin, became a fellow of the Harvard Corporation
- the equivalent of a regent - and he began asking Mr. Meyer even tougher
questions. (Mr. Rubin did not return my phone call.) For Mr. Meyer, the
questioning felt like meddling, even if it wasn't meant that way.
But here was the real blow. For the last year
or so, Harvard Management has been using a different compensation system
- one that Mr. Summers strongly backed and the Harvard Management board
approved. The carry-forward provision was eliminated. The compensation
at the low end was raised. But at the high end, the pay for overachievers
like Mr. Mittleman and Mr. Samuels was capped at somewhere between $20
million and $25 million.
It would be hard to imagine a more politically boneheaded move. On the
one hand, a $20 million paycheck is still far too high to mollify the
class of '69 critics. On the other hand, it was a crushing blow to the
fund managers still left, who felt that Mr. Summers was running roughshod
over Mr. Meyer's incentive system. I don't believe that Mr. Summers imposed
the new system as a means of getting rid of Mr. Meyer - he simply thought
it made more sense for a university endowment - but that was the inevitable
result. Mr. Meyer must have thought: who needs the hassle?
So where does that leave Mr. El-Erian? He is replacing a legend with a
performance record that will be nearly impossible to match. Much of the
talent at Harvard Management is gone, and those who remain are demoralized.
Although Mr. El-Erian is viewed as a brilliant bond guy, he has no experience
dealing with hedge funds. Indeed, should he decide that the Harvard model
no longer works, and wants to farm out more of the endowment, he will
be starting from scratch. Unlike other universities, Harvard doesn't have
the expertise to evaluate outside hedge fund managers - except Mr. Meyer's
former Harvard Management colleagues.
When I spoke to him late last week, Mr. El-Erian sounded both aware of
the challenges he faces, and undaunted. He insisted Harvard would continue
to manage its own money. "A lot of hedge funds simply exploit inefficiencies,"
he told me. "If you can do that more cheaply on the inside, you should."
He liked the idea, he said, of connecting the management company more
closely to the university, tapping into its brainpower for investing ideas
and assistance. He noted that in the current difficult investing environment,
returns were likely to be lower than they had been, that he would have
to do a fair amount of "institutional rebuilding," and that
he would be living, to some extent, in a "fishbowl." God bless
him, he seemed pretty excited about the whole thing.
Bill Gross, the bond guru who has been Mr. El-Erian's boss at Pimco, told
me that Mr. El-Erian was indefatigable, trustworthy, a great manager,
a savvy investor and "very politically astute." From the looks
of things, he's going to need all of those qualities.
Recently it has been brought to my attention
that an email from Doug Copp, titled "Triangle of Life," is
making its rounds again on the Internet. Mr. Copp's assertions in his
message that everyone is always crushed if they get under something is
We contend that "Drop, Cover, and Hold On"
indeed SAVED lives, not killed people. Because the research continues
to demonstrate that, in the U.S., "Drop, Cover, and Hold On!"
works, the American Red Cross remains behind that recommendation. It is
the simplest, reliable, and easiest method to teach people. The American
Red Cross has not recommended use of a doorway for earthquake protection
for more than a decade. The problem is that many doorways are not built
into the structural integrity of a building, and may not offer protection.
Also, simply put, doorways are not suitable for more than one person at
If you are in bed when an earthquake happens,
remain there. Rolling out of bed may lead to being injured by debris on
the floor next to the bed. If you have done a good job of earthquake mitigation
(that is, removing pictures or mirrors that could fall on a bed; anchoring
tall bedroom furniture to wall studs, and the like), then you are safer
to stay in bed rather than roll out of it during the shaking of an earthquake.
The Red Cross strongly advises not try to move
(that is, escape) during the shaking of an earthquake. The more and the
longer distance that someone tries to move, the more likely they are to
become injured by falling or flying debris, or by tripping, falling, or
getting cut by damaged floors, walls, and items in the path of escape.
Identifying potential "void areas" and planning on using them
for earthquake protection is more difficult to teach, and hard to remember
for people who are not educated in earthquake engineering principles.
The Red Cross is not saying that identifying potential voids is wrong
or inappropriate. What we are saying is that "Drop, Cover, and Hold
On!" is NOT wrong -- in the United States. The American Red Cross,
being a U.S.-based organization, does not extend its recommendations to
apply in other countries. What works here may not work elsewhere, so there
is no dispute that the "void identification method" or the "Triangle
of Life" may indeed be the best thing to teach in other countries
where the risk of building collapse, even in moderate earthquakes, is
In other words, fix your house up, so loose things
are attached to walls and are glued down. Find a safe place -- perhaps
your bed or a Triangle of Safety -- and pray like Hell. Don't do dumb
things -- like sleep under a heavy chandelier.
Meg Whitman is totally sucked
in by telecom: She will now devote her
entire attentions to justifying her dumb purchase of phone company Skype. She will neglect eBay, which despite its surging revenues now
becomes a great short.
Within several years, all telephone calls will be made for free using
VoIP, eBay CEO Meg Whitman told analysts during the company's earnings
call last week. "In the end, the price that anyone can provide for
voice transmission on the 'Net will trend toward zero." She said
that service providers would make money from the phone calls through advertising
or transaction fees. (She's nuts.)
The eBay CEO was responding to criticism from
analysts who questioned whether eBay had overpaid when it bought VoIP
provider Skype Technologies for $4 billion.
Whitman said that in the long run, VoIP providers with the "largest
ecosystems" will thrive because their users can be sold on other
services, such as PayPal which eBay also owns, or the highest-paying ads
can be delivered to them. In the call, eBay said that Skype will bring
in an estimated $60 million of revenue in 2005, and more than $200 million
My take: Meg won't earn any profits on $60 million. If she gets to $200
million (which I seriously doubt), maybe she will. .. A final thought:
If phone calls are meant to now be free,
where the heck is the $200 million in phone charges going to come from?
She's smoking the same stuff Wall Street smoked
in the late 1990s. Remember WorldCom, Global Crossing, etc.?
Children's answers - 1
A new teacher was trying to make use of
her psychology courses. She started her class by saying, "Everyone
who thinks they're stupid, stand up!"
After a few seconds, Little Davie stood up. The
teacher said, "Do you think you're stupid, Little Davie?"
"No, ma'am, but I hate to see you standing
there all by yourself!"
Children's answers - 2
Little Davie watched, fascinated, as his mother smoothed cold cream on
her face. "Why do you do that, mommy?" he asked.
"To make myself beautiful," said his
mother, who then began removing the cream with a tissue.
"What's the matter?" asked Little Davie.
Children's answers - 3
A Sunday School teacher of preschoolers was concerned that his students
might be a little confused about Jesus Christ because of the Christmas
season emphasis on His birth. He wanted to make sure they understood that
the birth of Jesus occurred a long time ago, that He grew up, etc. So
he asked his class, "Where is Jesus today?"
Steven raised his hand and said, "He's in
Mary was called on and answered, "He's in
Little Davie, waving his hand furiously, blurted
out, "I know! I know! He's in our bathroom!"
The teacher was completely at a loss for a few
very long seconds. Finally, he gathered his wits and asked Little Davie
how he knew this.
Little Davie said, "Well... every morning,
my father gets up, bangs on the bathroom door, and yells, "Jesus
Christ, are you still in there?!"
Recent column highlights:
+ Dumb reasons we hold losing stocks. Click here.
+ How my private equity fund is doing. Click here.
+ Blackstone private equity funds. Click here.
+ Manhattan Pharmaceuticals: Click here.
+ NovaDel Biosciences appeals. Click here.
+ Hana Biosciences appeals. Click here.
+ All turned on by biotech. Click here.
+ Steve Jobs Commencement Address. The text is available: Click here.
The full audio is available. Click here.
+ The March of the Penguins,
an exquisite movie. Click here.
+ When to sell stocks. Click here.
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:
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is research for a book I'm writing called "In Search of the Perfect
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