Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST, Friday, September 14, 2007: Diversification
or concentration? All the great fortunes have been made through concentration,
including Warren Buffett's. There is a real argument for concentration on one,
two or three investments. I made my money through concentration on one business,
which -- and this is the key -- I controlled.
I invest in things I don't control. To me that's called gambling. There
are degrees of gambling. Buying Treasurys is limited gambling -- but it's still
gambling. The U.S. dollar has lost 33.5% of its value since early 2002.
The interest paid on those Treasurys did not cover the loss on the dollar. Treasurys
have been a lousy investment.
investments you don't control, there is only one path -- it's called
has one benefit: It protects you from complete blowups -- an investment that
completely disappears. Bankruptcy, Chapter 11. Fraud. Poof. etc. I've had my
has one downside: It limits your rewards.
is called investment's "free lunch." That's another of Wall
Street's meaningless statements that are designed to sell you something. (My
favorite is "putting your money to work," i.e. buying what they want
to sell you.)
is increasingly important today because of four happenings:
it's impossible to predict. More things happen counter-intuitively. An example:
Oil is skyrocketing in price. It's above $80. Yet the economy is contracting
and the weather fine. Oil should be down in price. But it's up because
of ... wait for this -- hoarding. (See story on oil below).
2. Things are changing faster. What was valuable a year ago is no longer.
Blowups are happening without warning. A year ago, residential real estate was
hot. Now it's ice cold. (See story on personal guarantees below.)
The effects are more widespread. Sub-prime lending problems are not only
hurting hedge funds and institutions who have those bad loans in their portfolios.
The sub-prime problems are hurting broadly and, in weird ways. One of my biotech
stocks recently cratered. A hedge fund was dumping it because it had
to meet redemptions by investors who wanted their money back. It had to sell
the biotech stock because it couldn't sell its subprime holdings -- the investment
that was causing all the problems. So it sold anything and everything
at any price it could get -- irrespective of the stocks' prospects. And
worse, Wall Street gets wind of the forced sales, pummels the stock -- so the
seller gets less money. Then a day or two later, the stock rises. Hence volatility
The insanity of institutions. In 1950, 90.2% of U.S. stocks were
owned by you and I, individual investors. Today, we own only 25.9%. That
means there's a lot of money managers competing to manage our money.
The easiest way to get rich is to manage a billion dollar hedge fund and charge
2% annual management fees and a 20% incentive fee. If you break
even, you still make $20 million a year. Getting to a billion means you
need high returns to attract the money from investors. High returns means taking
risks -- extraordinary risks. Yesterday I talked about how Goldman Sachs' Global
Alpha hedge fund fell 22.5% in August, its biggest monthly decline, on
losses from currency and stock trades. Alpha's biggest loss in the month stemmed
from its managers' decision to sell Japanese yen and to buy Australian dollars.
This so-called "carry trade" unraveled (i.e. went kaput) when the
Australian dollar fell 6 percent against the yen in August.
ask yourself a question: Would you take your hard-earned money and gamble that
Australian dollars were going to rise against the Japanese Yen in a very specific
and very short timeframe. No way. You and I would buy a decent company in a
sound industry with sound financials.... But gamble on currencies. No way. I'm
not nuts, nor prescient. Nor am I under the pressures to perform that these
money managers on Wall Street are. And, of course, they're not playing with
their own money. It's your and my money. These guys must maintain a life style
to which they have become accustomed. To wit:
A hedge-fund manager
Daniel Loeb paid $45 million for a penthouse apartment at 15 Central
The New York Times refers to the limestone
covered building as "uber-luxurious". Denzel Washington and Sting
are also moving in. $45 million for an apartment?
Personal guarantees are valueless: When
you default on a $1 million bank loan, you're in trouble. When you default
on a $1 billion bank loan, the bank is in trouble. You can "personally
guaranty" the loan -- and the bank will insist you do. But your secret
weapon is to declare personal bankruptcy. Your personal net worth statement
might have shown net worth of $2 billion -- but if they were in assets now significantly
devalued -- like Arizona desert real estate -- you could easily now have a negative
net worth. From being a billionaire to a pauper in a few painful months. With
all your debts, it now makes sense for you to declare bankruptcy, or at least
threaten it. Hence, your bank and all your investors are screwed. You
get to start all over again with a clean slate, and maybe a few million dollars
squirreled away into a fancy home. Hint: live in Florida or Texas.
a barrel and more, coming soon. I've talked
about my belief in $100 a barrel for oil. I've felt that the major driving factors
were "peak oil" and insurrections/political problems in key oil-producing
countries -- Iraq, Nigeria, Mexico, Venezuela, etc. My friend Jim Kingsdale
is an oil expert. He writes Energy
Investment Strategies. His latest posting is fascinating
Jewish stockmarket saying. Predictably, I got it wrong.
From Mike, my learned reader:
Whats Different This Time?
As the price
of oil in dollars hit a record on September 12, breaking $80 for the first
time, the question occurs: Is the breakout a harbinger of consistent and significantly
higher prices or just the Pit Boys on testosterone? For perspective lets
note the environment surrounding this news.
A. The price
of oil in Euros is far from a record. Clearly, $80 has something to
do with the drop in the dollar. In fact, oil is becoming like gold, something
of a hedge against a falling dollar and, perhaps, inflation. A friend recently
asked me if I hold a portion of my funds in currencies outside the dollar
and my reply was, no but I have a lot of oil.
B. The dominance
of national oil companies (NOCs) and rise of oil hoarding is becoming
a generally recognized reality. I suggest you take a minute to read the following
account of a discussion of this topic by the CEOs of three oil majors. In
fact, you might take another minute to look at my essay on hoarding oil and
to the area called Hoarding in my Information area that collects news items
on the subject. I wont repeat the logic that underlies oil hoarding,
which is discussed in detail in the referenced essay. But please note that
the combination of hoarding by some NOCs and the supplanting of private corporations
by NOCs in global oil production, it is clear that oil hoarding is a growing
C. Oil broke
$80 despite bearish news. Just preceding the breakout, OPEC announced
it would increase production by 500,000 b/d after various OPEC leaders
had spent the preceding months saying they would not increase production.
On the same day as the breakout, the International Energy Agency in Paris
(IEA) reduced its estimate of oil demand based on a slowing U.S.
economy. In fact, the preceding several weeks of financial news has focused
on the increasing likelihood of a weaker economy, which implies lower oil
demand. Finally, we are in a traditionally weak shoulder season.
Last year at this time the price of oil had started a free-fall from a record
of $77 in August to just under $50 in January. Add it all up and you get a
classic indication of strength used by professional futures traders: if prices
go higher in the face of bad news, it generally means that the
trend upward is for real.
D. Longer term
fundamental trends are disturbing. Recent months have seen the following developments:
has pulled its contract with ENI, the Italian oil major, and a consortium
of other majors for developing the worlds most promising new oil field
in the Caspian which was to have added 1 million b/d, first in 2008, then
in 2010. It is no longer certain when this oil will be seen.
oil production continues to stall out and, more importantly, its exports are
falling even faster as domestic use continues to rise. The solution requires
major new investment in Mexican production, but so far thats not on
the horizon. Moreover, violence is increasing against the Mexican government,
threatening to make Mexico into the next Nigeria. I dont think it will
get that bad, but the trend is not good. As Mexican exports fall, the U.S.
has little option for replacing Mexican oil other than to outbid other consumer
nations for Middle Eastern oil.
continues to strangle Venezuelan oil production and to divert more it to any
customer other than the U.S. Recently, in addition to China, he plans more
exports to Iran and to his friends in South and Central America.
Middle East, where the worlds only spare oil capacity is said to exist,
the UAE is planning to shut down production of perhaps 810,000 b/d for three
weeks in November for field maintenance. The Saudi spare capacity is still
a matter of conjecture among oil experts both in terms of how much is really
there and what the quality of the oil is. Many believe that virtually all
Saudi spare capacity is heavy, sour crude, which requires special refining
capacity that may not exist. The Saudis are in the process of building their
first refineries, to come on stream in 2010, and some experts believe they
are doing it because there is insufficient global refining capacity to handle
their less valuable heavy, sour crude which makes up the bulk of their spare
capacity and which will increasingly become a more important part of their
output in the next decade.
chaos in Iraq and Nigeria is not indicated to decline much in the immediate
future. Shia are fighting each other in southern Iraq for oil control, now
that the British are leaving, which has the potential to lower current production.
The Kurds have signed contracts for new exploration and production, but even
if that goes forward it will not produce oil for several years at the earliest.
In Nigeria the efficacy of the new governments efforts to curb corruption
and bring peace with the local tribes in the southern oil producing areas
is unknown as of now.
There are some
positives like the growth of Angolan oil production and the fact that oil
inventories are not currently strained. In fact the latter is one reason that
OPEC was leaning against raising its production quota.
On the whole,
however, it looks to me like the wind is to the back of the oil price if the
dollar continues to weaken and exporters continue to lean increasingly toward
The kicker is
the imminent test of whether global production can support a new, never-previously-experienced
level of demand for oil that is forecast to occur based on winter heating
requirements. As the world breaks the 87 mb/d threshold of oil demand for
the first time in history during the fourth quarter this year, it is not at
all certain that production of oil will be sufficient to meet that demand.
The fourth quarter
will be the final exam of oil production capacity. If the world fails this
test, we will find ourselves on a new price plateau. If that happens, I suspect
that the current range expectations of $50 $75 may be replaced by a
range of $80 $110.
We thought the
last few years have marked the end of cheap oil. Everyone has sort of agreed
to that. But as oil routinely sells for $70 now instead of $30 a few years
ago, demand does nothing but expand. We may find that anything under $100
is still cheap for the price of oil and that the true end of cheap oil is
still over the horizon.
sell Rosh Hashanah, buy Yom Kippur. You had it reversed.
Going back to 1915 if you bought the close before Rosh Hashanah begins (that
was Wednesday afternoon) and sold the last day before Yom Kippur (which is
is ten days from RH) the Dow fell 0.62%. If you bought the day after
Yom Kippur (that will start at sundown on September 21) and held until the
end of the year, you averaged 1.99%.
half time show for next year's Super Bowl. Featuring
Michael Vick and Happy the Wonder Dog.
(I cannot stop laughing over this stupid, faked up photo. The expression
on the dog is superb. And his name -- Happy, the Wonder Dog -- is priceless.)
is the second day of Rosh Hashanah. Time for
more bad Jewish humor.
If the rich could hire other people to die for them, the poor could make a wonderful
+ The wise man,
when he holds his tongue, says more than the fool when he speaks.
+ What you don't
see with your eyes, don't invent with your mouth.
+ One of life's
great mysteries is how the boy who wasn't good enough to marry your daughter
can be the father of the smartest grandchild in the world.
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
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