Harry Newton's In Search of The Perfect Investment
9:00 AM EST, Tuesday, September 16, 2008: What
Wall Street needs is new capital. It was getting it from the Mid East and China.
China has now officially outlawed sending money to save U.S. investment firms
and U.S. banks. And the oil rich sheikdoms are running scared from plunging
oil prices and having lost too much money already on their recent U.S. savior
investments. Lack of new capital augurs badly for overleveraged companies like
AIG, Morgan Stanley, Goldman Sachs, Bank of America, UBS and Citigroup. Pick
a handful of them. Short them.
Think of this
as a pebble thrown into a pond. First, the obvious hurt -- housing, then the
financials that had financed the housing bubble. Then the home builders who
built it -- some of which have inexplicably climbed recently -- Toll Brothers,
Lennar and Pulte, for example. Now even New York real estate is starting to
tumble, no longer overprised. Then, the ripples hit the car makers, the computer
makers and even the law firms. Yes, you read right. The law firms are firing
lawyers. No one is immune from this contagion.
favor of pessimism: Most Lehman employees did not sell their stock,
nor sell short, nor collar their options. As a result most lost their retirement
nest eggs. The talk on Wall Street is that "I'll have to work several years
longer." That is -- if they can find a job. Which many won't. Wall Street
-- meaning the financial industry -- will be a much smaller place. The reasons:
is largely dead. You can no longer sell financial instruments no one understands.
investments are largely dead. After Lehman, after auction rate securities, no
one trusts Wall Street. The Washington Post actually published a recent piece
called "A Con Game in Pinstripes." In it, it argued that "Wall
Street has become fundamentally corrupt."
3. The brokerage
business is dead. No one can become a broker today and seriously expect to make
My best hedge
fund is up to 50% cash. Like many professional investors he regards this market
as "too hard."
My father used
to argue, "Take some home." Make a little money with the business,
take it home. Stick it in something ultra safe, like bonds. Earn yourself the
ability to clip coupons when that rainy day comes" -- as it has now come.
Except not everywhere.
True story: A year or two ago, a friend opened two high-end, ultra-expensive
restaurants opposite the Manhattan headquarters of Lehman and Bear Stearns What
Today the restaurants
are booming, with high booze and food sales. Eat and drink like there's no tomorrow.
are experiencing record sales. People have cut their food budget, but increased
their lottery budget -- keeping alive their dreams of hitting the jackpot and
praise of mulling: Never agree to anything without mulling. A good
night's sleep will always produce new arguments in your favor and convince
you that you're asking too little. I have a folder on my laptop: "To
Buy." I dump everything I want to buy into it. I revisit the folder
a few days later. I don't need 50% of what's in there. The pleasure of "pretend"
buying is often better than the pleasure of actually owning the thing.
praise of thinking:
After being up 30%+ earlier this year, my long-only commodities fund is now
losing money -- 36 basis points to be exact. What's the argument to owning this
thing? Allegedly it's the perfect diversification in one's portfolio. It performs
well when the stockmarket doesn't. And vice versa. That's the theory. The reality
is somewhat different, though the fund is up.
are allegedly tied to the growth in world economies. If they boom, they buy
more commodities, like nickel, wheat and sugar. But if prices rise, people open
more nickel mines, and grow more wheat and sugar. Then the price declines (down
50% or so in nickel and zinc in the past year). And we start all over again.
I asked my long-only commodities fund why they didn't also sell short, since
they obviously knew commodities. They said it was "too hard." In the
long run, as economies grew, commodities would improve in price, they argue.
Hence, buy a basket of commodities as a hedge against the rest of your portfolio.
But then I thought, "they do call them commodities for a reason."
Anyone, in time, can mine nickel. I should think more.
praise of being careful: From Australia:
Today's column gives good advice about not leaving GPS units attached to the
Further advice given by the Aussie police is that if you attach the GPS to
your windscreen by suction cap, ensure that the suction cap mark is polished
off before you lock up your car. Thieves will still target your car when they
see this mark, because they know that the GPS unit is temporarily hidden inside
your glove box.
Love your column. Keep up the good work.
Mass comes this sorry picture:
And the explanation:
and right behind the house. The thieves jacked it up sometime between midnight
and 6 AM , in a "nice" neighborhood in Worcester MA. I think they
used some of the stones from around the driveway to support it.
The house is for sale because my nephew and his wife work in Boston and want
to move closer to work, and a prospective buyer was coming to see the house
on the day the theft was discovered. Nephew didn't want to scare him off,
so he put a tarp over the van. Later he got really nice wheels, presumably
with locking lug nuts.
to Handle a Market Gone Mad: That's the headline
of a piece in today's Wall
Street Journal by Jason Zweig:
brain has a remarkable capacity for fooling itself. You can use that to your
If you learn
nothing else from the last few harrowing days, you should learn the difference
between what is obvious and what is inevitable.
In the heat
of the moment, the two perceptions seem identical. It was obvious that investors
would panic as they absorbed the news about Bloody Sunday on Wall Street,
so it was inevitable that the market would take a slashing. It was obvious
that Lehman Brothers had to go bust, so a bankruptcy filing was inevitable.
It was obvious that Merrill Lynch could no longer make it on its own, so it
was inevitable that a bigger institution like Bank of America would take it
-- at least individual investors -- don't actually panic in times like these.
Instead, they freeze. In July (the latest month for which final numbers are
available), mutual-fund investors pulled out just $2.62 of every $100 they
had invested in stock funds. That was less than they took out of bond funds,
even though the stock market had just gone through a nauseating summer swoon.
researchers at Strategic Insight, who have studied decades' worth of data
on how fund investors behave, this inertia is typical. Tim Buckley, who oversees
retail investor operations at Vanguard Group, says the giant fund company
had only 10% to 15% more phone calls and online inquiries yesterday than on
a typical Monday in September. "However much panic there might have been
on Wall Street," said Mr. Buckley, "there [was] no panic on Main
a 25-year-old systems administrator in Silver Spring, Md., called yesterday's
plunge "as much a test of my psychology as anything else." Because
he does not need the money "for another 30 to 40 years," he asked
rhetorically, "why should I worry myself about its performance over a
period of days or weeks or even months?"
Mr. Jaffa is
already developing what the ancient Stoics and the great Danish philosopher
Søren Kierkegaard called ataraxia, or imperturbability. But he knows
that ataraxia does not come naturally; it takes work. A year and a half ago,
Mr. Jaffa destroyed the online access code for his 401(k) so he could no longer
have instant access to his retirement accounts. His goal was to make it "significantly
harder" and to require "human interaction" before he could
trade on his own emotions. That enabled him to watch Monday's decline without
acting on it.
is one way the obvious is not inevitable. It may be "obvious" to
professional money managers that small investors are the problem in turbulent
markets. But it's not individual investors who cause (or even widely participate
in) a selling frenzy. It is, instead, the "smart money" that tends
differences between obvious and inevitable run much deeper than this, all
the way down into the biological bedrock of our minds. The investing brain
is bad at some things and good at many others, but above all else, it has
a remarkable capacity for fooling itself. What seemed so obvious and inevitable
Monday had, less than 24 hours earlier, struck nearly all of us as impossible.
not even most people on Wall Street really believed that Lehman would go bust.
The stock finished last week with a market value of $2.5 billion, showing
that investors as a group simply did not believe that Lehman would go under.
But by Monday
morning, everyone's beliefs had already been retroactively revised; suddenly,
Lehman's bankruptcy had been "inevitable." Psychologists call this
hindsight bias -- the uncanny feeling that "I knew it all along."
History is full
of such instances. The O.J. Simpson verdict, for example, convinced people
that they had predicted he would be found innocent (regardless of what they
actually said before the jury made its decision).
went bust, none of us could remember how surprised we were when we first heard
that it might. As Princeton University psychologist Daniel Kahneman says,
"Hindsight bias makes surprises vanish." And therein lies its extreme
danger for investors. By retroactively fooling us into thinking that we knew
how the past would unfold, hindsight bias tricks us into thinking we know
how the future will unfold. But if the past took you by surprise, why should
you believe you can decipher the future?
answers itself. It also points the way toward a sane course of action even
as the markets seem to have gone mad.
Be a contrarian.
The late Sir John Templeton preached that investors should buy at the "point
of maximum pessimism," when market sentiment stinks and no one wants
to hold anything but cash. Adds Daniel Fuss, vice chairman at money manager
Loomis Sayles & Co. in Boston: "It's not a point, it's a period."
No one can find the point or moment at which pessimism hits its exact zenith.
But it's not hard to identify a period in which pessimism is extreme -- like
right now. When I spoke to him yesterday, Mr. Fuss called this market "the
best opportunity to buy corporate bonds at phenomenal prices since September
1974." Risk takers might take a look at real-estate-related stocks; extreme
risk takers might even consider a small allocation to financial stocks.
Take an inventory.
"Instead of just saying, 'Everything's going down, everything's going
down'," says Gary Schatsky, a financial planner in New York City, "write
down on a piece of paper everything you own and everything you owe."
Then go through each of your assets and liabilities to see how you might improve
your position. In a period when stocks and bonds and mutual funds are not
delivering positive short-term returns, you can probably add the most to your
net worth by turning your attention to paying down or consolidating your high-cost
Take baby steps.
If you truly cannot sleep at night, sell off some stocks, or move some of
your money to bonds or cash. But do so a little bit at a time, and talk to
your tax adviser first in order to maximize the considerable tax benefits
you may be able to get out these incremental moves. By the time you get any
money moving, the panic may already have passed.
If the financial world really were coming to an end, nobody would know it
-- least of all the pundits who are currently crying doom. In 1929, experts
ranging from the legendary trader Jesse Livermore to John D. Rockefeller and
Treasury Secretary Andrew Mellon all declared that falling stock prices were
nothing to worry about. They were wrong. The lesson is not that it's a mistake
to be an optimist in falling markets, but rather that it's a mistake to trust
the consensus view of the experts. With the mood on Wall Street now as dark
as a mushroom farm, optimists are much more likely than pessimists to be proven
right in the end.
favor of optimism: Yesterday, this bank stock
reached its all-time high, before easing back a few pennies late in the day.
many dangers of a tight skirt:
In a busy city at a crowded bus stop, a beautiful young woman was
waiting for the bus. She was decked out in a tight leather miniskirt with matching
tight leather boots and jacket. As the bus rolled up and it was her turn to
get on the bus, she became aware that her skirt was too tight to allow her leg
to come up to the height of the bus' first step. So, slightly embarrassed and
with a quick smile to the bus driver, she reached behind her and unzipped her
skirt a little thinking that this would give her enough slack to raise her leg.
Again, she tried
to make the step onto the bus, only to discover she still could not make the
step. A little more embarrassed, she once again reached behind her and unzipped
her skirt a little more. And for a second time she attempted the step, and once
again, much to her surprise, she could not raise her leg because the skirt was
With a coy little
smile to the bus driver, she again unzipped the offending skirt to give a little
more slack and again was unable to make the step.
About this time
the big Texan who was behind her in line, picked her up easily from the waist
and placed her lightly on the step of the bus. Well, she went ballistic and
turned on the would-be hero, screeching at him, "How dare you touch my
body! I don't even know who you are!"
At this the Texan
drawled, "Well ma'am, normally I would agree with you, but after you unzipped
my fly three times, I kinda figured that we was friends."
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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