Harry Newton's In Search of The Perfect Investment
Technology Investor. Harry Newton
AM EDT, Friday, October 9, 2009: Stocks are
in a bubble. This cannot last. It's been pretty well straight up, since the
But, say the bulls,
it's only recovered 45%, compared to a "normal" 72% recovery from
previous stockmarket bottoms. We have still a long way to go.
wonderful? The first one was a daily chart. The second one was weekly.
The BIG fear is
that the stockmarket is disconnected from the realities of the world. The economy
is doing awfully. The stockmarket is doing great. This confuses people.
Sadly, it's not
For one, the econmy
is doing surprisingly well in several areas: retail sales, technology, much
corporate earnings, and this morning, a narrowing of the U.S. trade gap. Also,
mortgage interest rates have fallen, making it cheaper to refinance your old
house or buy a new one.
There remain two
huge overhangs: Jobs. We've lost 7 million since December 2007. To get back
to some semblance of a normal economy, we'll need to create 12 to 15 million
jobs over the next five years. That will be a hard job.
real estate . It's way in the toilet. At least $1.5 trillion of loans by banks
and others are under water. The banks are afflicted with The Egypt Syndrome
-- denial, denial, denial. They're keeping the loans on their books. They're
not selling them, not dealing with them. Their fear is if some loans are written
down to their real value, all loans will be forced to be written down. And their
balance sheets will then violate fed capital requirements and they'll be closed
down. The reality is they will be written down. And several hundred banks
will be closed in the next two years. (Just under 100 have been closed this
Many people also
believe the declining U.S. dollar is a problem. I is and it isn't. You have
to factor it into your investment decisions. Companies that export will do better.
Some overseas countries will do well, viz Australia, Brazil. Canada and -- of
all places -- Poland. The Australian dollar is now at 90 U.S. cents. A few months
ago, it was under 60 cents.
not logic, is what drives the stockmarket.
And right now
there are many, many people from Jim Cramer to Byron Wien pounding the table
Which brings me
to the importance of cycles. In January, Howard Marks, the brilliant head of
Oaktree Capital ($60 billion under management) wrote about the inevitability
of boom and bust business cycles. He concluded we're stuck with them forever.
Of all the investment
adages I use, this one remains the most important: What the wise
man does in the beginning, the fool does in the end. Practices and
innovations often move from exotic to mainstream to overdone, especially if
theyre initially successful. What early investors did safely, the latecomers
tried in 2003-07 with excessive leverage applied to overpriced and often inappropriate
Under the heading
of "the Importance of Cycles," he wrote:
In my opinion,
there are two key concepts that investors must master: value and cycles. For
each asset youre considering, you must have a strongly held view of
its intrinsic value. When its price is below that value, its generally
a buy. When its price is higher, its a sell. In a nutshell, thats
But values arent fixed; they move in response to changes in the economic
environment. Thus, cyclical considerations influence an assets current
value. Value depends on earnings, for example, and earnings are shaped by
the economic cycle and the price being charged for liquidity.
Further, security prices are greatly affected by investor behavior; thus we
can be aided in investing safely by understanding where we stand in terms
of the market cycle. Whats going on in terms of investor psychology,
and how does it tell us to act in the short run?
We want to buy when prices seem attractive. But if investors are giddy and
optimism is rampant, we have to consider whether a better buying opportunity
mightnt come along later.
You can read his
entire paper on the Oaktree Capital web site. Click here.
n short, we are
in a bubble. But there remain interesting equities -- like Amazon, Apple, Google,
Australia (EWA) and Brazil (EWZ). And gold (GLD) continues to shine, Just remember,
you have to pull the plug fast. We are in a bubble. I'm getting repititous.
fat are you? Figure your body mass index. Click here.
favorite New Yorker cartoons.
I've spent a lot
of time this week meeting with business people and investors. There is fear
-- especially among real estate entrepreneurs and owners. But the big sentiment
is uncertainty. My rule is simple: Have sufficient cash to allow for two years'
of living expenses.
Also, have some
fun this weekend. Recognized everyone else is as frightened and confused as
you are. Try to get some rest.
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 is .
You can't click on my email address. You have to re-type it . This protects
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role in choosing the Google ads on this site. Thus I cannot endorse, though
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note I'm not suggesting you do. That money, if there is any, may help pay Michael's
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