In Search of the Perfect Investment

Gold could be coming back — now that hedge funds have sold enough to fund their redemptions. Research in Motion (RIMM)  comes under criticism in today’s New York Times. “Analysts fault additions to RIM PlayBook Tablet.” Click here. I’m short RIMM.

Apple is getting a lot of nice favorable ink. That bodes well.

Keep staying away from big financials. Look at Citigroup today.

The huge role of video and YouTube’s expanding role.Google is the world’s largest search engine. The second largest? YouTube. Google owns YouTube, which it bought in October 2006 for $1.65 billion. I’m convinced that video is where it’s at for entrepreneurial opportunities — for two reasons:

1. The explosion of “channels,” i.e. places to sell your videos. Once there were three networks. Then there were cable TV channels. Now there are Internet TV channels like Hulu, YouTube and Netflix. From a recent New Yorker piece,

Through the nineteen-sixties and seventies, it was not unusual for the three major networks to capture eighty-five to ninety per cent of the available prime-time audience. That made it possible for advertisers to create national brands. In the eighties, as cable caught on, with channels like CNN, TBS, MTV, and Lifetime, it began to chip off pieces of the audience from the networks. “The Cosby Show” was the last TV series to command a mass following. During the 1985-86 season, more than thirty per cent of all households with televisions tuned in. Last year, “American Idol,” the most popular show on TV today, pulled in fewer than nine per cent of all television viewers in the U.S.

2. The explosion of cheap, small  video cameras with incredible new technology — like the ability to shoot in very low light and the ability to adapt to a range of light contrast — closer akin to what the human eye does. Remember my piece last week. Click here.

I wanted to put the entire New Yorker piece called Streaming Dreams on today’s site. But the piece is too long. I beg you to read it. It’s totally engrossing. Click here.

What happened in 2011? This is a decent piece from one of my favorite writers. Again from the New Yorker:

Year of the Yo-Yo by James Surowiecki January 16, 2012

In 2011, the S. & P. 500 finished the year where it started. (To be precise, it fell 0.003 per cent.) But it was anything but a placid year in the stock market. Instead, there was extraordinary tumult throughout 2011, with a series of sharp rallies and brutal selloffs, the biggest of which sent the market down seventeen per cent in a couple of weeks. Even on a daily basis, stocks were startlingly volatile: the Dow Jones Industrial Average moved more than a hundred points on forty per cent of trading days, and there were more than sixty days on which the S. & P. index moved about two per cent or more (which in 2005, for example, it didn’t do once). Ordinary investors, who have watched the value of their 401(k)s yo-yo seemingly at random, have been left feeling understandably dazed and confused as they head into the new year.

Traders and professional money managers don’t seem to have any real clue about what’s going to happen, either. You might think that volatility would allow people with superior information and market sense to get ahead. But last year money managers did a very poor job of playing the market. According to estimates made by Goldman Sachs, as of the last week in December seventy-two per cent of core large-cap mutual funds had underperformed their market indexes. The average stock-market mutual fund was down almost three per cent for the year. And hedge-fund managers, who are supposed to thrive on volatility, did even worse, with hedge funds that focus on stocks falling more than seven per cent. Strikingly, some of the biggest flops came from superstars: Bruce Berkowitz, whom Morningstar named one of the money managers of the past decade, saw his flagship fund fall more than thirty per cent; the hedge-fund manager John Paulson, whose bet against mortgage-backed securities a few years ago has been called “the greatest trade ever,” saw one of his funds drop nearly fifty per cent.

To make matters worse, the raw numbers for 2011 probably understate how badly ordinary investors fared, because they don’t account for our tendency to chase performance. As myriad studies have shown, investors often put their money into funds that have enjoyed recent success and take it out of funds that have been struggling. This seems logical, but, since most of a money manager’s performance, particularly in the short term, is the result of luck rather than of skill, this means that people often end up in funds that are about to go cold and leave ones that are about to do better. One study that looked at investor returns between 1991 and 2004 found that trading in and out of funds cost investors in actively managed mutual funds 1.7 per cent annually, and a Phoenix Investment Partners study that looked at rolling returns between 1990 and 2000 found that buying high and selling low cost investors twenty per cent of their returns over the decade. Hedge-fund investors, though supposedly more sophisticated than your average Joe, pay a similar price for chasing performance. Investing in actively managed mutual funds or in hedge funds already reduces the chances of beating the market, since, according to Vanguard, over the past decade more than sixty per cent of actively managed mutual funds underperformed the S. & P., while hedge funds have trailed the market since 2003. But the search for the hot hand takes a bad situation and makes it worse.

The sensible solution would be for investors to put their money into low-cost index funds and just keep it there. But that’s hard to do when the market is extremely volatile. Most of us find it difficult enough in normal times to take a long-term approach. So when prices are rising and falling two per cent a day, and when it seems like getting in or out of the market could be worth ten per cent of our portfolio’s value, the temptation to try to time the market is hard to resist. (The way the financial media covers the stock market-with each rise and fall treated as a major event-only exacerbates this problem.) Unfortunately, the same psychological forces that make investors bad at rating money managers also make them bad at market timing: all else being equal, they’re prone to sell at the bottom and buy at the top. And, the bigger and more dramatic the swings in the market, the more likely we are to make the wrong decision.

In other words, while crazy volatility may be great for traders (who live for the chance to make two per cent a day), it’s lousy for the rest of us, and for the economy as a whole. It isn’t just that volatility costs ordinary investors money. It also makes them more likely to give up on the stock market entirely: over the past three years, investors have pulled almost two hundred and fifty billion dollars out of equity funds, even though stock prices have almost doubled since the lowest point of the crash. And, while some of that money has gone into exchange-traded funds, most of it has just left the market. This flight from stocks is probably not a good thing for people’s retirement accounts-after all, in a capitalist country owning some capital is usually a smart way to make money. But it may well be a good thing for investors’ psychological well-being. In effect, they’ve decided that, in a market as volatile as this one, the only way to win the game is simply not to play. 

Friday the 13th. The not-so-perfect ending to the not-so-perfect cruise.

The luxury cruise ship Costa Concordia ran aground on the tiny Tuscan island of Giglio on Friday January 13th . At least three people died and up to 60 were still missing on Saturday. Passengers said the a chaotic and confusing scene reminded them of the Titanic.

The ship had passed between the Tuscan coast and Giglio, rather than in the open sea on the far side of the island. Local fishermen said it was uncommon for a ship the size of the Costa Concordia to take that route. (The captain was a monon?)

The ship’s captain, Francesco Schettino, said the ship had hit a reef that was not on its navigation charts. (The captain is definitely a moron.)

Once he hit the reef, the captain tried to turn the ship toward the Giglio port for easier evacuation, but it began to tip over as it reached the port.  (The captain should be shot.)

The helmsman of one lifeboat appeared ill-equipped to bring the scores of travelers on his vessel to safety: He kept banging into the ship, unable to steer the lifeboat to the shore, until a passenger shoved him aside and took the lead.

“No crew member was trained for an evacuation,” said one passenger.

People panicked and pushed. That didn’t help.

Phyllis Papa, 58, from Wallingford, Conn., said her sister, Maria, and her niece, Melissa Goduti, boarded the ship on Friday. Ms. Goduti told her by phone that the evacuation drill had not taken place yet, even though many passengers had been on the boat for days. A drill was scheduled for Saturday afternoon, she said.

On Friday night, Costa Cruises, which is owned by Carnival Cruise lines, issued a statement saying the cause of the accident had not been determined. (Carnival should also be shot.)

Giancarlo Sammatrice, 22, a cook from Vittoria, Sicily, was on vacation with his girlfriend. “I have lways been scared of those boats, but my girlfriend kept on saying that it was romantic, and I gave in,” he said. “There were not enough lifeboats. The pilots were not sailors but waiters who had no idea how to maneuver and kept on having us turning in circles.”

“It was the first and certainly the last cruise of my life,” he added.

In short, be wary of cruises.

Sleep stats: Only 7% of us get eight hours of sleep a night. But the effects are not good. Getting less sleep is associated with a 200% rise in cancer, a 100% rise in heart disease, and a 20% rise in the likelihood you’ll be dead in 20 years. Not only will you be less healthy, you’ll be fatter. People who sleep an hour more each day lose 14.3 pounds per year. And 1 in 3 women find themselves too sleepy for sex. These statistics are from Zeo, a company that makes a sleep aid, so they’re self-interested stats. But interesting nevertheless. For more, click here.

Closing down properly is key to PC longevity. Want your PC to work reliably forever? Several keys:

1. Turn it off. Don’t leave it running. Turning off actually cleans it, and its memory.

2. Don’t open email attachments and don’t visit “iffy” web sites.

3. Don’t load software that “looks good” — but may or may not be useful.

4. Don’t upgrade any software you’re happy with. Newer is usually not better, just bigger, clunkier and buggier. If it works, don’t mess with it.

5. Don’t fall for sales pitches and market hype. Windows 7 64-bit is great for professionals who run huge, complex programs. I find it cumbersome and not necessary for my work. I’m still using XP. It hasn’t crashed on me in eons. Repeat: If it works, don’t mess with it.

Australian Tennis Open is on ESPN2 and the Tennis Channel. It will continue until the final on Sunday January 29. All the greats are playing. Live play usually starts at 9 PM on ESPN2. Australia is 16 hours ahead of the east coast.

Tennis is like investing. You play conservative — get the ball over the net — and only take your chances when you have a setup — a sure shot at a winner. In investing, swinging for the fences comes maybe once every few years.  In tennis, more often.

Harry Newton whose credit card has been hacked recently and spurious charges put on it. I suspect the stealing is not done by a lone restaurant waiter but a bunch of sophisticated Easter European computer whizzes who hack databases. Hence my convenient “autopay” is in great jeopardy. Here’s my latest key:  Open an Excel spreadsheet. Include all the companies you’re autopaying. Put in one field your password, which should be different in each case. Put in a column for their contact phone number and web site. So you can alert them when your credit card number is changed.

I played three hours of aggressive singles tennis yesterday. My body is holding up nicely. I feel I’m in the best physical condition of my life. Not bad at 69. Jokes tomorrow.