In Search of the Perfect Investment

I’m freaked. A lady gets her purse snatched at a local busy Starbucks. Three weeks later the thieves empty her bank account. But, Harry, they needed her social security number.

Yup. Have you checked the Medicare card in your own wallet? There, in plain sight, is your social security number.

This morning I called Medicare, told the nice lady the story and asked if I could be issued a Medicare card without my social security number.

Her answer, “Wow! Nothing is in the work to change that.”

Clearly you should not carry your Medicare card in your wallet.

The inside on insider trading. You do better when you know more than your neighbor. That’s one reason real estate has an appeal. A commercial office building in San Francisco isn’t quoted every nano-second on Nasdaq. But Nasdaq (and other exchanges) are bigger and faster. Better to have the inside track. Maybe. My favorite New Yorker writer:

The Financial Page
Inside Tracks
by James Surowiecki June 10, 2013

August 28, 2008, was a bad day for Dell Computer. The company reported earnings well short of analysts’ estimates, and said that its gross profit margin (a popular benchmark for performance) had fallen sharply. Investors dumped Dell shares, and the stock price fell fourteen per cent the next day. But to a small cabal of hedge-fund managers and analysts the numbers came as no surprise, because a source at Dell had tipped them off. These funds had shorted Dell’s stock, and cleared more than fifty million dollars in profit in a matter of days. It was, all things considered, a nice little trade.

It was also, of course, illegal. But that wasn’t unusual on Wall Street in 2008: there’s a host of evidence that insider trading has become widespread. The scope of something so clandestine is inherently difficult to pin down, but the number of insider-trading referrals to the S.E.C. from FINRA, the financial industry’s self-regulatory body, keeps going up. The S.E.C.’s enforcement actions have been on the rise as well, and the past three years saw more of them than any other three-year period in its history. Andrew Ceresney, the co-director of enforcement at the S.E.C., told me, “We’ve gotten better at detecting illegal activity, and at using technology that allows us to draw connections and see patterns.” But this isn’t just a case of vigilant policing giving the impression of a rise in crime; a number of studies of market-moving events have documented a boom in “suspicious activity” (that is, more trading than usual) around those events.

The consequences of being caught have never been higher-Raj Rajaratnam, the founder of the hedge fund Galleon Group, was sent to prison for eleven years-but hard-pressed fund managers continue to be tempted. Competition in the investing world is fierce: there are now nearly eight thousand hedge funds, and on average they have underperformed the stock market for nine of the past ten years. Whatever your supposed market-beating strategy is, someone else is probably duplicating it, and everyone is desperate to find an informational edge. There was a time when big investors could come by that edge quasi-legally, as companies leaked information to select investors and analysts. But in 2000 the S.E.C. passed a rule called Regulation F.D., which required companies to disclose material information publicly or not at all. As a 2004 study documented, the advantage of well-connected investors was thereby diminished. Unsurprisingly, some of them responded by trolling for inside tips.

Such tips are easier to come by these days, because there are more insiders than ever. In the case of mergers and acquisitions, most deals are now routinely syndicated among many banks, and, as a 2007 study found, there is a tight correlation between the number of firms participating in a deal and the amount of suspicious trading before it is announced. Similarly, the proliferation of consultants has created more opportunities for information to leak. Galleon made a lot of money shorting Google, after an employee of an investor-relations firm that was working with Google said that the company was going to miss its numbers. Then, there’s the rise of the so-called “expert networks” industry-which, for a fee, connects money managers with experts in a given industry or company. In theory, these experts are banned from disclosing confidential information. In practice, it hasn’t always worked that way: the SAC Capital portfolio manager Mathew Martoma is being prosecuted for allegedly trading on a tip from an expert-network participant that an experimental Alzheimer’s drug had failed to perform as expected.

The rewards for having inside information are enormous. Technological advances mean that companies have a much better real-time sense of how they are doing than they once did. Yet many companies have reacted to economic uncertainty by disclosing less information; fewer of them offer even quarterly-earnings guidance to investors, for instance. Insider information these days is therefore both better and more valuable than ever. What’s more, in the past two decades the market’s reaction to earnings surprises has intensified, so the payoff when you bet correctly has increased, and things like derivatives make it easier than it once was to place big bets without arousing suspicion.

Is there any way to make insider trading less attractive? The government’s willingness to prosecute high-profile traders is a start. Still, we need a more fundamental approach. In a world where companies increasingly know about their business in real time, it makes no sense that public reporting mostly follows the old quarterly schedule. Companies sit on vital information until reporting day, at which point the market goes crazy. Because investors are kept in the dark, the value of inside information is artificially inflated. “Insider trading is, by definition, based on information that is not known to investors,” Baruch Lev, a professor of accounting and finance at N.Y.U. and an expert on corporate disclosure, told me. “If you increase transparency, the gains for insider trading must go down.” Back in 2002, Harvey Pitt, who was then the head of the S.E.C., told Congress that companies should be providing investors with regular updates about their performance, rather than just making quarterly disclosures. More consistent, if not real-time, data about revenue, new orders, and major investments would help investors make more informed decisions and, into the bargain, would diminish the value of insider information. If companies tell us more, insider trading will be worth less. 

Why I’m bringing my money back from Australia. The commodity boom drove Australia’s dollar to $1.08. Now it’s $96.7. the commodity boom is bust. Australian wages and prices are ridiculous — $150,000 to $200,000 for a truck driver up north where the mining business is.  Australia’s Reserve Bank is cutting interest rates. My CDs are paying less and less. Fortunately, a big chunk comes due this week. And it’s all coming back to the good old U.S. of  A.where I can now earn more, and more safely.

If I were a foreign exchange trader, I’d short the Aussie dollar. It’s going to $.90. There is some talk of it hitting $0.80 before it’s all over.

How to blow $200 million in five years: The Halsey Minor story. From a This Week:
The CNET co-founder makes going from a mammoth payday to bankruptcy look easy

In 2008, CNET co-founder Halsey Minor’s finances appeared to be in better-than-perfect shape after he sold the news website to CBS for $1.8 billion. His cut was a hefty $200 million. But today, the 47-year-old tech entrepreneur has filed for Chapter 7 bankruptcy protection. How does one go about blowing a fortune that huge in just five years? Here’s a brief look at how Minor fell so far so fast:

How much money does Minor have left?
Less than zero. In court documents, Minor says he owes as much as $100 million, but has no more than $50 million with which to pay his debts. His bankruptcy petition lists more than 50 creditors, including Bank of America Home Loans, the California Department of Motor Vehicles, Dominion Virginia Power, the Internal Revenue Service, tax collector offices in Los Angeles and San Francisco, and several law firms.

What went wrong?
Halsey says his luck as an entrepreneur just dried up. “I love being an entrepreneur even though it involves financial risk,” Minor wrote in a statement emailed to his hometown newspaper, the Daily Progress, in Charlottesville, Va. “But if you win some you are going to lose some too.” Of course, his troubles appear to have been a bit more complicated than that.

How much more complicated?
A lot. Minor’s investment firm, Minor Ventures, put money into some early-stage technology startups that did quite well – including GrandCentral Communications Inc., which sold for $65 million to Google, and was renamed Google Voice. But Minor Ventures also branched out beyond Minor’s area of expertise, technology, and that appears to have been where he got into trouble, forcing Minor Ventures to shut down during the Great Recession.

What was the real problem?
“It may have been a fascination with houses, hotels, horses, and art,” Bloomberg’s Dawn McCarty and Ari Levy say.

In 2008, Minor bought the Carter’s Grove Plantation – a 400-acre estate on the James River – from Virginia’s Colonial Williamsburg Foundation for $15.3 million, with plans to raise horses there. Carter’s Grove filed for bankruptcy in 2011. Minor now owes money to Colonial Williamsburg Foundation, and several horse farms. He also lost a $6.6 million judgment in 2010 to Sotheby’s for art he bought at auction but failed to pay for. He sold off much of his art collection in 2010 to pay off a $21 million delinquent loan.

What happens to Minor now?
The court will sell Minor’s eligible assets to the highest bidder, and he’ll start fresh. “Choosing Chapter 7 is clearing the slate,” bankruptcy lawyer Bob Rattet tells Bloomberg. “He isn’t required like Middle America to pay his debts, because they’re mostly business-related.”

Minor has been down before – he owed $40,000 and had maxed out his credit cards when he was starting CNET in the early 1990s, until Microsoft co-founder Paul Allen invested and bailed him out. “It sounds like Mr. Minor is doing alright for himself,” says Jazz Shaw at Hot Air. “When Bloomberg went to interview him at his home in the 90210 zip code, the driveway was clogged up with three SUVs and gardeners were working on the lawn. It’s a hard knock life, but you’ve got to give the guy props for persevering.”

Sources: Bloomberg, Business Insider, Hot Air, Wall Street Journal

I don’t know Halsey. But I can say from personal experience that the occupational hazard of making a BIG hit when you sell one business is believing that you can do another one — easily and quickly.

Very few entrepreneurs have not lost gobs of money thinking they’re infallible, walk on water and can quickly experience the rush that comes from another bit hit. There’s a discipline here. They don’t teach it  Often you may be better off not selling, e.g. Larry Ellison of Oracle, or at least having a plan of what you’ll do when do sell out — e.g. Bill Gates.

For me personally, I lust after another “big hit.” It hasn’t come. Hence this column (a daily “hit”) and tennis. The real big “hit” (in another sense) is when you find you’ve suddenly become irrelevant and not one of the companies you’ve invested in will listen to your “brilliance.”

That’s today’s confession: Now back to watching the French Open, renewing a tenant’s lease at a higher price (pulling teeth is more pleasurable), playing tennis this afternoon — and writing my dictionary, and fiddling with investments. A reader says “skip NDF, look at VGENX” — Vanguard Energy Fund with a much lower expense ratio — 0.31% versus 0.95% —  but with a much broader definition of “energy.”  The former invests in “U.S. upstream North American energy companies that engage in the exploration and production of crude oil, condensate, natural gas and natural gas liquids that generally have a significant presence in North American oil and gas fields, including shale reservoirs.” It also pays 7%. The later pays 2% and includes everything from coal makers to the biggest — Exxon Mobil, Royal Dutch Shell, Chevron, BP, etc.  I’m tending to like NDF better, despite its higher expense ratio.

Harry Newton happy and healthy in semi-retirement.

Have you been watching Turkey and Syria? The Arab Spring continues with an awful human toll. A professor wrote in yesterday’s New York Times:

So far Mr. Erdogan (Turkey’s prime minister) has arrogantly dismissed his critics. If he continues to ignore their voices, the danger is that Turkey will descend further into violence and see its much-trumpeted experiment in Islamic democracy fail.

You can read the full article called Turkey’s Authoritarian Turn here.