Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM Wednesday, August 31, 2005: Katrina
is shaping up to be a bigger disaster than we ever imagined. It could throw
the economy into recession. It's not going to be good to the stockmarket. If
stocks get knocked, it may be a good time to buy. But not now.
is a head game. As things change, you have to change. If you don't, you're dead.
Tennis is like investing. Every day is a new match, with new influences -- like
Katrina. You're only as good as your last match (or pick). Yesterday's pick
will look awful today. Andy Roddick lost last night to unknown
59th seed, Gilles Muller of Luxembourg. Andy's head was in the wrong place.
He played as though he was investing in mid-2000, when the tech boom was dying.
He forgot the world had changed. He should have played differently.
I used to think entire-portfolio reviews each quarter was sufficient. I now
think weekly makes sense. Check the logic of owning each holding weekly.
cards and their ridiculous 3-year expiration date: If you give your
credit card to your electricity, phone or cable company to pay their monthly
bills, you get messed up every three years when your card expires. It
took me 7 months to get the mess fixed with the idiots at Manhattan Cable. I
can't find a credit card with longer than a three-year expiration. But I have
found a workaround: Give yourself a six-year expiration date. It seems
to work. My present Visa expires in October 2007. Lately, I've been telling
over-the-phone and Internet vendors that my card expires in October 2010. My
charges have gone through. No problems. No questions.
lawyers are honest. But the bad ones really are bad. From today's
Wall Street Journal:
Communications International Inc. and Tyco International Ltd., two major clients
of the law firm of Boies, Schiller & Flexner LLP, paid millions of dollars
to a legal-document-management company that was partially owned by members of
the family of star lawyer David Boies.
death of the long distance business.
Skype has 156 million downloads for its free local, long distance and international
calling software. Yahoo! Messengers now has free phone calls. Microsoft has bought
Teleo, a San Franciso maker of software for calling over the Internet. Time Warner
surprised the analysts when it reported more signups for its overpriced voice
Internet calling. Google has Google Talk.
About half a
dozen other Boies Schiller clients have used, or are using, the document-management
company, Amici LLC, to store and manage legal documents since the company's
founding in 2002. One of Amici's founders was William F. Duker in Albany,
N.Y. Mr. Duker, a lawyer and former associate of Mr. Boies, pleaded guilty
to four felony counts and was sentenced to 33 months in prison in 1997 for
falsely inflating legal bills to the federal government.
Adelphia Communications Corp. disclosed this week that Boies Schiller resigned
as special counsel to the company at Adelphia's request after the cable company
discovered business ties between Mr. Boies's family and Amici, which Adelphia
also used. ..
Mr. Boies in
an interview said yesterday he should have fully disclosed his children's'
ownership interest in Amici. "I should have made certain that everyone
knew about it," he said. He added that "a half dozen, or maybe eight
Boies Schiller clients also use Amici."
Mr. Boies also
confirmed that members of his family indirectly own stakes in a document-copying
company called Echelon Group LLC. Echelon is Boies Schiller's in-house copying
service for its Manhattan and Armonk offices, and had revenue of a little
less than $1 million last year, Mr. Boies said. He said that Amici was only
one of several companies that Boies Schiller recommended to Tyco and that
Tyco made its own independent decision. ...
death of the Sharpe Ratio: Every time someone
shows me a fund I should invest in, they mention something called the Sharpe
Ratio. I've never understood it. But I pretend I do. If I don't, I sound
stupid. Today's Wall Street Journal debunks the ratio:
William F. Sharpe
was probably the biggest expert in the room when economists from around the
world gathered in Sonoma, Calif., to hash out a pressing problem in July:
How to gauge hedge-fund risk.
About 40 years
ago, Dr. Sharpe, now a retired professor from Stanford University, created
a simple calculation for measuring the return that investors should expect
for the level of volatility they are accepting. In other words: How much money
do they stand to make compared with the size of the up-and-down swings they
will lose sleep over?
Sharpe Ratio became a cornerstone of modern finance, as investors used it
to help select money managers and mutual funds. But at the Sonoma meeting,
the use of the ratio was criticized by many prominent academics -- including
Dr. Sharpe himself.
The ratio is
commonly used -- "misused," Dr. Sharpe says -- for promotional purposes
by hedge funds. Bayou Management LLC, the Connecticut hedge-fund firm under
investigation for what authorities suspect may have been a massive fraud,
touted its Sharpe Ratio in marketing material. Investment consultants and
companies that compile hedge-fund data also use it, as does a new annual contest
for the best hedge funds in Asia, by a newsletter called AsiaHedge.
very disturbing," says the 71-year-old Dr. Sharpe. Hedge funds, loosely
regulated private investment pools, often use complex strategies that are
vulnerable to surprise events and elude any simple formula for measuring risk.
"Past average experience may be a terrible predictor of future performance,"
Dr. Sharpe says.
who won a Nobel Prize in 1990 for another model he helped create to price
securities, designed the ratio to evaluate portfolios of stocks, bonds
and mutual funds. It is derived from a simple equation: First, the rate
of return of Treasury bills -- which are virtually risk-free -- is subtracted
from the portfolio's rate of return. The average difference between those
two figures over a given period of time is then divided by how much the portfolio
strayed from that average. That so-called standard deviation is a measure
of volatility -- those worrisome ups and downs.
The higher the
Sharpe Ratio, the better a fund is expected to perform over the long term.
A ratio of more than 1 is considered pretty good because that means the portfolio
is producing relatively high returns with relatively low volatility.
At a time when
smaller investors and pension funds are pouring money into hedge funds, the
ratio can foster a false sense of security, some experts say. There are now
8,000 hedge funds world-wide handling nearly $1 trillion. ...
funds can manipulate the ratio to misrepresent their performance," adds
Dr. Sharpe, a founder of Financial Engines, a Palo Alto, Calif., investment
adviser and manager. He is on the board of a private family fund, but doesn't
use his own ratio to evaluate hedge funds. "Anybody can game this,"
he says. "I could think of a way to have an infinite Sharpe Ratio."
In a recent
study, Dr. Lo found that the annual Sharpe Ratio for hedge funds can be overstated
by as much as 65%. "You can legitimately generate very attractive Sharpe
Ratios and still, in time, lose money," he says. "People should
not take the Sharpe Ratio at face value."
Even if it isn't
manipulated, Dr. Sharpe says, it doesn't foreshadow hedge-fund woes because
"no number can." The formula can't predict such troubles as the
inability to sell off investments quickly if they start to head south, nor
can it account for extreme unexpected events. Long-Term Capital Management,
a huge hedge fund in Connecticut, had a glowing Sharpe Ratio before it abruptly
collapsed in 1998 when Russia devalued its currency and defaulted on debt.
funds are generally secretive about their strategies, making it difficult
for investors to get an accurate picture of risk. "For hedge funds,
we have no standards to measure risk," says James Van Horne, a Stanford
business-school professor who attended the Sonoma gathering.
investors have discovered this the hard way. The Art Institute of Chicago
cited a good Sharpe Ratio when it explained why it invested in a small Texas
hedge fund called Integral Investment Management. In 2001, the Institute sued
the hedge fund in a state court in Dallas, saying that it lost at least $20
million. The case remains in litigation.
The quest for
a new measure of risk is confounding experts around the world. At a popular
virtual community for hedge-fund investors called Albourne Village, more than
2,000 members recently downloaded a document called "A Critique of the
Sharpe Ratio," by a London-based money manager warning hedge-fund investors
away from it.
In Hong Kong,
the government bars hedge funds from opening unless they can prove they aren't
going to fail -- and yet there is no adequate measure, says Sally Wong, executive
director of the Hong Kong Investment Funds Association.
with the Sharpe Ratio is that it assumes that a fund's returns will remain
even over time. "Many hedge-fund strategies have greater downside events,"
Ms. Wong says. She favors another measure, the Sortino Ratio. That is similar
to the Sharpe Ratio, but instead of using the standard deviation as the denominator,
it uses downside deviation -- the amount a portfolio strays from its average
downturn -- to distinguish between "good" and "bad" volatility.
But even the
namesake of that ratio is troubled by its use for evaluating hedge funds.
"I think it's used too much because it makes hedge funds look good,"
says Frank Sortino, who developed the ratio 20 years ago and is director of
the Pension Research Institute in San Francisco. "It's misleading to
say the least," he adds. "I hate that they're using my name."
Dr. Sharpe feels
similarly. "I never named it the Sharpe Ratio," he says of his formula.
"I called it the Reward-to-Variability ratio."
an actual job application that a 75 year old senior citizen submitted to Walmart
US Open tennis on TV. The TV schedule is below.
SEX: Not lately,
but I am looking for the right woman (or at least one that will cooperate)
Company's President or Vice President. But seriously, whatever's available.
If I was in a position to be picky, I wouldn't be
applying here in the first place.
$185,000 a year plus stock options and a Michael Ovitz style severance package.
If that's not possible, make an offer and we can haggle.
HELD: Target for middle management hostility.
A lot less than I'm worth.
ACHIEVEMENT: My incredible collection of stolen pens and post-it notes.
REASON FOR LEAVING:
TO WORK: Any.
1:30-3:30 p.m. Monday, Tuesday, and Thursday.
DO YOU HAVE
ANY SPECIAL SKILLS?: Yes, but they're better suited to a more intimate environment.
MAY WE CONTACT
YOUR CURRENT EMPLOYER?: If I had one, would I be here?
DO YOU HAVE
ANY PHYSICAL CONDITIONS THAT WOULD PROHIBIT YOU FROM LIFTING UP TO 50 lbs.?:
DO YOU HAVE
A CAR?: I think the more appropriate question here would be "Do you have
a car that runs?"
HAVE YOU RECEIVED
ANY SPECIAL AWARDS OR RECOGNITION?: I may already be a winner of the Publishers
Clearing House Sweepstakes, so they tell me.
DO YOU SMOKE?:
On the job - no! On my breaks - yes!
WHAT WOULD YOU
LIKE TO BE DOING IN FIVE YEARS?: Living in the Bahamas with a fabulously wealthy
dumb sexy blonde supermodel who thinks I'm the greatest thing since sliced
bread. Actually, I'd like to be doing that now.
DO YOU CERTIFY
THAT THE ABOVE IS TRUE AND COMPLETE TO THE BEST OF YOUR KNOWLEDGE?:
Oh yes, absolutely.
George got the
+ US Tennis Open TV Schedule. Click
+ Manhattan Pharmaceuticals: Click
+ NovaDel Biosciences appeals. Click
+ Hana Biosciences appeals. Click
+ All turned on by biotech. Click
+ Steve Jobs Commencement Address. The text is available:
Click here. The full audio is available. Click
+ The March of the Penguins, an exquisite movie. Click
+ When to sell your stocks. Click
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. Thus I cannot endorse any, though some look
mighty interesting. If you click on a link, Google may send me money. That money
will help pay Claire's law school tuition. Read more about Google AdSense,
here and here.