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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.

Tennis 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.

Credit 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.

Most lawyers are honest. But the bad ones really are bad. From today's Wall Street Journal:

Qwest 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.

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.

As reported, 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. ...

The 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?

The so-called 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.

"That is 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.

Dr. Sharpe, 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. ...

"Hedge 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.

Plus, hedge 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.

Even sophisticated 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.

Her problem 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."

NAME: George Martin

SEX: Not lately, but I am looking for the right woman (or at least one that will cooperate)

DESIRED POSITION: 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.

DESIRED SALARY: $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.

EDUCATION: Yes.

LAST POSITION HELD: Target for middle management hostility.

PREVIOUS SALARY: A lot less than I'm worth.

MOST NOTABLE ACHIEVEMENT: My incredible collection of stolen pens and post-it notes.

REASON FOR LEAVING: It sucked.

HOURS AVAILABLE TO WORK: Any.

PREFERRED HOURS: 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.?: Of what?

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.

NEAREST RELATIVE....7 miles

DO YOU CERTIFY THAT THE ABOVE IS TRUE AND COMPLETE TO THE BEST OF YOUR KNOWLEDGE?:
Oh yes, absolutely.

George got the job.

Recent column highlights:
+ US Tennis Open TV Schedule. Click here.
+ Manhattan Pharmaceuticals: Click here.
+ NovaDel Biosciences appeals. Click here.
+ Hana Biosciences appeals. Click here.
+ All turned on by biotech. Click here.
+ Steve Jobs Commencement Address. The text is available: Click here. The full audio is available. Click here.
+ The March of the Penguins, an exquisite movie. Click here.
+ When to sell your stocks. Click here.

Harry Newton

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 me from software scanning the Internet for email addresses to spam. I have no 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, click here and here.
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