Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM Tuesday, December 13, 2005: My
real estate friends are convinced they're facing a 20% drop in the price
of real estate in the next two years. They're factoring this expectation into
their projections on all their deals. There are few good deals around. Sellers
have wised up and have dramatically raised their asking prices. Many "deals"
no longer make any sense on present yields -- i.e. return from present rents.
The seller now assumes that the buyer will do something to the property -- convert
it into condominiums, tear it down and build something new, etc. Real estate
is a hard place to be at present -- unless you're selling. Now is a good time
Commodities -- where the action has been in 2005:
Check out natural gas. Hard to predict what to own. That's why a bundle makes
sense. This bundle rose by 14.4% this year (to December 9). It has outperformed
the stockmarket this year. Hence, my obsession with diversification.
12/09/2005 -- percent
Hedge funds take your money and do what they will with
it. This is not bad -- if you trust them. This is bad if they're
rogues. The following piece comes from the latest Forbes Magazine. It
shows what happens with rogues. The article was headlined, "A
am convinced there's something fishy going on here. But I don't know
exactly what. I received this email yesterday. I don't have a Chase credit. And
I'm reluctant to push the "Enroll Now" just to see what will happen.
The computer trade press (which I still read) is full of phishing and pharming
stories -- emails ways to get you to give them secret financial information, including
your credit cards and your social security number. Only the paranoid survive this
world. It's best to assume they're out to get you.
The feds say
Michael Lauer built his $1.2 billion hedge fund on deceit and lies. But two
and a half years after they shut him down, he still hasn't gone to trial.
Michael Lauer was nearly penniless when he came to America. He dabbled in
the restaurant business, then drove a cab to put himself through school. Two
decades later he was running a hedge fund, impressing the rich and famous
with a sixth sense of when stocks were about to move and a confident air that
suggested he knew things others did not. Sotheby's ex-boss, Alfred Taubman,
invested, as did the Dayton family (of department store fame) and Britney
Spears. Hundreds of millions flowed in, and Lauer indulged himself--a house
in Greenwich, Conn., a Mercedes racecar worth $1.5 million and a Cessna plane.
But the Securities
& Exchange Commission says that Lauer, the 50-year-old head of Lancer
Group, built his new life on a pack of lies. Dozens of investors have filed
suits. And as this story went to press, Lauer was about to defend himself
against contempt-of-court charges for failing to hand over documents and show
up to a deposition. That could land him behind bars even before the SEC civil
Lauer says he
can't hire a lawyer to fight his myriad foes because he doesn't have the money.
The feds have frozen much of his personal property--all before he's uttered
a word in his defense to a jury. His plane has been sold. The Mercedes sits
in a Florida warehouse awaiting the highest bidder. The house has a lien on
it. Meanwhile, the receiver charged with liquidating his fund has raised $30
million so far--but taken $10 million out of that in fees. A trial hasn't
even been scheduled, despite the fact it has been two and a half years since
his business was shut down.
off today than when I came to this country," he says. "At least
I had my reputation then."
The SEC says
Lauer hatched a "devious plot" to fool investors into thinking he
had produced big gains so that he could pocket tens of millions of dollars
in performance fees. It alleges he goosed the thinly traded shares of "virtually
worthless" companies by buying tiny amounts at large premiums to their
current prices--then assigned those oddball values to vast stakes bought earlier
at a fraction of the cost. It says Lauer even once claimed profits on stocks
he did not own.
All this adds
up to what may prove to be one of the biggest fund frauds ever: Portfolios
that drew $613 million from investors, net of redemptions, and were once valued
by Lauer at $1.2 billion, shriveled to $70 million, if a filing last month
with a Fort Lauderdale district court holds true. That means $543 million
in cash has vaporized.
worthless companies valued at hundreds of millions of dollars," says
Christopher Martin, an SEC lawyer. "It's black and white."
If the case were such a slam dunk, he would have been brought to trial by
now. He says the real story is that the SEC is stumbling, specifically over
two words: "absolute discretion." Investors approved contracts giving
him just such license in valuing illiquid shares. As the agency pursues its
new, self-appointed role as hedge fund cop, he predicts, similar language
at other funds is sure to trip it up.
the SEC going to acquit itself with all these valuation idiosyncrasies?"
he asks. "It's an impossibility."
Lauer says it
is the feds that lost millions for his investors by setting off a "short-selling
frenzy" when the biggest of his three funds was seized in July 2003.
A crucial question for a future jury: Was Lauer a victim of government overreach,
as he asserts, or a charlatan who set out to cheat his investors? Or something
in between--a swaggering money man who, trusting too much in his magic touch,
just made some bad bets?
lived successively in Lvov, Ukraine; Kraków; and Vienna before moving
to New York in 1971. He put himself through Columbia University driving a
cab at night--a "top biller," he says. Behind the wheel he discovered
an instinct for going where others weren't. "It's all game theory,"
he says. "It's what other people are doing and why."
He trained as
a Marine, left, went to business school, then got an introduction to the head
of Oppenheimer & Co. through a friend of his mom's. In 1980 he took a
job there as a technology analyst.
He quickly made
a name for himself with what colleagues called the "Lauer estimate,"
setting earnings targets way above or below those of other analysts. He always
seemed to have the skinny on a stock. He began wearing fancy suits and racing
sports cars. Rumors spread that he had once worked for the CIA. (He says he
never did.) Adding to the mystique: his unusual accent, a curious mix of German,
Russian and Polish--a "certificate of worldliness" is the way Lauer
A former colleague
describes the Lauer phenomenon this way: "The swagger, the lack of analysis,
all this bull. He went with the hot story, the whisper. He'd change his voice.
He was bringing you in on a secret." Says another, "People would
look at his work and say, Damn! That was a good idea.' He wasn't a flimflam
artist. He was the real deal."
In 1988 he jumped
to Kidder Peabody. Prescient calls on big defense stocks earned him a place
on Institutional Investor magazine's list of best analysts for each of the
next six years. But he was more drawn to "orphans" and "fallen
angels"--companies either too small for analysts to write a report about
or too tarnished to merit a good one.
hedge fund Lancer Partners in 1993, then Lancer Offshore (incorporated in
the British Virgin Islands) two years later. (He also ran two smaller portfolios
that eventually combined to form the OmniFund.) His reports to limited partners
showed a blazing start: 91% and 118% in returns for its first two years versus
the S&P's 6% and 1%.
As do many fund
managers, Lauer insisted on keeping his holdings secret. SEC filings, though,
paint a partial picture. He bought a 7% stake in defense contractor Tech-Sym
in 1996, soon after former Magellan Fund star Jeffrey Vinik had unloaded.
He also seems to have had a big appetite for unregistered shares. These can't
be sold for a year or two and so can be picked up in private deals at a discount
to regular shares.
In March 2000
the stock market plunged. In April Lauer made some curious trades that raised
SEC suspicions. He bought 1.7 million unregistered shares at 23 cents apiece
in a company with no operations called SMX, according to broker reports. Then
at the end of the month he bought 2,800publicly traded shares at $19.50 and
valued all his holdings--registered and unregistered--near that price. On
Dec. 29, the last trading day of the year, he bought 1,000 shares at $27--up
$13 from the start of the month and $7 more than he himself had paid that
very afternoon. His Offshore fund held 5.7 million shares, nearly all restricted,
and some warrants. No matter. The SEC says he used $27 to value all his SMX
holdings, yielding $189 million in total, an 8,000% increase over his cost.
were audited by PricewaterhouseCoopers. Lauer told the auditor that SMX was
"involved in the marketing and sale" of Nascar products, but SMX
had yet to buy the Nascar licensee that would allow it to do so, according
to a receiver suit against PWC. The auditor ended up approving the valuation
in 2000 anyway. A year later the licensee purchase had fallen through and
SMX shares were down. Lauer cut his valuation 30%. But PWC was still bothered
enough to place a call.
"If I have
to stand in court and somebody asks me, Did you look at the financial
statements and how can you value a company of that kind?' what should I say?"
a PWC partner asked.
PWC also demanded
an appraisal of ten companies, including SMX, whose financials it did not
believe supported Lauer's valuations. Four of the ten had operating losses;
another four didn't even have operating revenue; the remaining two were barely
surviving. In any event PWC ended up receiving a report on only four--written
by a Florida firm that, it turned out, was either a shareholder in or provided
directors to all of them. PWC signed off on the 2001 valuations anyway.
were a billion companies with no revenue that were valued at very high prices,"
Lauer says. "This was the era of irrational exuberance."
Of the six companies
that PWC never got a report on, two were especially dubious: Fidelity First,
a mortgage bank with $100,000 in revenue, and Lighthouse Fast Ferry. Two minutes
before trading closed on Dec. 31, 2001 Lauer bought at least 9,000 shares
of Fidelity First--more than half the stock that traded that day--at $3, or
50% more than the last reported price, according to the SEC. Lauer assigned
the new price to all his shares. The result: a $120 million stake in his Offshore
fund, up $40 million in two minutes.
As for Lighthouse,
Lauer would end up buying on the last trading day in each of eight months
that year, often minutes before the close and at a price sometimes a third
or more higher than the last trade or bid. By the end of 2001 he had driven
shares from 90 cents to $1.90--helping to produce a paper gain of $11 million
for his funds, the SEC says. Lighthouse would also figure in a kickback fraud
committed by Bruce Cowen, a Lauer consultant, who eventually sang to the feds
about Lauer's trading. In exchange Cowen got a reduced sentence of 24 months.
Lauer says he
had nothing to do with Cowen's trading scheme. He says that a witness in the
case testified that he, Lauer, had turned down an offer to manipulate Lighthouse
stock. Lauer points out that illiquid issues often draw bids and asks far
apart, and that using bid-up stock prices to value all your holdings is not
in itself illegal. What's more, he says the SEC got the value of his shareholdings
wrong and that he often discounted paper gains when calculating his fee anyway.
But if he had chosen to write them up instead, he hastens to add, that was
well within his rights. That's because of those two words: absolute discretion.
illegal relevant to the contract?" he explodes. "How does that violate
In June 2002
PWC approved the previous year's results but noted in its annual letter to
Lauer's investors that the $827 million value ascribed to the Offshore fund,
most of it paper gains, was all based on Lauer estimates. PWC, which is being
sued by 86 investors in a private complaint, says it is "fully defending"
2002 the New York Post's Christopher Byron wrote the first of a series of
articles questioning Lauer's valuations. By the end of the year investors
with stakes ostensibly worth $200 million were clamoring for their money back.
But Lauer had taken so much cash out in fees for himself in the three years
through 2002--$44 million--that he couldn't cover even a fraction of the redemptions,
the SEC says. Lauer points out that two-thirds of that pay was for work in
the 1990s. He says that he deferred nearly all of the remainder, holding it
instead as shares in his funds.
In July 2003
the SEC filed a suit with 1,800 pages of exhibits and requested that the U.S.
District Court in Fort Lauderdale freeze Lauer's assets and appoint a receiver
for his funds. That receiver, Martin Steinberg of law firm Hunton & Williams,
has since compiled a list of 15 companies in which Lauer owned stakes of 5%
or more--stakes for which he should have filed 13Ds but did not. Lauer says
his lawyers were in charge of the filings.
The SEC originally
expected a trial in spring 2004; now it says it's not sure when one might
start. Part of the problem is bad luck: The first two judges hearing the case
dropped out after rejuggling their workloads. Lauer himself has played a part
in the delay of justice. He has filed numerous, and voluminous, petitions
with that court--to change the venue to New York, to stop the receiver from
selling shares and, of course, to rant at the SEC, which he refers to in one
filing as standing for "Sees Everything Crooked." He says he will
Peter Watson's Big Idea?
In Sunday's New York
Times Magazine, reporter Deborah Solomon interviewed Peter Watson. I sound this
interview fascinating (mostly because I agreed with much of what Watson said).
Q: Your ambitious
new book, "Ideas: A History of Thought and Invention, From Fire to Freud," claims
to chronicle all the major ideas in the world since the invention of the hand
ax two million years ago. Are you trying to be a polymath?
My wife says I
am the know-it-all from hell.
How does one
go about deciding which ideas to put in and which to leave out? As they say,
even taxi drivers have ideas.
Yes, taxi drivers
have ideas. They have ideas about how to get from Eighth Street to 81st Street
by missing the Midtown traffic. But what we are talking about here - let's be
sensible - are ideas that have an impact on the lives of many people. We're
not talking about just little ideas, are we?
On the other
hand, not all big ideas are good ideas. In fact, most big ideas are probably
terrible ideas. What do you think is the single worst idea in history?
ethical monotheism. The idea of one true god. The idea that our life
and ethical conduct on earth determines how we will go in the next world. This
has been responsible for most of the wars and bigotry in history.
has also been responsible for investing countless lives with meaning and inner
I lead a perfectly
healthy, satisfactory life without being religious. I think more people should
as if you're starting your own church.
Not at all. I
do not believe in the inner world. I think that the inner world comes from the
exploration of the outer world -- reading, traveling, talking. I do not believe
that meditation or cogitation (definition: thinking, reflecting, meditating)
leads to wisdom or peace or the truth.
Then I don't
understand why you would want to write a history of ideas, since inner reflection
and dreaminess surely count at least as much as scientific experiment in the
formation of new ideas.
the English philosopher John Gray, it is more sensible to look out on the world
from a zoo than from a monastery. Science, or looking out, is better than contemplation,
or looking in.
If that were
true, how would you explain a novelist like Virginia Woolf, whose achievement
was based on the rejection of the panoramic outward view in favor of inner sensibility?
The rise of the
novel generally is a great turning in. But I don't think it has given a lot
of satisfaction to people. It has not achieved anything collective. It's a lot
of little personal turnings that lots of people love to connect with. But these
are fugitive, evanescent truths. They don't stay with you very long or help
you do much.
me as deeply unanalyzed. Have you ever considered seeing a psychiatrist?
I was a psychiatrist.
I left because I thought Freud was rubbish.
Clinic in London. I left in the late 60's because I thought Freudian therapy
was a waste of time. I don't believe there is any such thing as the unconscious
or the id.
In that case,
where do you think ideas come from?
I don't think
they come out of daydreaming. Everybody who has had a great idea or made
a great realization has been working very hard at it, and they often have failed
many times. You don't go from nothing to a great idea without doing a lot
I find I seldom
have ideas away from my desk.
That is because
ideas come from other ideas. I used to sleep with a piece of paper by my bed.
But I never had an idea in bed. The other thing I noticed is that when you are
out to dinner and you have a good idea and write it down, the next day when
you're sober, it's terrible.
you went out less, you would have better ideas.
I think the interesting
thing in life is not having an idea, but realizing it.
has a problem:
A middle aged woman had a heart attack and
is taken to the hospital.
While on the operating
table, she had a near death experience. Seeing God, she asked, "Is my time
God said, "No,
you have another 43 years, 2 months and 8 days to live."
the woman decided to stay in the hospital and have a face-lift, brow lift, lip
enhancement, boob job, liposuction, and a tummy tuck. After her last operation,
she was released from the hospital.
the street on her way home, she is hit and killed by a bus.
Arriving in front
of God, she demanded, "I thought you said I had another 40 years? Why didn't
you pull me out of the path of the bus?"
God replied, "Lady,
I didn't recognize you!"
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+ Steve Jobs Commencement Address. The text is available:
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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
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