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Harry Newton's In Search of The Perfect Investment Newton's In Search Of The Perfect Investment. Technology Investor.

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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 to sell.

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.

Commodities in 2005
Year to 12/09/2005 -- percent
Crude Oil
Heating Oil
Natural Gas
Live Cattle
Lean Hogs
Feeder Cattle

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 Prickly Hedge."

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 trial begins.

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.

"I'm worse 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.

"You have worthless companies valued at hundreds of millions of dollars," says Christopher Martin, an SEC lawyer. "It's black and white."

Lauer's answer: 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.

"How is 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?

Lauer's family 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 describes it.

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.

Lauer started 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.

Offshore's books 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.

"There 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.

"What is illegal relevant to the contract?" he explodes. "How does that violate the contract?"

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" itself.

In September 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 be vindicated.

I 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.

What's 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?

Without question, 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.

But religion has also been responsible for investing countless lives with meaning and inner richness.

I lead a perfectly healthy, satisfactory life without being religious. I think more people should try it.

It sounds 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.

To paraphrase 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.

You strike me as deeply unanalyzed. Have you ever considered seeing a psychiatrist?

I was a psychiatrist. I left because I thought Freud was rubbish.

Where did you train?

The Tavistock 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 of work.

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.

Perhaps if you went out less, you would have better ideas.

I think the interesting thing in life is not having an idea, but realizing it.

God 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 up"?

God said, "No, you have another 43 years, 2 months and 8 days to live."

Upon recovery, 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.

While crossing 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!"

Recent column highlights:
+ Dumb reasons we hold losing stocks. Click here.
+ How my private equity fund is doing. Click here.
+ Blackstone private equity funds. 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 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. Please note I'm not suggesting you do. That money, if there is any, may help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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