Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST Monday, February 4, 2008: The
weekend media was full of gloom and doom. Most contrarian "sophisiticated"
investors regard this as a positive sign. They believe in "Don't fight
the fed." This morning, Bloomberg reports
S. Bernanke's decision to lower interest rates 1.25 percentage points last
month will end the dollar's two-year slide, according to the world's biggest
currency traders. For
the first time since 2003, investors are focused on relative growth prospects
rather than absolute borrowing costs, according to Geoffrey Yu, a London-based
strategist with UBS AG, the No. 2 trader. The steepest cuts by a Federal Reserve
chairman in seven years will support economic growth in the U.S. as Europe
slows, said BNP Paribas SA, the most accurate currency forecaster Bloomberg
tracks. The dollar will gain at least 9 percent against the euro this year,
UBS and BNP predict."
I'm not so sure.
I remain in mulling mode. I continue to follow my mantra, "When in doubt,
had a piece by Vitaliy Katsenelson, author of the bool, "Active Value
Investing: Making Money in Range-Bound Markets". His conclusion:
STOCKS ARE ALLEGEDLY
CHEAP NOW, at 17 times 2007 earnings. And they are cheap by historical standards.
Only seven years ago, they were at price/earnings ratios double today's; they
are even cheaper if you compare their forward earnings yield of 6.7% to Treasuries'
yield of 4.25%. They are cheap, cheap, cheap! Or so we've been told.
the cheapness argument falls on its face once we realize that pretax profit
margins are hovering at an all-time high of 11.9%, almost 40% above their
average of 8.5% since 1980. Once profit margins revert to their historical
mean, the "E" in the P/E equation will decline. If the market made
no price change in response, its P/E would rise from 17 to 23.8 times trailing
that the profit-margin reversion will take place. Here are the most common
arguments against it, and some food for thought on why "common"
doesn't necessarily translate as "wise."
Who said that
margins have to revert to a mean; why can't they just remain high?
revert to the mean not because they pay tribute to mean-reversion gods, but
because the free market works. As the economy expands, companies start earning
above-average profits. The competition reacts to fat margins like bees sensing
sugar water. They want some, too, so they fly in and start cutting into these
above-average margins. This always has happened in the past, and it will happen
again and again in the future.
which of late has been into "meltdowns", ran this cover:
It predicts, like
many others, a continuing drop in housing prices -- another 25% over the next
2-3 years -- based on housing prices reverting to their historical mean.
Personally I had a totally lovely weekend, playing tennis and figuring solutions
to the "Punch List" on our new house.
Two astronauts land on Mars. Their mission: to check whether there is oxygen
on the planet.
the box of matches," says one. "Either it burns and there is oxygen,
or nothing happens."
He takes the box,
and is ready to strike a match when, out of the blue, a Martian appears waving
all his arms... "No, no, don't!"
The two guys look
at each other, worried. Could there be an unknown explosive gas on Mars?
Still, he takes
another match... and... A crowd of hysterical Martians is coming, all waving
their a arms: "No, no, don't do that!"
One of the astronauts
says, "This looks serious. What are they afraid of?
here for Science, to know if man can breathe on Mars.
So he strikes
a match -- which flames up, burns down, and.... NOTHING HAPPENS!!
So he turns to
the Martians and asks, "Why did you want to prevent us from striking a
The leader of
the Martians says, "Today is Shabbos!"
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
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