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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 Monday, February 6, 2006: Did this ridiculously warm weather give me my horrible cold? I'm searching for the culprit. My wife says I'm a hypochondriac. I'm not. I just feel awful.

Went looking for raw land on the weekend: Beautiful, raw land is in short supply, and rising strongly in price. Hence it's a great diversification away from other investments. Conclusions:

1. I'm not the only one with this brilliant idea. Every Tom, Dick and Harry is prowling the countryside in search of "cheap" land in large parcels. Land in midstate New York (100 to 130 miles from New York City) has doubled in price in the past five years.
2. Most Tom, Tom and Harry know far more about land and investing in it than I do. Many have their own construction companies. That's a huge competitive advantage.
3. Much land is not raw. It often has a house or a farm on it. That will add to the price -- even though you don't want the house or the farm and you may need to bulldoze them.
4. There are often "gotchas." One 200 acre farm I saw had five acres carved out of the center of it, so some one could live there. To make this 200 acre property valuable, you need the entire 205 acres. Once you buy the 200 acres, the owners of the five acres will hold you to ransom for their five, knowing that you have to buy their parcel.
5. Zoning is coming with a vengeance. Traditionally, rural communities have allowed you to do slice, dice and build whatever you wanted -- so long as you obeyed simple building codes, like sewage and safety. These days many communities have moratorium on slicing land into small parcels, while the community leaders cogitate about a zoning plan -- an immensely difficult and politic-ridden task. Nobody in rural America wants their rights restricted -- especially given the unprofitability of the family farm.
6. Slicing big land parcels into smaller parcels can be expensive -- what with roads, electricity, water and sewage needs.

Huge rewards from managing money, sometimes: Steve Cohen, 49, runs a hedge fund in Greenwich, CT. He paid himself $500 million in 2005. Mr. Cohen manages more than $6.5 billion in assets. He produced a return of 16% to 19% last year, estimated the New York Times, outpacing the 8 percent average of 1,500 hedge funds, as calculated by the MSCI hedge fund index. The reason he got the $500 million is that he gets 50% of the fund's profits and, the fund is huge. "Normal" hedge funds pay their owners 20% of the profits.

What's often lost among all the stories about high payouts to hedge fund managers is that picking stocks is an inherently risky business. On the weekend, one of my fund managers emailed me (I've disguised his sector):

In January, the Fund lost approximately 13.0% (net of all fees) while its benchmark rose +4.2%. Since the Fund's inception in February 2004, it has yielded a compounded return of 61.9% (net of all fees) versus its benchmark's gain of 6.0%.

In light of January's extremely disappointing performance, I would like to take a few paragraphs to explain the cause of the poor performance and to detail corrective changes that have been implemented to get performance back on track.

January's poor performance stands out as an eye-catching outlier to previous down months. In my analysis, there were two main reasons for the significant loss. Firstly, the Fund was overexposed to the short side, while the market itself soared. Secondly, I was unable to effectively manage the upside volatility of our largest short positions. Let me start with our short exposure. For quite some time I have had a bearish view on the sector -- a view which has grown stronger over time. Coming into the fourth quarter earnings season, I expected the sector to weaken for reasons that I have described in detail in my previous newsletters. Because of this belief, and my inability to find what I felt were compelling longs, the Fund entered the year heavily short. Throughout the month, my sector's stocks were strong across the board. Consequently, our shorts suffered broadly. The shorts became a larger part of the portfolio as a result of their price appreciation. Thus, the Fund's net exposure became more short. Due to the level of my conviction in our individual short positions, and my belief that the stocks were not moving on relevant fundamental drivers, I did not take action to decrease the Fund's short exposure. This was a costly mistake.

It was not just the fact that our Fund was net short that caused January's downdraft. The performance was especially hindered by the nature of our largest shorts. Point blank, our largest shorts were among the best stock performers of the month. One short was especially painful, as it more than doubled over the course of the month -- at one point tacking on over 50% in one day. Yet, there was not significant news driving the ! stocks upward. This kind of price escalation was, at once, mind-boggling and frustrating. In total, our losses were heavily concentrated among 5 or so of our top shorts, which were responsible for over 8% of the month's losses. Looking at it retrospectively, these short positions have an obvious commonality. They are all highly speculative names that are heavily shorted and that lacked a fundamental short catalyst in January. My conviction level remains strong on the fundamental work that we have done of these names and the catalysts for market realization are fast approaching. However, it is clear that in January I was overexposed to these names as a % of assets. It is also clear that I should have been more mindful of the sector's propensity toward extreme volatility--particularly in these types of names.

What am I doing to get performance back on track and to prevent such plunges in performance in the future? I am first addressing what I perceive to be the root of the problem in January. I have started to and will continue to rein in the Fund's net exposure. In the future, I will be more proactive in keeping the exposure in a tighter range so that negative beta does not drown out our Fund's alpha. I will also keep a more vigilant eye on volatility risks due to large position sizes, particularly on shorts. Short-squeezing seems to have become an enduring trend in the sector. In order to successfully navigate such violent stock movements, I have to leave myself more room for maneuverability. This implies that I must keep the position sizes of my shorts smaller, especially in situations when liquidity is tight and where I am unable to hedge through the options market. I am working to bring ! down the sizes of such positions in our current portfolio, in a sensible, controlled fashion.

To my mind, January's mistakes are identifiable and correctable. The crux of what has us allowed our firm to excel in the past remains in tact. We do excellent fundamental work on the sector, and in general, trade our names very well. This did not suddenly change in January. If anything I feel more confident than ever in our ability to evaluate the sector for profit opportunities, if for no other reason than I now have a deep support staff that is comprised of amazingly talented and dedicated individuals. My definition of risk in the market is that of irreversible loss of capital. I do not perceive that such irreversible losses occurred in our Fund in January. Rather, I feel that the portfolio was wrongly positioned for what was the most speculative month that I have witnessed since the bursting of the bubble. I am confident that fundamentals will trump technicals in short order, and that our theses will in fact play out as we have predicted. We have catalysts that are forthcoming. ...

Fluorescent bulbs revisited: From a reader, Rodney Madden,

Harry, I converted all of my bulbs sometime back. Why? When standing under incandescent lights that were recessed I found that after a period of time one gets VERY warm. The fluorescent bulbs completely eliminated that. This too adds to your savings especially being from Texas our air conditioning is constantly running. Also, get the right color of light bulb. That green/blue tint is from bulbs that are labeled "daylight" or "coolwhite", and most people want "warm white".

Cell phone as weapon: An idiot in a big pickup truck threatened me as I was parking. We were on a dark deserted street. I was scared. My idea: Bring out my cell phone, pretend I was dialing it. The instant he saw he cell phone he drove off. Good lesson.

Wipe Your Cell Phone's Memory Before Giving It Away. Zap your PINs, passwords, and other sensitive information. Take your SIM card out. To get rid of everything, you may need to employ multiple reset commands--and those commands aren't always easy to find in a modern cell phone's complex menus. One Samsung phone which a Washington Post editor looked at requires ten different commands to delete all data, including text messages, phone numbers, call timers, and logs. For precise instructions on how to delete information in your phone, click here.

The world's funniest Johnny Carson clip: It's the classic Johnny Carson and Jack Webb (Sgt. Friday) skit. Click here.

Believing in Genies:
A husband took his wife to play her first game of golf.

Of course, the wife promptly hacked her first shot right through the window of the biggest house adjacent to the course. The husband cringed, "I warned you to be careful! Now we'll have to go up there, find the owner, apologize and see how much your lousy drive is going to cost us."

So the couple walked up to the house and knocked on the door. A warm voice said, "Come on in." When they opened the door they saw the damage that was done: glass was all over the place, and a broken antique bottle was lying on its side near the pieces of window glass.

A man reclining on the couch h asked, "Are you the people that broke my window?"

"Uh...yeah, sir. We're sure sorry about that," the husband replied. "Oh, no apology is necessary. Actually I want to thank you. You see, I'm a genie, and I've been trapped in that bottle for a thousand years. Now that you've released me, I'm allowed to grant three wishes. I'll give you each one wish, but if you don't mind, I'll keep the last one for myself."

"Wow, that's great!" the husband said. He pondered a moment and blurted out, "I'd like a million dollars a year for the rest of my life."

"No problem," said the genie. "You've got it, it's the least I can do. And I'll guarantee you a long, healthy life!"

"And now you, young lady, what do you want?" the genie asked.

"I'd like to own a gorgeous home complete with servants in every country in the world," she said. "Consider it done," the genie said. "And your homes will always be safe from fire, burglary and natural disasters!"

"And now," the couple asked in unison, "What's your wish, genie?"

"Well, since I've been trapped in that bottle, and haven't been with a woman in more than a thousand years, my wish is to have sex with your wife."

The husband looked at his wife and said, "Gee, honey, you know we both now have a fortune, and all those houses. What do you think?" She mulled it over for a few moments and said, "You know, you're right. Considering our good fortune, I guess I wouldn't mind, but what about you, honey?"

"You know I love you sweetheart," said the husband. I'd do the same for you!"

So the genie and the woman went upstairs where they spent the rest of the afternoon enjoying each other. The genie was insatiable. After about three hours of non-stop sex, the genie rolled over and looked directly into her eyes and asked, "How old are you and your husband?"

"Why, we're both 35," she responded breathlessly.

"No Kidding," he said. "Thirty-five years old...and both of you still believe in genies?"

Recent column highlights:
+ Munich, the movie. A must-see. Click here.
+ Identity Theft precautions. Click here.
+ 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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