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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 EST Monday, January 28, 2008: When in doubt, stay out. This has been my boring mantra since November 13 when I said, "Get out of the market." Repeating my boring mantra makes for a boring column, but I'd rather preserve my money than be exciting. We may or may not be already in, or gong into a recession. We are absolutely in trying times where the magnitude of the problems facing us -- especially in the financial community -- remain murky and most unclear. Today, the Shanghai stockmarket fell 7.2%. Japan and Hong Kong dropped 4%. London, Frankfurt and Paris are all down by more than 2%. All, I believe, are now below where they stood 12 months ago -- with the sole exception of Australia.

My inability to predict where this is going makes me totally reluctant to jump back in, despite today's much lower prices. Many investors who are out, are searching for "safe havens." Gold is the safest haven. One way of playing gold is IAU, an ETF which reflects the price of gold. It's done well:

How much higher can gold go? There are many gold bugs who believe, despite its recent awesome rise, it could actually double from here.

My wife says I'm "pessimistic." She's absolutely right when it comes to being involved in things I have no control over. Control is my operative word. So for exhibit one, I state my long-held belief: Owning your own business makes the most sense. There are six benefits:

1. No one can capriciously fire you because you're a woman, a dwarf or from Australia.

2. You can implement decisions quickly. The time you spend convincing someone in someone else's organization you can spend implementing in your own. Speed is the best competitive advantage. "Do it now" is worth millions.

3. When you own your own business, you own the profits. They drop into your pocket.

4. When you sell your own business, you get a second dose of your own profits - as much as 15 times the profits. No one who works for someone else can ever receive a second dose of profits.

5. You will never get a stress-related illness. Such illnesses are caused by the irrationality of bosses - not the irrationality of markets and customers. You can always do something about markets and customers -- sell harder, cut expenses, etc.

6. You can set the work culture. Like working on Saturdays. Like expecting instant email responses. Like doing things fast. You can make the whole culture like you. You can make the company move quickly, love customers, etc.

Exhibit two is Ben Stein's piece over the weekend, called Can Their Wish Be the Market’s Command? Her are some excerpts:

LONG ago and far away, I was a student of law and of economics at Yale. The economics I found fairly easy...But the law was a total puzzle. Here would be one case that went for the appellant, but just a circuit away, or maybe even in the same circuit, there would be another case — with identical or almost identical facts — that went for the appellee.

I was puzzled. I sat in the Sterling library reading the cases over and over, but still could not get it. Then, one day, out of the blue, my learned brother-in-law Melvin, who had gone to Harvard Law School, asked me if I knew about “legal realism.” I didn’t, but I soon learned.

“Legal realism” said that the whole common-law system of abiding by past decisions was a fig leaf. What really happened, at the appellate level and probably at the trial level, too, was that judges made up their minds based on their predilections, their biases, which lawyer was their friend, what they had for breakfast that day. Then, because a case that reached appeal always had some legal merit on each side, the judges, or their very young clerks, picked whatever precedent they wished to support their bias and pretended that they were bound by that precedent and could not have decided any other way.

The scales fell from my eyes, and I went on to finish law school in fine fettle. It was just all show business and personal bias and what’s in it for the judge. That made law school easy.

Time has passed in a big way. But the lessons of legal realism have always been uppermost in my mind when I think about law or about anything else important: Stated reasons are often not the real reasons.

Because I usually write about finance, I have come to believe in the theory of what I would call “financial realism,” or what might more accurately be called “trader realism.” Under this theory, on which I have an imaginary patent, traders can see masses of data any minute of any day. They can find data to support hitting the “buy” button or the “sell” button. They don’t act on the basis of what seems to them the real economic situation, but on what’s in it for them.

Just as a tiny example, years ago a close friend, now deceased, was a trader in London for a big financial house. As he told it, one day I.B.M. came out with stellar numbers. The boss of the trading floor said, “O.K., the guy who’s getting the prize is the one who can make us money selling I.B.M. short.”

So the traders grabbed for their phones and started to put out any bad thoughts they could dream up about I.B.M. They called journalists, retailers, anyone. They sold huge amounts of I.B.M. short. Soon, they had I.B.M. on the run, made money on their shorts and went to Langan’s to drink champers.

As I see it, this is what traders do all day long — and especially what they’ve been doing since the subprime mess burst upon the scene. They have seized upon a fairly bad situation: a stunning number of defaults and foreclosures in the subprime arena, although just a small part of the total financial picture of the United States. They have then tried — with the collaboration of their advance guards in the press — to make it seem like a total catastrophe so they could make money on their short sales. They sense an opportunity to trick other traders and poor retail slobs like you and me, and they generate data and rumor to support their positions, and to make money.

MORE than that, they trade to support the way they want the market to go. If they are huge traders like some of the major hedge funds, they can sell massively and move the market downward, then suck in other traders who go short, and create a vacuum of fear that sucks down whatever they are selling.

Note what is happening here: They are not figuring out which way the market will go. They are making the market go the direction they want.

I know this because I know traders. They’ve told me that they love to sell into fear because fear is bottomless — you can make money selling all day, while buying eventually slows because enthusiasm has limits. The amount of money available to large professional traders is so large that they can overwhelm the market, at least for a while, anytime they want. And they like to do it when the market least expects it.

To my humble eyes, this is what we have seen recently on world markets. Note that the losses in United States markets alone are on the order of about $2.5 trillion in recent weeks. How can a loss of roughly $100 billion on subprime — with some recoveries sure to come as property is seized and sold — translate into a stock-market loss 25 times that size? The answer is trader realism.

The losses in the stock market since the highs of October 2007 are about 14 percent. This predicts — very roughly — a fall in corporate profits of roughly 14 percent. Yet there has never been a decline of quite that size for even one year in the postwar United States, and never more than two years of declining profits before they regained their previous peak.

In other words, traders are sending stocks down by a fantastically larger amount than is warranted by a recession or the losses in subprime. How and why does it happen? As someone said in the movie: “Forget it, Jake. It’s Chinatown.” It’s just Chinatown in trader-land, where money is made and there is no perspective.

So when you see the market gyrating wildly downward and hear some pundit saying it’s because of this or that data or this paradigm or that ratio, remember trader realism. The traders move the market any way they want, any way they think they can make money, and then they whisper a reason to journalists later in the day. Then the journalists print it or say it on television, and the amateurs believe it. And the traders snicker.

These traders, not economists or securities analysts, can turn the world upside down, make governments tremble, give central bankers colitis and ruin the lives of ordinary men and women saving for their children’s college education or their own retirement. In America today, it is the traders, not the politicians or the generals or the corporate bosses, who have the power.

This is what has become of the America of Thomas Jefferson. Lucky for the traders. Sad for the rest of us.

And one thing’s for sure: With the traders running things, it won’t be a good time for amateurs until the traders cry “Switch!” and the market starts to rise.

The Bucket List movie. Highly recommended:

This movie will appeal if you're over 50. It's the "story" of two old geysers terminally ill with cancer who make a list of all the things they want to do before they kick the bucket. Morgan Freeman thinks up the idea. Jack Nicholson finances it. You'll laugh and cry along the way.

A weekend virus. I run a hardware firewall. I keep my virus checker running. But stuff sneaks through. One did over the weekend. Hence, once a week, I run a full file-by-file computer scan -- which usually takes 30 minutes. The scan quarantined the virus. Symantec's web site said to delete the offending files. I did. Fortunately I have old uninfected backups elsewhere. This stuff is boring. My Mac friends don't have these problems.

The mother in law
Michael took his happy yellow lab to the vet. "Dr. Cohen, please cut off my dog's tail."

Dr. Cohen recoiled in horrow. "Why should I such a terrible thing?"

"My mother-in-law's arriving tomorrow and I don't wany anything to make her think she's welcome."

The Irish prostitute
An Irish daughter had not been home for over 5 years. Upon her return, her Father cussed her.

"Where have ye been all this time? Why did ye not write to us, not even a line? Why didn't ye call? Can ye not understand what ye put yer old Mother thru?"

The girl, crying, replied, "Sniff, sniff....Dad. ...I became a prostitute..."

"Ye what!!? Out of here, ye shameless harlot! Sinner! You're a disgrace to this Catholic family."

"OK, Dad-- as ye wish. I just came back to give mum this luxurious fur coat, title deed to a ten bedroom mansion plus a $5 million savings certificate. For me little brother, this gold Rolex. And for ye Daddy, the sparkling new Mercedes limited edition convertible that's parked outside plus a membership to the country club........ ......... ....... (takes a breath).............and an invitation for ye all to spend New Years Eve on board my new yacht in the Riviera and... ..."

"Now what was it ye said ye had become?" says Dad.

Girl, crying again, "Sniff, sniff....a prostitute Daddy! Sniff, sniff."

"Oh! Be Jesus! Ye scared me half to death, girl! I thought ye said a Protestant. Come here and give yer old Dad a hug."

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 on this site. Thus I cannot endorse, though some look 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 Michael's business school tuition. Read more about Google AdSense, click here and here.

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