Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
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.
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
How much higher
can gold go? There are many gold bugs who believe, despite its recent awesome
rise, it could actually double from here.
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 Markets
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 didnt, but I soon learned.
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 whats 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 dont act on the basis of what seems to them the real economic
situation, but on whats 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 whos
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 Langans to drink champers.
As I see it,
this is what traders do all day long and especially what theyve
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. Theyve 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. Its Chinatown. Its
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 its
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.
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 childrens 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 things
for sure: With the traders running things, it wont be a good time for
amateurs until the traders cry Switch! and the market starts to
Bucket List movie. Highly recommended:
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.
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.
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?"
arriving tomorrow and I don't wany anything to make her think she's welcome."
daughter had not been home for over 5 years. Upon her return, her Father cussed
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..."
Out of here, ye shameless harlot! Sinner! You're a disgrace to this Catholic
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... ..."
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.