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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, June 11: Weekends can be frustrating. You meet with your friends. Some are doing well. Some are doing poorly. You want to reach out and help. But they talk about "risk," about "lack of capital," "being too late."

If you persist in helping, you'll fall into "The Harry Newton Hole." You’ll dig yourself in deeper, requiring more and more of your time…. And, in the end, you’ll be blamed because it didn’t work. (This also applies to giving people computer advice.) The hardest thing to learn: You can lead a horse to water, but you cannot make them drink. The second hardest thing: most people aren't entrepreneurs and will never be entrepreneurs, no matter how much work you put in.

It's frustrating for me. I have these stupendous ideas on how my friends can get rich beyond their wildest imaginations.

You been watching my favorite Aussie miner? Kagara Zinc (KZL.AU) just popped over $AUS7, recouping its losses from earlier this year. As they say in Australia, that's better than a slap in the belly with a cold fish. (Australia has its own language.)

Stick with your winners. Lose your losers. This is Dennis Mykytyn's simple sage advice to me. He runs Modern Capital, one of my favorite hedge funds. I was thinking of Dennis as I read this piece from the weekend's New York Times. It's called, "To Pick Winners, Start by Weeding Out the Losers."

INVESTORS who want to add a margin of safety when searching for hot growth stocks may want to consider a grading system developed by Partha S. Mohanram, an associate professor at Columbia University’s business school.

Professor Mohanram says that his method can’t reliably pinpoint the next Google, but that it may help investors avoid some money-losers. For individual investors, the main insight of his work may be that stocks whose prices far outstrip the net value of their assets are unlikely to outperform the overall market. Prudent investors would be advised to do their homework and avoid such risky bets.

Professor Mohanram outlined his grading system in a paper published in the September 2005 issue of the Review of Accounting Studies. Using a database of stocks similar to those in the Dow Jones Wilshire 5,000 index from 1979 to 2001, he found that his system appeared to be more effective in screening out stocks with poor performances than in predicting those that would actually beat the market.

On average, the returns of the 14 percent of stocks that received the highest grades under the professor’s system outperformed the market by an average of 3.1 percentage points a year. The stocks with the lowest scores — about 13 percent of those considered — underperformed the market by an average of 17.5 percentage points a year.

The paper, “Separating Winners From Losers Among Low Book-to-Market Stocks Using Financial Statement Analysis,” may be found on the Web site of the Social Sciences Research Network, at, and through links on, a site developed by Richard Sloan, now the director of accounting research at Barclays Global Investors in San Francisco and formerly a professor at the University of Michigan. (Harry's note: I found the article for $32 on SpringerLink -- click here.)

Professor Mohanram developed the grading system by collecting public company reports, then screening for three measures of profitability — the ratio of net income to assets, the ratio cash flow to assets, and the difference between net income and cash flow — as well as five other variables. These were the consistency of both sales and earnings growth, and spending in three categories: research and development, advertising and capital expenditures.

Institutional investors began taking notice of his research several years ago. James Montier, for example, a global equity strategist at Dresdner Kleinwort Wasserstein in London, wrote favorably about it in a research paper before the final peer-reviewed version of the paper was published.

While poring through hundreds of company reports and grading all of their stocks may be beyond the ability of a typical investor, a basic guideline drawn from the study may be widely useful: stocks whose book value (assets minus liabilities) is much lower than their market value are unlikely to fare well.

That means it’s important to check the balance sheet of a company before making an investment in it.

“Stocks with low book-to-market ratios don’t perform well as a group,” Mr. Mohanram said, adding that their average return is 8.7 percentage points a year below the market.

These stocks — generally those whose prices have shot up on investor euphoria that isn’t adequately supported by the net value of the assets stated on the company’s books — will often turn out to be a disappointment, Mr. Mohanram’s paper suggested.

As recent examples of such stocks, he cited Lucent and Yahoo. At the end of 2005, Lucent’s book-to-market ratio was 0.03, and it underperformed the market by 19.5 percentage points in 2006, while Yahoo, with a book-to-market ratio of 0.15, underperformed the market by 30.5 percentage points for the same period.

Those interested in using his grading system to beat the market may want to combine two strategies, Mr. Mohanram says, by buying high-scoring stocks and selling low-scoring stocks short. Short-selling, of course, can be a risky strategy and is not widely recommended for individual investors.

Investors who work with brokers might ask for their help in duplicating the system, suggests Robert Hagin, a former Morgan Stanley research chief who now runs Hagin Investment Research.

And investors don’t have to adopt the system completely in order to make use of it, says Jayendran Rajamony, a portfolio manager at Numeric Investors who is an admirer of Mr. Mohanram’s work. They may simply look at annual reports and research papers for any growth stocks that interest them and use his criteria — even without peer comparisons — as screens in picking or avoiding stocks.

“It’s about doing fundamental analysis,” Mr. Rajamony said. “This system is a way for investors to discipline themselves to pay attention to important variables because picking growth stocks is not just about buying a stock with a good story.”

In short, don’t buy a stock that holds a world of promise but not much else.

How the rich live. The book is called "Richistan: A Journey Through the American Wealth Boom and the Lives of the New Rich." It's written by Robert Frank. It's hysterical.

You don't want to buy it. But you do need to read some excerpts from a review of it in the New York Times Book Review:

All good journalism is really travel writing. You prepare for a serious story the way a foreign correspondent would. You buy the maps, you learn the language, you hang out with the locals — not just the taxi drivers! — and then you write.

That’s what Robert Frank has done. He writes the Wealth Report column for The Wall Street Journal. ... In his new book, “Richistan,” he posits the existence of a little-known country within our country. This “parallel country of the rich was once just a village, he argues, but now it’s an entire nation.

The data bear Frank out. It was a huge deal when John D. Rockefeller became the country’s first billionaire. Adjusted for inflation, he had $14 billion — less than the net worth of each of Sam Walton’s five children today. There were an estimated 13 American billionaires in 1985. Now there are more than 1,000. In 2005, America minted 227,000 new financial millionaires, men and women with more than $1 million in investible assets. There are as many millionaires in North Carolina as there are in India. And so on.

Frank argues that the rich are “financial foreigners” within their own country. They have their own health care system, staffed by “concierge doctors.” They have their own travel network of timeshare (or private) jets and destination clubs. For her birthday, one 11-year-old “aristokid” pleads to fly commercial, “to ride on a big plane with other people. I want to see what an airport looks like on the inside.”

Like an anthropologist in the Amazon basin, Frank goes native. Except instead of a loincloth, he dons a white tuxedo to attend the International Red Cross Ball in Palm Beach, where he meets “Jackie Bradley, a buxom blonde squeezed into a jewel-encrusted Joy Cherry gown.” Bradley is chatting up her new book, “The Bombshell Bible.” “It’s really more about my inner life,” she says. “I’m hoping to use it to help other women like me.”

And Frank learns the lingo. Most Richistanis earn their citizenship through a “liquidity event,” when someone buys out their company, rather than through inheritance. Hedge fundies prowl the nether regions of Manhattan for trendy paintings, or “noncorrelated assets.” “Affluent” is Richistani code for “not really rich.” According to Frank, you need about $10 million to be considered entry-level rich.

Frank also plumbs Richistan’s secret status codes. You might have thought that a Mercedes SLK or a Rolex were flash possessions. Wrong! In Richistan, they are reverse status symbols. The affluent drive Mercedes; the rich drive Maybachs. Franck Muller hardly advertises their bejeweled watches, which top out around $600,000, because they might attract the wrong kind of attention. Like yours.

If you experience status anxiety, this book isn’t for you. You can’t avoid the conclusion that everyone is a lot richer than you are, whether he deserves to be or not. Here’s a guy, Ed Bazinet, who got rich making little ceramic villages with light bulbs inside them. How hard can that be?

On a more reassuring note, it’s nice to learn that the rich suffer status anxiety, too. When Richistanis are asked how much money would make them feel secure, they inevitably choose a figure that is double their own net worth. Because so many newly enriched entrepreneurs hail from middle-class backgrounds, they hate being called rich. Chauffeurs, for instance, are out. Rolls-Royce says 95 per cent of its customers drive the cars themselves. Tim Blixseth, the founder of the Yellowstone Club and other gated hideaways, tells Frank: “I don’t like most rich people. They can be arrogant.” This from a man who owns two Shih Tzus named Learjet and G2. As in Gulfstream G2. If you were rich, you would get it. ...

Scientific experiments
In a number of carefully controlled trials, scientists have demonstrated that if we drink 1 liter of water each day, at the end of the year we would have absorbed more than 1 kilo of Escherichia coli, (E. coli) bacteria found in feces. In other words, we are consuming 1 kilo of Poop.

However, we do NOT run that risk when drinking wine because alcohol has to go through a purification process of boiling, filtering and/or fermenting.

Water = Poop.
Wine = Health.

Hence, it's better to drink wine and talk stupid, than to drink water and be full of shit

The Scotsman in the new country
A Scotsman moves to the United States and attends his first baseball game. The first batter approaches the batters' box, takes a few swings and then hits a double. Everyone is on their feet screaming "Run!!!"

The next batter hits a single. The Scotsman listens as the crowd again cheers "RUN!! RUN!!" The Scotsman is enjoying the game and begins screaming with the fans.

The fifth batter comes up and four balls go by. The Umpire calls: "Walk." The batter starts his slow trot to first base. The Scot stands up and screams, "Run ye lazy bastard rrrun!"

The people around him begin laughing. Embarrassed, the Scot sits back down.

A friendly fan notes the man's embarrassment, leans over and explains, "He can't run -- he has four balls."

The Scot stands up and screams: "Walk with pride, Laddie!"

Off to California: I'm off to San Diego this morning to check up on some investments. I'll be on a big plane. I had my 65th birthday yesterday. There's an expression in New York: With my birthday and $2, you'll get a ride on the subway (which costs $2). But, once you're 65, you qualify for New York's bargain of your lifetime: you ride the subway for $1. Good things happen when you get old.

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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