Technology Investor 

Previous Columns
8:30 AM Monday, June 6, 2005: Today's recommendation is to read this weekend's New York Times Magazine. You can do that on paper from your local newsstand or online -- Click here.

Articles cover hedge funds, why mergers are great for bankers and management (but few others), an interview with Carl Icahn which is scrumptious (he's a real person) and, my favorite, a lead piece by Roger Lowenstein, one of America's top financial reporters and book writers. He wrote When genius failed -- The rise and fall of Long-Term Capital Management and Buffett : The Making of an American Capitalist.

For your Monday morning treat, here's a major clip of what Roger wrote this weekend:

Financial anxieties are pandemic. But in trying to soothe our worries, we may only make them worse.

The New York Times
June 5, 2005
See a Bubble?

Annual performance of major hedge funds

Source: CSFB/Tremont Hedge Fund Index

It's a good time to be a financial-disaster writer. Disasters abound, and even when they don't, people are eager for your opinion on when the next bubble is going to pop. Scarcely a day goes by without a warning of some dire calamity -- in the dollar, in housing values, in pension funds. The way people crave financial info, we must be the best-informed, most economically literate society ever. But we do not sleep any better for it. Is all the anxiety warranted, or even productive?

A few years ago, the chief claim on the public tranquillity was the fear of ''deflation,'' meaning that the price of just about everything would fall. Before that, it was fear of ''Y2K.'' Neither transpired. This is not to say that disaster never strikes. The number of bubbles and consequent meltdowns over the last quarter-century could fill a proper B-school syllabus. In order of appearance, oil drillers, precious metals, personal computer makers, the stock market, commercial real estate, Trump casinos, junk bonds, biotechs, Russia and Internet stocks each had their moments of glory and returned to earth.

Not every bubble ends with a crash, but sometimes, because of a linkage or feedback mechanism, one loss triggers another and leads to a sort of contagion. In 1929, people who bought stocks on credit were forced to sell, which spurred more losses, more loan repayments and more forced selling. This is what people worry about: the Big One. Japan experienced a somewhat similar meltdown in the early 90's.

Almost by definition, the spark for such calamities is unforeseeable. This explains our vigilance. What is less appreciated is that excessive, or inappropriate, vigilance also exacts a price. It does so in several ways. People who insulate their portfolios against phantom risks pay a toll, just as they paid to protect their computers against Y2K.

In limiting risk, people also limit the opportunity for gain. It is common, today, for investors to own six or eight mutual funds, each of which is likely to be invested in hundreds of stocks. This will, they hope, assure that no little bump, no little meltdown, overly upsets their portfolios. But since when was investing about avoiding the bumps? Anyone investing for the longer term can safely ignore them.

George Bernard Shaw observed that every profession is a conspiracy against the laity. The financial profession duly warns us of meltdown risk, but it has adopted a pinched definition of risk that has led us into fruitless and sometimes harmful diversions. The odds of a meltdown being necessarily uncertain, Wall Street fosters an overly precise, pseudoscientific approach. Investors are told to ''balance'' portfolios (rather than to select stocks), to ''allocate'' (rather than to ''invest'') their assets and to reckon with quarterly earnings forecasts down to the penny per share -- an absurd irrelevancy for someone whose retirement is years away.

Wall Street properly worries about what might go wrong, but it has recast the issue in spurious terms, detaching us from the messy and often subjective considerations that might help us avoid truly perilous bubbles: those that (like the dot-coms) subject us to the risk of enduring loss. If you tune in to enough financial shows, you are bound to stop asking considered questions like ''Is the Web going to be full of other companies competing against this one?'' and to start toying with numerics like a stock's volatility or the percent of your holdings in a given ''sector.'' No wonder people are jittery: this stuff changes every second. To listen to the anchors on cable TV, we should reshuffle our portfolios in response to each new, tangential threat -- oil prices, the dollar, real estate. And, of course, we should diversify in the extreme.

Diversification is insurance against the possibility that we might do something stupid; it also heightens the chance that we will do something stupid. People with flood insurance build their homes closer to the shore, and people in the 90's, having diversified, figured they could afford to take at least a small flier on dot-coms. Risk prevention can lead to risk.

Lately, our search for calamity has focused on those obscure but swiftly multiplying Wall Street beasts, ''hedge funds.'' When General Motors was downgraded to junk-bond status, it was not G.M.'s fate that seemed to preoccupy traders and journalists as much as the fact that some of these funds had suffered possibly dire losses. Why some private-investment partnerships (which is what hedge funds are) should be cause for general alarm has to do with their pervasive character. They are said to be everywhere -- determining the outcome of shareholder battles, roiling the art market, causing a run on convertible bonds. Markets were less worrisome when they were simpler, when they confronted us with fewer choices; hedge funds seem an embodiment of complexity. Also, the last near market meltdown was occasioned by the implosion in 1998 of Long-Term Capital Management, a Greenwich, Conn., bond-trading firm that was, indeed, a hedge fund.

That is hardly reason to indict such funds for the next collapse. L.T.C.M.'s had more to do with its aggressive, leveraged portfolio than with anything intrinsic to its hedge-fund form. But it is human to look for a recurrence, and since Sept. 11, fear of things going drastically wrong has become a national instinct. The reason L.T.C.M. shook Wall Street was that many investment banks held the same positions that the fund did, setting the stage for chain-link losses. But most hedge funds today neither rise nor fall in synchrony. As my colleague Joseph Nocera observes in this issue, they invest in distinct asset types; they are the bits of the chain without the link.

People worry about hedge funds, I think, because of a Galbraithian prejudice that easy money is bad money. At a dinner in Palm Beach, Fla., in March, I casually inquired of one hedge-fund steward how much he controlled. Came the reply, ''Six and a half billion dollars.'' I whistled and replied that 1 percent of $6.5 billion would be a decent living. (Hedge-fund managers often charge 1 percent of assets plus a fifth of any profits.) He smiled and held up two fingers: 2 percent. Do the math; this gentleman's firm will earn, annually, $130 million a year for switching on the lights each morning -- $260 million if his fund attains a ho-hum return of 10 percent. No wonder that the London Business School boasts a ''Hedge Fund Center'' and, according to a recent graduate's informal survey, Harvard Business School sent 60 percent more of its graduates to hedge funds last year than to the much bigger mutual-fund industry.

But hedge funds are less an expression of risk-taking than of people's aversion to risk. Most funds deliberately try to hedge their bets (thus the name) by going both long and short -- that is, betting that one asset will rise while a related one falls. They are thus designed to be less volatile than ordinary stocks, which is why they are so fashionable. The risk isn't meltdown but mediocrity, a glimpse of which may be seen in the industry's recently lackluster returns.

Real estate, the runner-up to hedge funds in the anxiety sweepstakes, could be another matter. A recent Lehman Brothers report, ''The Changing Landscape of the Mortgage Market,'' observed that U.S. homeowners have been ''very willing to increase their leverage . . . through products like IO loans and MTA ARMs.'' This refers to interest-only mortgages, and to those in which the rate begins at an alluring, below-market level but after an interim floats according to the yield on Treasury bills. Who in his right mind would take an ''IO- MTA ARM''? Hmmm, come to think of it, I did.

Although my bank did not describe it this way, an adjustable-rate mortgage is a bet between the bank and the homeowner. If rates fall or remain stable, I win; if rates rise, I lose. Of course, if I lose, the bank might also lose. I might, heaven forbid, default.

Why would a bank finance a home that under a conventional mortgage the borrower could not afford? Some computer in its vault was evidently mollified by the variability of the rate. What makes this bet rather interesting is that millions of other people have the same kind of loan that I do. If rates should take a sudden upturn, it is conceivable that a good many will default, in which case an instrument (a floating-rate mortgage) conceived to help the bank manage interest-rate risk will have resulted in increasing the bank's losses.

The saving grace is that home loans generally are the last thing people default on. But imagine how scary it would be if, say, businesses extended floating-rate contracts to one another -- if virtually every company were dependent on making the right calculation about how these risk-avoidance vehicles would function.

Well, actually, they do. They are called derivatives. Derivatives are contracts that call for one party to pay another according to the movement of an underlying yardstick, like a foreign currency, a bond, a stock or even the weather. Since the 1980's, Wall Street has marketed derivatives as a tool for making risk more palatable, and Alan Greenspan has consistently praised them for enabling firms to spread, or ''manage,'' their risk. For instance, a bank can hedge against the risk that one of its loans will sour. It simply -- well, not so simply -- purchases a ''credit default swap,'' which entitles it to a payoff if a specified company, G.M. for instance, goes into default or suffers a material downgrade in its credit rating. The party on the other side might be a hedge fund that is more sanguine on G.M.'s bonds or has a way (it thinks) to hedge that risk. Every financial firm uses some varieties of derivatives, which, again, are contracts that call for a payment (one way or other) depending on some underlying asset. Their growth has been explosive. Credit-default swaps, for instance, didn't exist a decade ago; today there are $8 trillion of them. No one has any idea of the losses that could ensue from a panic; credit-default swaps ''have never been stress-tested,'' notes the analyst James Bianco.

Neither the Fed nor the S.E.C. has ever really clamped down on derivatives or insisted on a form of disclosure that would tell folks what is going on. So forget hedge funds; if you're searching for the next financial storm, try derivatives. (Nothing much you can do about them, either.) Come to think of it, most of the sudden financial disasters of the previous decade -- Orange County, L.T.C.M., Enron -- involved derivatives, too.

There is a paradox here. A vehicle developed to help reduce individual risk has heightened risk to the system. At some point, the anxiety turned counterproductive. There was a time, of course, when people could buy only the homes they could afford and invested in only a few, carefully chosen stocks -- when traders could not run certain risks because no derivatives existed to provide a hedge. Today, whether you are a trader or homeowner, bank or corporate treasurer, our financial culture offers a prophylactic against every conceivable worry. Maybe weaving a giant insurance net is really the way to manage anxiety, but maybe it has us worrying about what we will do if the insurance fails. Perhaps, if there were fewer traders dulling their anxieties with financial Zoloft (a drug for the treatment of depression and anxiety) and fewer investment options available to the rest of us, we would make better decisions -- and sleep more soundly.

How to destroy your brakes:
I paid $800 to replace the brake rotors which were rusted. My mechanic says IF you're not going to drive the car for week or so, take a garden hose and spray water into the wheels and their brake rotors. He says this will clean them of stuff that will rust them - chiefly SALT in the winter.

What every self-respecting geek wants: The Radius 320. Three screens in one. No seams. 4800 x 1200 pixels. Only $8450. But, oh so beautiful. Click here.

What every self-respecting geek wants -- Part II. This $80 keyboard has no labels.

Type up to 100% faster in a few weeks! For $80 you can buy a keyboard with nothing on it.

According to the maker, "Since there is no key to look at when typing, your brain will quickly adapt and memorize the key positions and you will find yourself typing a lot faster with more accuracy in no time. It is amazing how slow typers almost double their speed and quick typers become blazing fast!" The company's founder, Daniel Guermeur, told me it worked for him. He became much faster when he memorized all the keys, including the special characters. Click here.

Please tell me what they do: From an unsolicited email to me:

This month I will be joining an innovative company named ResultsPositive.

ResultsPositive is a multi-dimensional company specializing in optimizing leadership, workforce, and technology performance. The company has deep expertise in IT Governance, organization alignment, process optimization, development approaches, architecture, and technology implementation.

I don't make this stuff up:
TORONTO, July 27, 2004 ( - Sergio Mercado, of the Canadian Embassy in Mexico has issued a memo ordering all Canadian Immigration Officers to insist on seeing the full monty if a woman wants to come to Canada to work as a stripper. Canadians were informed by their immigration officials in June that there was a severe shortage of professional table and lap 'exotic' dancers which would be made up by inviting foreign professionals to come to Canada on special visas. Since then, hundreds of women, mostly from severely economically depressed former Soviet Bloc nations, have come to Canada. "Canadian girls don't want to pursue this occupation," Toronto lawyer Mendel Green said. "There is a major shortage of dancers at most clubs."

The rules are that a prospective stripper-immigrant must provide nude photos of herself doing her 'act' in a club to prove her bona fides. The Toronto Sun acquired the internal memo through access to information documents. It says, "Stage photos during performances are required." The photos must show the woman completely nude. "If they don't have pictures in the nude, they are not going to wiggle their bottoms in Canada." Says Mercado. The instructions, are intended to "curb abuse and exploitation of the young women."

Yet another pill for you know what:
An Iowa farmer needs a bull to service his cows but needs to borrow the money from the bank. The banker comes by a week later to see how his investment is doing.

The farmer complains that the bull just eats grass and won't even look at the cows. The banker suggests that a veterinarian have a look at the bull. The next week the banker returns to see if the vet helped

The farmer looks very pleased "The bull has serviced all my cows, broke through the fence, and has serviced all my neighbor's cows."

"Wow," says the banker, "what did the vet do to that bull?"

"Just gave him some pills," replied the farmer.

"What kind of pills?" asked the banker.

"I don't know," says the farmer, "but they sort of taste like peppermint."

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. That money will help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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