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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, Thursday, March 1, 2007: Stocks rebounded a little. That means little, except that the world is not coming to an end -- at least this week. The reality is that stocks have had a nice run and the the U.S. economy is slowing. That doesn't mean you should dump all your stocks. But now is an excellent time to assess everything you own, one by one.

1. Sell those whose future looks "iffy" -- those who have missed earnings, had strange problems (like re-stating financials).

2. Sell those which are way overpriced. Use simple measures, like price-earnings ratio. Compare them to others in the industry.

3. Sell those who've have a great run. Take a little off the table and play with the bank's money.

4. Concentrate on those you feel really positive about, and apparently others do, also.

Remind yourself that very very few people got rich by picking stocks. Most who are in that business got rich on the fees from managing other peoples' money. Most people (including myself and Cramer) got rich by running their own business. That's something we had control over. "Control" is the operative word.

Without it, you're into guessing -- also called predicting. No one has ever been consistently right predicting anything. Accuracy in predicting is often replaced by obfuscation, especially when a deadline looms. My favorite obfuscation bounced into my inbox this morning. It came from Citigroup Research. Here are the delicious words. Don't try and understand them. Just marvel at the creativity of the obfuscation:

Market Meltdown or Mountains Out of Molehills?

+ A severe market sell-off driven by a confluence of factors generated a newfound fear that has overwhelmed prior skepticism.

+ Various indicators suggest that things should calm down in the future - such as the VIX, the ARMS index near record levels, a plunge in bullishness readings, and a rise in put/call ratios.

+ Declines of greater than 3% in a day have generated an impressive record of subsequent market recovery - with a near 80% investment success rate within three months.

+ Our Cyclical Expectations Model (CEM) also slid last week; the CEM has often been a reasonable indicator of near-term market direction. Thus, trading fragility was in place but likely needed an "event" to push markets over the edge. In this context, China seems to have been the excuse, not really the cause.

There's more. But I won't bore you. The key lesson is not to try and predict "The Market" -- but to take "bets" on things you feel 100% comfortable with, and hopefully, can control. This is one reason Wall Street is sticking so much money into private equity funds. You buy the company; you control it. The CEO doesn't perform; you can him. You dont sit helpless, and watch disaster unfold.

So who benefited? Today's Wall Street Journal had a piece "As As Market Fell, Some Big Names Won Their Bets." Of course, the Journal has no real idea who were the big winners and losers of the last few days. But it had to write the story. Space to fill and all that. (I'm no different.) As you admire John Meriwether's brilliance, keep reading to the part showing what he made last year -- about what I'm earning with my bank's CDs.

Market routs always leave plenty of victims behind. A savvy -- or lucky -- few can come out ahead amid the chaos, though.

Winners from Tuesday's market plunge included one of the more renowned traders in recent Wall Street history: John Meriwether. Mr. Meriwether formerly ran Long Term Capital Management, the hedge fund whose collapse in 1998 nearly triggered a global financial crisis. He now runs a $2.6 billion fund, JWM Partners, which was up after markets closed Tuesday and has generated positive returns for February, according to investors.

The 59-year-old Mr. Meriwether, who was traveling and unavailable for comment, benefited from bullish bets on the yen and Japanese equities and U.S. Treasury bonds, according to people familiar with his results.

Another winner was Deutsche Bank's Greg Lippmann, who in recent months has made paper profits for the bank of roughly $250 million betting against an index of subprime-mortgage loans, which plunged more than 7% Tuesday before rebounding a bit yesterday. Mr. Lippmann, Deutsche's asset-backed securities trading chief, has urged his firm's clients to bet against the value of mortgage bonds underpinned by subprime loans, as those made to borrowers with weak credit are known. According to attendees at a September dinner, he boasted, "This trade will work."

Mr. Lippmann declined to comment yesterday.

The ability of Messrs. Meriwether and Lippmann to stay afloat while the market was sinking illustrates how some of the most sophisticated players have learned to take advantage of heightened risk levels in the financial system these days. To be sure, some of the gains and losses so far exist only on paper, and whether they will actually materialize in the real world -- especially for trades that aren't easy to unwind -- is an open question.

Meanwhile, a number of small investors making more-mundane stock-market bets were left holding the bag. Hit especially hard were individuals stampeding into mutual funds in January, especially stock funds that invest overseas.

Joseph Clark, a 42-year-old day trader in Buffalo, N.Y., initially steered clear of stocks most of Tuesday because he didn't see any good opportunities for a quick profit. After spending most of the day painting his son's room, he checked his eight Dell Computer monitors and decided to buy. At 2:58 p.m., he bought 1,000 shares of Allegheny Technologies for about $98 a share. With some other trades, he plunked down about $150,000 of his $700,000 portfolio.

He lost $1,200 within a few seconds, as the Dow industrials suddenly plunged about 300 points due to a glitch in computing the index. "Before I could blink, the stock had sunk to $96, so I started selling at a loss," he says. "It went to hell in a handbasket. It was disgusting."

And some hedge funds -- private partnerships that cater to wealthy investors and large institutions -- that focused largely on stocks were pinched as well. Many individuals and hedge funds have been using heightened levels of borrowed money to amplify returns, and that left them exposed on bad bets when stocks dived.

"In U.S. equities and volatility the damage was much sharper and faster, with the bulk of the move we saw in May last year delivered in a single day," noted Goldman Sachs Group economists Dominic Wilson and David Heacock.

Yesterday, stock prices rebounded a bit from Tuesday's 416-point decline, with the Dow Jones Industrial Average rising 52.39 points to 12268.63. But the recent action highlights how some of the market's heavyweights have profited from the sudden pullback in various markets world-wide that have been marked by excesses. Financial markets for some time have been awash in cash, leading to huge amounts of cheap financing. And market players have benefited from buying riskier securities around the world and letting them ride. The question is whether Tuesday's plunge could begin to change that scenario.

Mr. Meriwether's macro fund -- which like other macro funds has a no-limits investment strategy that can make for volatile performance -- profited from having bought Japanese yen, which rose Tuesday as investors sought the currency to unwind so-called carry trades. In these transactions, investors buy a currency whose central bank pays low interest -- in this case, Japan's yen -- to invest the money in places with higher yields.

In addition, JWM held lots of U.S. Treasury bonds, whose reputation as one of the safest places to park money drew buyers fleeing riskier assets Tuesday. The firm had also bet against riskier issues of corporate bonds.

Compared with other hedge funds pursuing the same strategies, Mr. Meriwether has done well. Last year, his macro fund generated returns of 7.5%, down from 25% in 2005. The Macro Index compiled by Hedge Fund Research Inc. of Chicago was up 5.61% in 2006 and 6.67% in 2005.

Meanwhile, Deutsche Bank's Mr. Lippmann, 38, promoted his winning bet at a September dinner with several dozen top hedge-fund clients in a private dining room at the Palm restaurant in New York. At the gathering, Mr. Lippmann strongly argued that the value of mortgage bonds underpinned by loans to borrowers with weak credit would begin to fall. Some in the room had already lost money trying to predict a softening in the housing market, and they were skeptical that Mr. Lippmann's timing was right, attendees say.

On Tuesday, Mr. Lippmann's bet became even more profitable when the ABX index, which reflects the value of such risky mortgages, fell 7.4% on top of a 30% decline since the beginning of the year. Yesterday, the ABX index rebounded, rising roughly 3%.

The ABX index tracks how much it costs to insure a group of BBB-minus-rated bonds based on subprime mortgages. The index is a derivative that falls in value when the cost of insurance rises, so it is seen as a proxy for the value of the underlying bonds. The position Mr. Lippmann was promoting involved betting that the cost of insuring such bonds would rise, causing the index to fall in value.

The same bearish bet championed by Mr. Lippmann at Deutsche was widely popular among hedge funds, analysts say. "The [ABX] market appears to have been in control of [bearish investors] for some time now," says Peter DiMartino, an asset-backed securities strategist at RBS Greenwich Capital in Connecticut. "Folks who historically would have [made bullish bets on the index] have been hesitant to step in, which has made it an even more illiquid market."

Of course, Mr. Lippmann and hedge funds could lose big if the index rebounds strongly, given how the illiquidity makes it difficult to buy and sell in this burgeoning market. Says Loren Katzovitz of fund firm Guggenheim Advisors: "I've spoken to over 40 hedge-fund managers in my world, and the trade is in the billions."

For more than a year, hedge-fund manager Evan Claar's caution weighed on his portfolio. Mr. Claar, who runs New York hedge fund Crossway Partners, keeps about one-third of the firm's money in short positions -- or bets that stock prices will fall -- and another third in restructurings and other investments that tend to be uncorrelated to the market. His fund gained almost 18% last year, but could have done even better with fewer short positions.

On Tuesday, the strategy paid off, though. As the market tumbled, Mr. Claar's positions rose in value, helping the fund maintain its gains for the year. Yesterday, Mr. Claar did a bit more selling, he says.

"Last year, our short positions were painful" because the shares he held kept going up, he says. But on Tuesday, "we were vindicated for maintaining our short exposure, and it shows how important it is to always stay hedged."

Mr. Claar says technology stocks remain overvalued, citing excess inventories, and he has worries about the subprime-mortgage sector. But he is more bullish on the overall U.S economy.

Mr. Clark, the Buffalo day trader, managed to recover half his losses before the markets closed Tuesday. And amid yesterday's rebound, he managed to generate gains of $700 trading a tiny technology stock. But the week's action has left him shaken. "It doesn't inspire confidence," he says. "I can control my own trading plan -- but I can't control what the market does."

One overaching lesson: As you read the Journal's piece, you ask yourself "Why didn't I short the index of subprime lending? After all, Harry's written about the problems in subprime." Fact is Harry (and most other semi-intelligent people) didn't know such an index existed. Which brings us to a point Harry (i.e. me) has written about: Expand your investment horizons. Search for new vehicles. Yesterday I received a pitch to invest in a new fund. These are some of the things it will focus on. I wish I knew what they all meant.

Debt to Equity swaps
Restructuring existing debt that has violated covenants
Buying distressed businesses
Capital-structure arbitrage
Structured equity investments
Litigation-related investments
Catalyst-based short positions
Turnaround investments through distressed-debt or equity stakes
Activist equity investments

Now for your treat of the day: InfoWorld Magazine covers the computer industry. It has a column called "Off the record. Anonymous tales from the front lines." It ran the following piece in February. Take out the Kleenex. This is hysterical.

Upgrade disasters made easy
We've got a huge number of upgrades to do, so let's do them all at the same time!

By Anonymous

I’m the technical administrator at a large medical group in Canada. Among other things, I’m responsible for the LAN, the WAN, all the desktops, laptops, peripherals, and a medical-records application that’s at the core of our group’s operations. Over the last couple of years, we’ve been struggling to make that app perform more reliably. At the same time, our infrastructure has been growing fast, and sluggish performance from our overloaded servers had become a problem.

We developed quite a wish list:

* A two-generation upgrade of the medical records application — an app that’s critical to the health and well-being of our patients;
* A two-generation upgrade of our revenue-critical Practice Management application;
* Moving our datacenter from an overcrowded, in-house facility to a third-party hosted center;
* Installing bigger, faster servers for in-house use;
* Upgrading our connectivity software from RDC/Terminal Server to Citrix ICA;
* Deploying server virtualization and SAN (storage area network) technology;
* Upgrading Windows Server, SQL Server, and triCerat (software that supports printing across the WAN);
* Buying new scanning software to interface with the upgraded medical records app.

OK, there were issues. Our CIO had no experience with Citrix ICA … or server virtualization … or SANs. But we figured if we moved through this process one step at a time, everything would be fine.

Then, in the infinite wisdom of the powers on high, our CIO got approval to make all these changes simultaneously, during a one-week roll-out! I warned the CIO that the proverbial snowball in hell would have a better chance of success than this ill-advised rush to disaster. But he assured me that his staff would be able to handle any problems.

The roll-out started on Friday evening. By Saturday morning we were crippled. The only functional apps were an old Exchange server and the staff time-clock software running on the old server. The CIO and his staff of help-desk technicians had reserved Sunday for testing. But nothing was working, and the level of chaos was so intense nobody knew what to test first.

Any first-term computer science student would have known that a more incremental, staged transition would have had a better chance of success. For much of the week the transition team threw money at Microsoft, Citrix, our medical-records application vendor, an IT consulting group, and the new datacenter hosting company, trying to isolate, identify, and repair the vast number of issues that had arisen. The CIO spent the week hiding from a small army of inside staffers and outside consultants, all of whom were waiting in line to call him bad names.

By 5 p.m. Thursday things were beginning to work, and by mid-day Friday I was reasonably confident that we were able to care for our patients. I had been worried that a patient might die because of the deranged state of our systems. But we got lucky, and no one suffered physical harm. On the other hand, my best guess is that during the course of this week we spent roughly twice the half-million dollars that had been allocated for the upgrade.

To my surprise, the CIO hasn’t been fired. Maybe that’s because HR (Human Resources) can’t find his records.

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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