Harry Newton's In Search of The Perfect Investment
Technology Investor. Harry Newton
9:00 AM EST, Monday, March, March 2, 2009. Think
how you train children (or dogs). You reward the activity you want. As our
government writes checks to reward bad behavior by bad business
executives, you train them to expect more checks, and more checks. Today there
is talk Washington will give AIG another $30 billion. The government has already
given AIG $150 billion. And there is talk that the government, which has already
given Citigroup $50 billion, may be preparing to give it another $30 billion.
Then there's GM and Chrysler and a zillion other industries who are finding
it's easier to sell Washington than their erstwhile customers.
At some point,
you have to ask, are there not better solutions? As a measure of the present
failures, look at world stock markets. Little optimism there. This morning
in Europe and Asia, stocks plummeted, with finance and mining being hurt hard
as much as 5%. And there is talk we're looking at another awful week on Wall
I've been gloom
and doom on the stockmarket since November 2007 when I said, "Get out."
Now my BIG fear is another 20% to 30% drop in stockmarkets -- and the
extreme likelihood that a drop of this size could happen soon. Very soon.
The worse part
of this downdraft is that there are no safe havens for your money --
other than cash, or cash-equivalents like treasuries or insured bank accounts
like CDs. Gold is not a safe haven. It's driven by pure speculation -- the
same speculation that got oil to $147 last year (and then the ensuring bust).
Now there is talk that silver is a safe haven. When there's talk in the press
about "safe havens," you know it's too late. For now, I recommend:
None of us are
capable of playing these markets -- except for shorting financials (My only
recommendation). Look at the world's best investor, Warren Buffett. Berkshire
Hathaway's profits were down 96% in 2008. In his just released 2008
letter to shareholders, Buffett writes:
Despite the optimism,
Buffett doesn't expect an improvement any time soon. In the annual report he
writes, "The economy will be in shambles throughout 2009
and, for that matter, probably well beyond,"
on the preceding page, recording both the 44-year performance of Berkshires
book value and the S&P 500 index, shows that 2008 was the worst year
for each. The period was devastating as well for corporate and municipal
bonds, real estate and commodities. By yearend, investors of all stripes
were bloodied and confused, much as if they were small birds that had strayed
into a badminton game. As the year progressed, a series of life-threatening
problems within many of the world's great financial institutions was unveiled.
This led to a dysfunctional credit market that in important respects soon
turned non-functional. The watchword throughout the country became the creed
I saw on restaurant walls when I was young: "In God we trust;
all others pay cash."
By the fourth
quarter, the credit crisis, coupled with tumbling home and stock prices,
had produced a paralyzing fear that engulfed the country. A freefall in
business activity ensued, accelerating at a pace that I have never before
witnessed. The U.S. - and much of the world - became trapped in a vicious
negative-feedback cycle. Fear led to business contraction, and that in turn
led to even greater fear.
spiral has spurred our government to take massive action. In poker terms,
the Treasury and the Fed have gone "all in." Economic medicine
that was previously meted out by the cupful has recently been dispensed
by the barrel. These once-unthinkable dosages will almost certainly bring
on unwelcome aftereffects. Their precise nature is anyone's guess, though
one likely consequence is an onslaught of inflation. Moreover, major industries
have become dependent on Federal assistance, and they will be followed by
cities and states bearing mind-boggling requests. Weaning these entities
from the public teat will be a political challenge. They won't leave willingly.
downsides may be, strong and immediate action by government was essential
last year if the financial system was to avoid a total breakdown. Had that
occurred, the consequences for every area of our economy would have been
cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street
and the various Side Streets of America were all in the same boat.
bad news, however, never forget that our country has faced far worse travails
in the past. In the 20th Century alone, we dealt with two great wars (one
of which we initially appeared to be losing); a dozen or so panics and recessions;
virulent inflation that led to a 211/2% prime rate in 1980; and the Great
Depression of the 1930s, when unemployment ranged between 15% and 25% for
many years. America has had no shortage of challenges.
liquid. From the New Yorker.
read this book.
written. In the early 1990s, Galbraith added an introduction, which began:
Crash, 1929 was first published in 1955 and has been continuously in
print ever since, a matter now of forty years and more. Authors (and publishers)
being as they are, the tendency is to attribute this endurance to the excellence
of the work. Evidently this book has some merit, but for worse or perhaps
better, there is another reason for its durability. Each time it has been
about to pass from print and the bookstores, another speculative episode
-- another bubble or the ensuing misfortune -- has stirred interest in the
history of this, the great modern case of boom and collapse, which led to
an unforgiving depression.
One of the
subsequent episodes occurred, in fact, as the book was coming from the printer.
There was a small stock market boom in the spring of 1955. I was called
to Washington to testify at a Senate hearing on the past experience. During
my testimony that morning the stock market went suddenly south. I was blamed
for the collapse, especially by those who were long in the market. A fair
number of the latter wrote to threaten me with physical injury; a more devote
citizenry told me they were praying for my ill health or early demise. A
few days after my testimony I broke my leg while skiing in Vermont. The
papers carried mention. Letters came in telling me of prayers that had been
answered. I had at least done something for religion. ...
That was only
the beginning. The offshore-funds insanity of the seventies, the big bust
of 1987, less dramatic episodes or fears, all brought attention back to
1929 and kept the book in print. And so again now in 1997.
That we are
having a major speculative splurge as this is written is obvious to anyone
not captured by vacuous optimism. There is now far more money flowing into
the stockmarkets than there is intelligence to guide it. ...
I offer a
final word on this book. It was published in the spring of 1955 to an appreciative
audience. There a brief appearance on the best-seller lists. I looked with
pleasure at the bookstore windows. On my frequent visits to New York, I
was distressed to see no sign of it in a small bookshop on the ramp leading
down to the planes in the old La Guardia terminal. One night I stopped in
to inspect the shelves. The lady in charge finally noticed me and asked
me what I sought. Somewhat embarrassed, I passed over the name of the author
and said it was a work called The Great Crash. "Not a book you
could sell in an airport," she responded firmly.
+ John A. Thain
paid out $3.6 billion in bonuses two days before Merrill Lynch was acquired
by Bank of America -- and just weeks before it posted a staggering fourth
quarter loss of $15.3 billion. Bank of America bought Merrill for $50 billion
in stock. Today, the two companies combined are worth $25 billion.
+ Time Warner
charges $7.35 a month to rent its cable boxes, but only $1.75 a month for
a cable card which will pop into virtually all new flat screen TVs. That card
won't let you watch movies on demand -- but who cares, since Time Warner's
selection is so awful.
+ Apollo Management
bought Linens 'n Things for $1.3 billion in 2006. By May 2008, Linens 'n Things
was in Chapter 11 and Apollo had lost everything. The U.S. is seriously over-retailed.
+ Paul Greenwood,
the 61-year-old horse aficionado arrested recently for a $553 million investment
scam (probably another Ponzi scheme), spent much on the money on collectible
I don't make
this stuff up.
If you missed Friday's column about The Itch Factor,
please read it. Click here.
to the west for March
As is our practice, Susan and I have moved to La Quinta, California for March.
This way we escape this
La Quinta is
in the Coachella Valley, a desert made verdant by ample underground aquifers.
There are over 100 golf courses in the valley. Many of them actually look
like the photo above.
This is the La Quinta Resort on whose grounds we've rented a house (at a discount).
In recent years, the resort has been bought and sold by every private equity
fund in the land. Predictably, the latest owner paid too much and has sought
creative, if deserate, ways to enhance his return. His latest BIG idea was
to replace 17 of the 22 tennis courts with a water park featuring a gigantic
slippery slide for the kids. The hope was that zillions would flock here during
the 120 degree days in the summer and fill the empty hotel. Fortunately, the
recession dried up all the money and kiboshed the idea. And the hotel has
retreated to its old world charm. In the 1920s it attracted Hollywood stars.
These days it gets tennis players and convention attendees, though, I suspect,
not many of either this year.
A group of Americans were traveling by tour bus through Holland
. As they stopped at a cheese farm, a young guide led them through the process
of cheese making, explaining that goat's milk was used. She showed the group
a lovely hillside where many goats were grazing.
'Those,' she explained, 'are the older goats which are put out to pasture
because they no longer produce.'
She then asked, 'What do you do in America with your old goats?'
A spry old gentleman
answered, 'They send us on bus tours!'
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
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