Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST, Monday, March 26, 2007: You
can buy good companies and watch their shares rise in value. This is slow and
not always reliable. Sometimes things go awry and the shares fall. There are
better ways. One is to buy shares and then call your favored journalists up
and tell them what a great stock you've found. They'll write up your stock's
virtues. Bingo, the price will rise. And your purchase will look brilliant.
way is to be a broker. A big institution like a mutual fund asks you to buy
lots of shares in ABC Company. Before you buy the shares on behalf of your client,
you buy a few for yourself. As you place the large institution order, the stock
will rise. And everyone will make lots of money.
of this is illegal and immoral, but happens every day. Reporters need stories
of hot stocks. Institutions need to place orders for hot stocks. The investing
public -- i.e. you and I -- rarely hear about these stories. Fact is Wall Street
lives on short-term information and most hedge funds -- i.e. most of the trading
on Wall Street these days -- don't "buy and hold." They trade. They
buy and sell, hoping to make a few bucks today and sell quickly, before the
impetus (story writeup, big order placement, the great "news", etc.
) fades. As a result, what successful hedge funds are buying and selling becomes
"hot" information. Since most clients don't trust Wall Street research,
brokers are more likely to use as their sales pitch "So and So hedge fund
is buying XYZ Corporation" instead of "Our research department thinks
it's a great stock." In today's upside down world what a hot fund is doing
has much more credibility, i.e. it will sell some shares and generate a commission.
I going on this
article as a result of a bunch of weekend events. First, I receive this email
written by the SVP, Head of Global Securities Research & Economics at Merrill
Lynch, Candace Browning:
March 22, 2007
Not long ago,
something very disturbing happened to me while I was sitting at my desk listening
to our morning call. That morning, we featured a contrarian upgrade of a major
U.S. company's common stock which went on to generate over a 40 percent return
for our clients. What happened was that within 60 seconds of releasing our
opinion change, this same information we had just sent out on our private
platforms was being replicated with plagiaristic precision by a New Jersey-based
digital financial news source. This is a website that purports to provide
its paying customers with research it compares to "having a seat at Wall
Street's best houses and learning what they know when they know it."
The heart and
soul of what sell-side analysts do is to provide well-grounded investment
ideas to individual and institutional clients to support them in making timely
and (we hope) profitable investment decisions. But that day I realized that,
much like the music and film industries before us, Merrill Lynch Research
is in the throes of being Napsterized. I also realized that like every other
content provider from the Walt Disney Company to obscure news outlets Merrill
Lynch Research needed to regain control of our distribution channels in order
to preserve and protect our hard-earned intellectual capital for you.
this month, we have begun to take a number of aggressive steps to ensure that
we can continue to provide premium products and services for the exclusive
use of our clients. We are rolling out a digital distribution strategy that
1) terminates research access to non-clients on our proprietary site and external
vendor platforms; 2) further restricts and delays media access to selected
content; 3) eliminates existing licensing arrangements that erode the value
of our written product and 4) establishes licensing agreements at market prices
competitive with services offered by other providers.
For a number
of years, I have been listening with mounting frustration to a never-ending
litany of statements that erroneously predict the demise of sell-side research,
labeling it as virtually without value in the digital era. Certainly the ease
and speed with which the fruits of our efforts can be posted on the web for
the world to review has pointed yet another arrow at the chests of sell-side
research organizations. Yet, when I listen to these predictions, I feel like
Tom Sawyer covertly present at his own funeral: perversely proud to be there
while basking in an inviolable certainty that sell-side research is alive
is not only surviving but thriving in today's global marketplace, because
it plays a critical role in ensuring that corporate, fixed income and other
securities are priced as fairly as possible in the primary and secondary markets,
thereby delivering one of the most important functional elements of a market
economy: efficient capital allocation. Sell-side research turns information
into insight both in the form of investor education and specific recommended
investment ideas. Merrill Lynch currently employs 750 analysts who follow
more than 3,000 stocks and other securities for institutional and individual
clients. The educational value and investment recommendations produced by
those analysts is not only broad, it is exceedingly valuable: Last year, our
recommendations produced a total global return (calculated in local currency)
of 19.5% versus the MSCI's 16.2%.
clients grasp the value of sell-side research. According to a recent poll
of more than 2,000 institutional clients by Greenwich Associates, U.S. respondents
reported that they effectively allocated nearly half (42%) of their total
commission spend on high-quality sell-side ideas. And, the much-bandied-about
notion that hedge funds value research less than other money management firms
is further contradicted by the same poll's finding that U.S. hedge funds allocate
55% of their commissions for research, as opposed to 33% at mutual funds.
There is little
doubt that sell-side research continues to be highly valued by those in the
know, yet at the same time it is incumbent upon us to nimbly adjust to the
ever-shifting exigencies of the digital era. By continuing to deliver alpha
and eliminating access to research by non-clients, we can and will regain
the recognition that the sell-side research profession deserves, and we will
also better serve you.
Then I send it
to a bunch of friends who work managing money. One replies:
I got this
too. I noticed how they failed to mention that they make much of their money
taking advantage of the trading flows of its large institutional clients...
I like how she makes the Merrill Lynch equity research department (home of
Henry Blodget) out to be the greatest victims of all time.
I asked how this
happens? The reply:
They get a big
buy order from us. They tell their hedge fund clients (including their own
prop desk) that we're buying. They put those orders ahead of ours and everyone
(but we and our shareholders) profits as the stock goes up with our buy.
This isn't a ML-specific thing, but generally understood to happen across
I replied and
asked: "Isnt this called front-running? Isnt it illegal?"
And the answer?:
Yes and yes.
It's hard to prove, but it definitely happens.
I pick up the Sunday New York Times. There's a headline, "James
Cramer as Emily Litella." For those of you who don't who Emily Litella
is, let me quote from Wikipedia:
Litella" was a fictional character played by comedian Gilda Radner in
a series of appearances on Saturday Night Live.
Emily Litella was an elderly woman with a hearing problem seen on the op-ed
Weekend Update segment in the late 1970s. Frumpily attired in a dress and
a sweater, "Miss Emily Litella" was introduced with professional
dignity by the news anchors, who could sometimes be seen cringing slightly
in anticipation of the faux pas which they knew would follow as their "guest"
launched into tirades on various topics.
peered through her bifocals and read a prepared letter addressing some public
issue, becoming increasingly agitated as her statement progressed, only to
discover in the middle of her report that she had misheard what the issue
was. A typical example:
is all this fuss I hear about the Supreme Court decision on a "deaf"
penalty? It's terrible! Deaf people have enough problems as it is!"
When the on-air
reporter interrupted to point out her error (death vs. deaf), she would crinkle
her nose, usually say, "Oh, that's quite different...", and then
humbly say to the audience, "Never mind." ...
topics included Saving Soviet Jewelry ("Jewry"), Endangered Feces,
Flea Erections, Making Puerto Rico a Steak ("..next thing you know, they'll
also want a baked potato with sour cream!"), Presidential Erections,
Pouring Money into Canker Research, the Eagle Rights Amendment, Busting School
Children (bussing school children), Conserving our Natural Racehorses, Youth
in Asia (Euthanasia), and Sax and Violins on Television.
NY Times' article reported on how Cramer fed information to a "bozo
reporter" on a stock he wanted pushed up or down. Of course, Cramer denied
all. But I distinctly remember him discussing this technique in one of his early
books. I got the impression talking to bozo reporters was a critical part of
his success as a hedge manager.
I'm sure none of
this surprises anyone reading this column. It's good to be reminded how Wall Street
"works." Caveat emptor.
March 25, 2007
James Cramer as Emily Litella
James J. Cramer,
CNBCs televangelist of trading with his manic Mad Money
show, now says that those sins he was confessing were not his own.
In a video interview
taped in December for TheStreet.com that quickly turned into a big hit on
YouTube last week before TheStreet.com had it removed, Mr. Cramer laid out
in bombastic detail how to really make mad money on Wall Street. He would
foment, he said, to push a stock up or down. If he wanted a stocks
price to fall, he recommended spreading negative information about the company
to a bozo reporter at The Wall Street Journal. Bob Pisani, a CNBC
reporter, is another useful conduit of damaging rumors, he said. No
one else in the world would ever admit it, he said of the various methods,
but I dont care.
But on Thursday
morning, he was worried. Mr. Cramer appeared on the Imus in the Morning
radio show to say that he had misspoken. He said that he did not do any of
those things when he ran a hedge fund, nor did he even believe what he had
When Don Imus,
the shows host, asked him, Whos the bozo at The Wall Street
Journal? Mr. Cramer dodged the question. He also said he had apologized
to Mr. Pisani, whom he called one of the best. Mr. Cramer added,
I screwed up in saying that stuff about him.
happens when your broadband line screws up?: Every weekday morning
at about 8, the DSL line at my country house slows down to a crawl and eventually
seizes. When I report the problem, my phone company says they'll "speed
up my line," which accomplishes nothing. The problem is not my DSL line.
It's their connection to the Internet. They don't have enough capacity. Getting
this message through can take months. The higher you escalate your complaints
and problem diagnostics the better.
Sadly, you can't complain to any government agency -- like the local Public
Service Commission -- because the telephone industry has conveniently organized
broadband service to be non-regulated. I've been complaining up the chain for
many months. Last Friday I learned that my local phone company had actually
listened to me and had placed an order for an OC-3 line back in December. But
Qwest had screwed the order up. It hadn't been able to deliver the equipment
necessary to hook up the 155.5 million bit per second OC-3 line. And Verizon,
which was delivering the line from our phone company to the Internet, had canceled
its order. In short, total mess.
only lesson: Stay on top. Keep complaining. In the bureaucratic, slow-moving
telephony world, the squeak wheel gets the most attention.
future of books: I just sent the 23rd edition
of Newton's Telecom Dictionary to the printer. Am I wasting my time making "dead-tree"
editions? Should I sell the book electronically? But how? The world of books
is changing. If you're interested in books, this piece from the Economist is
The future of
bound by anything
Now that books are being digitized, how will people read?
IN SECRET locations
and using secret methods, human beings are scanning lots and lots of books
for Google, the world's largest web-search company. That humans are involved
is beyond doubt (fingers are visible in the corners of many pages on books.google.com)
although this is uncharacteristic of Google, which has a fetish for purist
not divulge exact numbers, but Daniel Clancy, the project's lead engineer,
gives enough guidance for an educated guess: Google's contract with one university
library, Berkeley's, stipulates that it must digitize 3,000 books a day. The
minimum for the other 12 universities involved may be lower, but the rate
for participating publishers is higher. So a conservative estimate has Google
digitizing at least 10m books a year. The total number of titles in existence
is estimated to be about 65m.
not the only project of its kind. The Internet Archive, for instance, is a
non-profit organization founded in 1996 by Brewster Kahle, a San Francisco
idealist who wants to re-create a modern Library of Alexandria containing
all public-domain texts and videos. Amazon has been scanning books, as have
Microsoft and Yahoo!, Google's biggest rivals in web-search, and individual
libraries around the world. Eager not to be left out, publishers are also
doing the same. But Google's effort, in scale and ambition, is off the charts.
As books go
digital, new questions, both philosophical and commercial, arise. How, physically,
will people read books in future? Will technology unbind books,
as it has unbundled other media, such as music albums? Will reading habits
change as a result? What happens when books are interlinked? And what is a
Change is least
likely in the physical medium of books. Electronic books do exist; the best-known
is the Sony Reader, a book-sized gadget made by the eponymous consumer-electronics
company. Sony currently makes 12,000 books available online for download,
but our mission is not to replace the print book, says Ron Hawkins,
the Sony Reader's marketing boss.
There is an
obvious analogy between what Apple's iPods have done to CD players and what
electronic books may do to the printed page, but the shift is unlikely to
be quite so comprehensive. The simplest difference is that transferring one's
old music CDs onto iPods is easy, whereas transferring one's old books onto
an e-book is impossible.
So who is going
to read the millions of pages that Google and its colleagues are so busy digitising?
Some people will read them on-screen, some will use Google as a taster for
books they will then buy in paper form or borrow from a library, and still
more will use it to look for specific snippets that interest them.
changes are likely to be seen in what becomes a book in the first place. Here
the internet may indeed be to some book genres what Apple has been to music
or what YouTube (now part of Google) has been to video. Among younger listeners
albums are dead. They have been replaced by playlists of individual songs
designed to be shared with friends.
In books this
has already happened for encyclopedias. Wikipedia, which is free, collaborative
and online, has eaten into sales of paper-bound alternatives. So books that
people would not traditionally read in their entirety, or that require frequent
updating, are likely to migrate online and perhaps to cease being books at
all. Telephone directories and dictionaries, and probably cookbooks and textbooks,
will all fall into this category.
the situation is more nuanced. Many non-fiction books express an intellectual
idea. Traditionally, the only way to deliver such an idea profitably involved
binding it into a 300-page book, says Seth Godin, a blogger and author of
eight books on marketing. If you had a 50-page idea, you couldn't make
any money from it, he says, so a lot of non-fiction books end up on
shelves with 250 unread pages. Freedom from such rigidities may save a lot
of authorial time.
books will also benefit from another change that comes with digitization.
Like web pages, digitized books can have incoming and outgoing hyperlinks.
On books.google.com at the moment, links are only to entire books. But in
future, says Google's Mr. Clancy, links will point to and from specific phrases
or words inside books. Footnotes, citations and bibliographies are obvious
points for live links.
This has several
benefits. It will help scholarly research, since it makes primary sources
much more accessible. And it will reduce the slog of academic book-wormingjotting
down the location of a book, trudging through the library, pulling it off
the shelf, queuing for the photocopierto the negligible effort of clicking
Such links will
also make books much easier to discover, by helping search engines. As link
structures develop around books, search algorithms can count incoming links
as votes, giving more weight to incoming links from much-cited
places and less to obscure ones. The (offline) citation culture of academic
literature already works this way. This, in fact, is what gave Larry Page,
one of Google's co-founders, the original idea for his search algorithm, which
he cheekily called PageRank.
What about all
the genres of books that fill a different human need? Certainly, some types
of fictionnovels as well as novellasare also likely to migrate
online and to cease being books. Many fantasy fans, for example, have already
put aside books and logged on to virtual worlds such as World
of Warcraft, in which muscular heroes and heroines get together to slay
dragons and such like. Science fiction may go the same way, and is arguably
already being created by residents of online worlds such as Second
however, will never find a better medium than the paper-bound novel. That
is because readers immersed in a storyline want above all not to be interrupted,
and all online media teem with distractions (even a hyperlink is an interruption).
People do not read fiction in order to accomplish a specific task in a limited
amount of time, as they read reference and schoolbooks. Random-access dictionaries
and cookbooks may be useful; random-access novels less so.
What about short
stories and poems? Being short, they fit the new media, so some may do well
online and need not be bound in paper. Commuters could receive their daily
haiku or sonnet on their mobile phones while taking the bus to work. They
might also use the new media to enjoy poetry in a more traditional way. Storytelling
started as oral history, says Adam Smith, the boss of Google's book
project, so a partial reversion to that form, through podcasting, would be
But even anthologies
of short stories and poems, like longer novels, are unlikely to disappear.
People want to be guided by others. They also want media suitable for unhurried
reading in beds and bathtubs and on beaches. Above all, they want paper books
for what digitization is revealing them to be. Books are not primarily artifacts,
nor necessarily vehicles for ideas. Rather, as Mr. Godin puts it, they are
souvenirs of the way we felt when we read something. That is something
that people are likely to go on buying.
nice to Osama bin Laden
Little Melissa comes home from first grade and tells her father that
they learned about the history of Valentine's Day.
"Since Valentine's Day is for a Christian Saint and we're Jewish,"
she asks, "will God get mad at me for giving someone a valentine?
thinks a bit, then says "No, I don't think God would get mad. Who do you
want to give a valentine to?"
Laden," she says.
Bin Laden?" her father asks in shock.
she says, "I thought if a little American Jewish girl could have enough
love to give Osama a valentine, he might start to think that maybe we're not
all bad, and maybe start loving us Americans a little bit. And if other kids
saw what I did and sent valentines to Osama, he'd love everyone a lot. And then
he'd start going all over the place to tell everyone how much he loved them
and how he didn't hate anyone anymore."
Her father's heart
swells and he looks at his daughter with newfound pride. "Melissa, that's
the most wonderful thing I've ever heard."
Melissa says, "and once that gets him out in the open, the Marines could
come in and blow the shit out of him."
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.