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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, March 3, 2008: While we remain stuck with illiquid auction rate preferreds, there is a tinge of good news. First, our holdings are paying increasingly higher interest rates. Second, the plunge in muni bond prices is attracting new buyers who consider the present, much higher, muni bond yields to be enormously attractive. Muni bonds are now paying more than treasurys:

Third, municipalities -- finally -- are revolting against the iniquitous bond rating system which has allowed Wall Street to screw them out of millions of dollars of needless insurance. The New York Times has an excellent piece today called "States and Cities Start Rebelling on Bond Ratings."

Fourth, state treasurers, attorneys-general, governors, and other senior officials are focusing on the mess in municipals and auction rate preferreds (with our help). Ultimately, this will make the municipal market stronger and make liquidating the holdings behind our auction rate preferreds easier.

None of this should detract from our putting pressure on the issuers of our auction rate preferreds and the brokers who sold them to us. One interesting point: There is a rule on Wall Street that we were meant (under the law) to have been given a prospectus before being sold these things. Few of us were. For more on our six-part strategy, read Friday's column. If you're stuck in these things, please email me. Collective thinking works better.

From Warren Buffett's annual report:

Some major financial institutions have, however, experienced staggering problems because they engaged in the "weakened lending practices" I described in last year's letter. John Stumpf, CEO of Wells Fargo, aptly dissected the recent behavior of many lenders: "It is interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine."

You may recall a 2003 Silicon Valley bumper sticker that implored, "Please, God, Just One More Bubble." Unfortunately, this wish was promptly granted, as just about all Americans came to believe that house prices would forever rise. That conviction made a borrower's income and cash equity seem unimportant to lenders, who shoveled out money, confident that HPA - house price appreciation - would cure all problems. Today, our country is experiencing widespread pain because of that erroneous belief. As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been swimming naked when the tide goes out - and what we are witnessing at some of our largest financial institutions is an ugly sight.

Very sick cartoon. This cartoon has its charm. Check out the comment at the bottom right.

Investors pay too much to have their money managed. From The Economist, February 28:

LOOKING after other people's money is a fine business. The asset-management industry long ago managed to secure a deal whereby its fee income rose in line with the markets; it can earn ever more money by doing nothing. The industry oversees some $64 trillion of assets and, at a conservative estimate, its costs in fees, dealing charges, custody and so on are around 1.5-2% a year—so investors are shelling out $1 trillion a year to the custodians of their cash.

As our special report in this issue shows, the industry puts a big chunk of this straight into its back pocket. A survey by Boston Consulting Group found that operating margins of fund-management firms were more than 40%. People like Steve Schwarzman of Blackstone and Ken Griffin of Citadel have become billionaires thanks to the way their private-equity groups and hedge funds look after other people's money.

You would have thought such a business would be an easy target for new entrants; competition would reduce margins and force fees down. But, by and large, this has not happened. A cheap alternative to traditional fund management arose more than 30 years ago, in the form of index-trackers, portfolios that mimic a benchmark such as the S&P 500. Trackers have gained a respectable market share but are much more popular with astute pension funds and insurance companies than with the general public.

Even pension funds entrust money to index-trackers with one hand and to high-charging private-equity and hedge-fund managers with the other. They appear to believe both that markets are so efficient that it is hard for fund managers to beat them; and also that markets are so inefficient that it is still possible to beat them after paying hedge-fund managers 2% a year, plus a fifth of all positive returns.

This dichotomy stems from the conviction that some special fund managers have skill, or “alpha” in the jargon. The fund-management industry has exploited this by persuading investors to judge it on past performance, rather than price. And you can always find some managers that have outperformed; in a range of 20 funds, at least four or five will probably have beaten the market. The industry has been able to advertise those funds and keep quiet about the rest.

You can see why investors want more than an “average” return when they learn that some managers have made 20% a year. And the records of some of these managers may indeed be due to skill, rather than luck. The problem lies in the difficulty of spotting such skillful managers before they have beaten the market, not after—when their run is over.

Consumers have often been their own worst enemies. If they are to save at all, they typically take a lot of persuading. Marketing costs eat into investors' returns. Salesmen have to be paid, and their commission creates an incentive to push higher-charging funds. If consumers were only willing to look more carefully at these costs, they could save themselves a lot of money.

There is hope, however. A relatively new form of tracking vehicle, called exchange-traded funds (ETFs), has grown its assets even faster than hedge funds have this decade. Furthermore, as academics have studied the patterns of fund managers' returns, they have discovered that excess returns, which the managers attribute to their own skill, may well stem from things like a greater exposure to smaller stocks. You can design ETFs to mimic these factors cheaply. Even the returns of hedge funds can be copied.

Yet change will come slowly. It is hard for the average investor to see through the statistical fog; easy to be “fooled by randomness”, in the phrase of Nassim Nicholas Taleb, a writer and former trader. But small investors really ought to worry about cost. Figures from John Bogle, founder of the fund giant Vanguard, show that an S&P 500 index-fund returned 12.3% a year between 1980 and 2005, whereas the average mutual-fund investor, because of costs and poor timing, earned just 7.3%. That makes an enormous difference to wealth: $10,000 invested in the index fund grew to $170,800; a typical mutual-fund investor saw his money grow to just $48,200.

In a free market, regulators should not aim to control fees or even ban the advertising of past returns. But they should make sure that the full costs of fund management are clear. And when governments set up their own savings schemes—in pensions, say—they should make sure that costs are controlled. Let hedge-fund managers earn their yachts the hard way.

Today's great financial quote. It comes from a hedge fund manager who is (rightly) annoyed that such funds can't market their services on a normal website. He is suing the SEC.

“We want to be able to have a website like any other business. The only websites required to pre-qualify people are hedge funds and pornography . . . gun shops are allowed to advertise, the Massachusetts state lottery is allowed to have a website. We want to be treated like any other business.”

Unintended consequences in Iraq: From the comes an insightful piece called, "After Iraq." Two paragraphs are specially interesting.

As America approaches the fifth anniversary of the invasion of Iraq, the list of the war’s unintended consequences is without end (as opposed to the list of intended consequences, which is, so far, vanishingly brief). The list includes, notably, the likelihood that the Kurds will achieve their independence and that Iraq will go the way of Gaul and be divided into three parts—but it also includes much more than that. Across the Middle East, and into south-central Asia, the intrinsically artificial qualities of several states have been brought into focus by the omnivorous American response to the attacks of 9/11; it is not just Iraq and Afghanistan that appear to be incoherent amalgamations of disparate tribes and territories. The precariousness of such states as Lebanon and Pakistan, of course, predates the invasion of Iraq. But the wars against al-Qaeda, the Taliban, and especially Saddam Hussein have made the durability of the modern Middle East state system an open question in ways that it wasn’t a mere seven years ago. ...

All states are man-made. But some are more man-made than others. It was Winston Churchill (a bust of whom Bush keeps in the Oval Office) who, in the aftermath of World War I, roped together three provinces of the defeated and dissolved Ottoman Empire, adopted the name Iraq, and bequeathed it to a luckless branch of the Hashemite tribe of west Arabia. Churchill would eventually call the forced inclusion of the Kurds in Iraq one of his worst mistakes—but by then, there was nothing he could do about it.

A man applies for a job at the Post Office.
The interviewer asks him, 'Are you allergic to anything?' He says 'Yes - just caffeine'

'Have you ever been in the service?" 'Yes,' he says. 'I was in Iraq for two years.'

The interviewer says, 'That will give you five extra points toward employment,' and then asks, 'Are you disabled in any way?

The guy says, 'Yes IED exploded near me and blew my testicles off.'

The interviewer tells the guy, 'O.K. In that case, I can hire you right now. Normal hours are from 8 AM to 4 PM. You can start tomorrow at 10:00 - and plan on starting at 10 AM every day.'

The guy is puzzled and says, 'If the hours are from 8 AM to 4 PM, why don't you want me to be here before 10 AM?

'This is a government job,' the interviewer says. 'For the first two hours we just stand around drinking coffee and scratching our balls.

No point in you coming in for that.'

Amazing simple home remedies
1. If you are choking on an ice cube, pour a cup of boiling water down your throat. Bingo. The blockage will instantly remove itself.

2. Avoid cutting yourself when slicing vegetables by getting someone else to hold while you chop.

3. Avoid arguments with the Mrs. about lifting the toilet seat by using the sink.

4. For high blood pressure sufferers: simply cut yourself and bleed for a few minutes, thus reducing the pressure in your veins.

5. A mouse trap, placed on top of your alarm clock, will prevent you from rolling over and going back to sleep after you hit the snooze button.

6. If you have a bad cough, take a large dose of laxatives. You'll be afraid to cough.

7. You only need two tools in life - WD-40 and Duct Tape. If it doesn't move and should, use the WD-40. If it shouldn't move and does, use the duct tape.

Everyone seems normal until you get to know them.

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 on this site. Thus I cannot endorse, though some look 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 Michael's business school tuition. Read more about Google AdSense, click here and here.

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