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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 Friday, May 12, 2006: How do you invest in something "hot" you don't understand? The easiest answer is you don't. There are too many "gotchas" -- bad things that come out of left field that you can't predict because you don't know the business. But... if it still smells boiling hot, the key due diligence is to check who are the people behind it? There are two aspects:

1. Are they honest?
2. Are they competent?

Sadly, you'll never know the answer to either. You can ask lots of questions. You should. You can do background checks on them -- you should. That'll tell you if they've had legal problems -- with the authorities, earlier investors, partners, etc. But most cases are settled "on the courthouse's doorsteps" and the details never recorded officially. So, you'll never find out.

The stats are against success, against your ever making money. Most people make bad entrepreneurs. Most businesses fail. In the end, it's a judgment call. You go with your gut. And get your rights in writing and your shares listed so you can bail, wipe your hands, stop agonizing and move on.

After yesterday, several readers said watch out for movies. Sample:

I wanted to share my independent movie experience with you before you invest. A friend of mine is a movie professor at a college here in North Carolina and filmed a full length feature film two summers ago. All in all, he spent/raised about $500k on the movie. The movie turned out great. It won several awards and everyone who sees it really enjoys it. The one problem he has found when he was shopping the movie to distributors was the lack of a recognizable star. The stars of this movie had been guest stars on several (6 or 7) TV shows and had done a lot of commercials and other things, but they were not 'known" enough in the industry to help it get a foot in the door. Many of the bigger/major film festivals passed on the film because it didn't have anyone in it. Of course, now its going to go to DVD and it should make a very small amount of money, but it's good enough to have made a lot more. So, when you read the script, make sure you follow up on who is going to be cast. Of course, if the director is the known commodity then that would probably work also.

One reader invested $25,000 in a movie in 1970 ("at a time when $25k was meaningful to me"). The movie opened in a New York theater at 1:00 PM on a Friday and closed forever that night. It was a movie about police brutality at the 1968 Democratic Convention. I asked him, "Doesn’t seem like your kind of movie. You must have been pretty stupid in 1970?"

His woeful response: "Stupid, naïve, inexperienced, whatever. Not much progress (since), either." Not true. Now he says "No" more often and tends to like hard asset investments -- like buildings that pay regular cash returns from boring things like rent.

Great news for us investors: The Senate on Wednesday passed a $70 billion package of tax cuts that will extend the lower 15% tax rate on on capital gains and dividends from the end of 2008 through 2010. It also would exempt about 15 million taxpayers from paying higher taxes under the AMT by raising exemptions to $62,550 from $58,000 for couples, and to $42,500 from $40,250 for single filers. The bill now goes to President Bush who has pledged to sign it.

Despite oil over $70 a barrel, the economy is barreling along nicely. There are more myths, stories and nonsenses about what "the real" story is with oil and its affects on us. This piece comes from the June issue of Atlantic Monthly. It's by Clive Crook, a senior editor. It's very balanced and makes sense, at least to me:

For America, energy security lies closer than you might think

It should be reassuring that the “energy crisis” one often reads about is always “looming.” In recent months the price of oil has been persistently higher than $50 a barrel. Just a few years ago, when it fell to less than $10, a price that high would have seemed both improbable and quite scary. It would have evoked memories of the oil shocks of the 1970s and the ruinous economic dislocation that followed. But in 2006, preoccupied as the country may be with its oil addiction and energy security, we still aren’t in a crisis, apparently. The crisis is only looming.

Looking at the performance of the economy, you could be forgiven for failing to notice the price of oil altogether. Growth is strong; unemployment is low; inflation is under control. Energy shocks do not look like this. Oil at $50, $60, $70 a barrel? People resent the price of gas at the pumps, yes. But the economy seems to glide on, impervious.

Of course, high oil prices have acted as a brake on an otherwise strong economy—but only a modest brake. The biggest reason is that the economy uses energy, and especially oil, much less intensively than it did before. Since 1970 the country’s economy has grown by roughly 200 percent; its consumption of oil has risen by just 40 percent. The economy still needs oil to function. And in absolute terms, it needs more than before. But it needs far less in relation to output; that is, oil is a smaller component in the goods and services that America produces than it used to be. This makes a huge difference. Why? Because any given rise in oil’s price becomes easier for the country to absorb.

That is the real meaning of “energy security.” Contrary to what many politicians appear to believe, energy security does not reside in a low and stable price of oil. Oil prices have always fluctuated wildly and probably always will; the structure of the industry makes price stability an unrealistic goal. Security lies in the improving ability of the economy to take widely fluctuating prices in its stride. The economy’s movement away from energy-intensive industries toward services has had precisely this effect. So too has the ordinary use of new, energy-saving technologies designed primarily to drive down costs. To some extent, energy efficiency and energy security turn out to be the same thing.

Much of the rhetoric about oil today is overheated. The world is not running out of the stuff, or out of energy more generally. With present technologies, proven and probable reserves of oil will be sufficient for decades. Even if prices somewhat lower than those already seen this year were sustained, an array of existing but not yet widely applied technologies would make it economically feasible to extract oil from tar sands or shale, or to convert coal to liquid fuel. There will be enough fuel from those sources to meet the world’s needs as far into the future as one cares to look—even if no brand-new energy-producing technologies emerge anytime soon.

T he biggest immediate problem is not the supply of energy in the long term, but its fixity in the short term. Bringing new supplies onstream takes time, whether it is a matter of building new power plants, sinking new oil wells, or adding new refining capacity. At the same time, demand for energy is insensitive to price; when capacity is stretched it takes a very sharp increase in prices to push consumption down. Today, new investments are going ahead and consumers appear to be reining back. Once capacity comfortably exceeds demand again, as it did through the 1980s and 1990s, prices may eventually fall just as sharply. But the cycle will likely repeat, leading to periodic vulnerability to oil shocks. The unremarked improvement in America’s energy security has been impressive, but it needs to continue, and it should be happening faster than it is.

Up to a point, there is a public interest in protecting the economy from wasteful volatility by speeding the rate of decline in oil’s systemic importance—by, as it were, investing in more shock protection than ordinary private cost saving will achieve. Environmental risks clinch the argument. The science and economics of manmade global warming are far more complicated than most commentary on the subject would have you believe, but there is a strong case for curbing global greenhouse-gas emissions. This can be done economically, provided the investments are phased in over an extended span of time. (For instance, it is far cheaper to build a new plant that emits less carbon dioxide than to retrofit an existing plant to the same effect. One failing of the Kyoto Protocol is its rush to impose immediate, drastic changes at ruinous cost.) Still, the planning and the policies need to be put in place now.

Energy diversification would better insulate the economy from oil-price shocks and reduce emissions of greenhouse gases. The economic instruments needed to speed this diversification away from oil are close at hand: taxes on greenhouse-gas emissions (in principle, a tax on carbon, implemented through higher taxes on gasoline and other fuels) and subsidies for the use of oil-saving technologies.

The current administration has repeatedly paid lip service to the idea of energy diversification but has done little so far to put it into practice. It should do much more. Not because the oil is running out, and not because the world has just a few years to avoid a global-warming catastrophe: there is plenty of oil, and dealing with global warming intelligently must be a multidecade undertaking. Rather, such policies are an opportunity for the United States to lead other nations in effectively addressing the world’s biggest environmental risk, and become more prosperous in the bargain.

Google lost $16 yesterday, or 4%. Fred Hickey talks about Google being a train dashing along tracks at 300 MPH. Any little "gotcha" could de-rail it. Associated Press ran a story yesterday, "Bogus Hits Could Make Up 12% of Web Ad Clicks." Excerpts:

SAN FRANCISCO (AP) -- John Thys still has not figured out how much his company has paid Google Inc. for bogus sales referrals caused by ''click fraud'' -- a sham aimed at a perceived weakness in the Internet search leader's lucrative advertising network. But Thys says he has uncovered enough of it to conclude that Google is trying to shortchange his company and thousands of other advertisers by offering refunds totaling $60 million (euro47.29 million) to settle a lawsuit.

''It's almost like an insult that they expect us to take this token money,'' said Thys, director of Internet marketing for

Google also expects to pay $30 million (euro23.64 million) to the lawyers who settled the case on behalf of advertisers, raising the settlement's total value to as high as $90 million (euro70.93 million). Still, that is a fraction of the more than $10 billion (euro7.88 billion) in cash held by the search company.

An Arkansas judge is expected to consider the proposed class-action settlement in late July.

The refunds, which will be provided in the form of advertising credits, are meant to compensate Google's customers for undetected click fraud, which contributed to the $13.3 billion (euro10.48 billion) in ad revenue that has poured into the company since 2001.

Google's offer works out to a $4.50 (euro3.55) refund on every $1,000 (euro788) spent in its vast advertising network over the past 4¼ years.

Meanwhile, independent studies assert that anywhere from $100 (euro79) to $400 (euro315) of every $1,000 (euro788) stems from click fraud. If those estimates prove correct, Google might be on the hook for $1 billion (euro790 million) to $5 billion (euro3.94 billion) in advertising refunds.

Click fraud takes different shapes, but the end result is usually the same: Merchants are billed for fruitless traffic generated by scam artists and mischief makers who repeatedly click on an advertiser's Web link with no intention of buying anything.

Based on a month-long analysis of the traffic that Google ads referred to, Thys suspects click fraud may have accounted for 35 percent of the Web site's $20,000 (euro15,763) ad bill.

After reviewing Thys' evidence, Google said its internal safeguards had spotted the suspicious activity as it occurred and never billed for fraudulent clicks. But Thys said the search engine did not provide him with any data to back up its findings in an e-mail signed simply by ''Ray'' from Google's click quality team.

Google maintains its class-action settlement represents a fair offer that underscores how well it has shielded advertisers from the costs of click fraud.

The class-action settlement of the Arkansas lawsuit will likely test advertisers' faith in Google. The company is supposed to send out notices of the settlement later this month, giving advertisers until late June to reject or protest the refund offer. already has decided to reject the offer.

If the entire deal is rejected, lawyers then go back to the negotiating table; individual advertisers can also declare they will not participate, freeing them to file their own lawsuits seeking better deals or join a separate one pending in California.

Judge Joe Griffin is scheduled to decide whether to approve the settlement in a two-day hearing beginning July 24.

Meanwhile, Yahoo Inc. -- owner of the Internet's second-largest advertising network -- continues to fight similar click fraud allegations in the same Arkansas court as well as a federal court in California. A click-fraud lawsuit filed against Google in that same federal court has been suspended while its Arkansas settlement is reviewed.

The Google settlement, announced in early March, already has focused more attention on click fraud.

The shady activity produces revenue for Google, Yahoo and a long list of Web sites that display the ads because the clicks trigger sales commissions even if a referral does not produce a sale.

Suspected motives vary. Sometimes Web merchants try to deplete a rival's advertising budget. In other instances, the owners of small Web sites participating in the marketing networks run by Google and Yahoo are believed to click on ads to generate more commissions for themselves.

Complicating the click fraud issue even further, search engine advertising is not subjected to independent auditing like the advertising done in newspapers, magazines and broadcast media. In search advertising, Web site owners sign contracts obligating them to pay for all valid clicks -- and the search engine has discretion over what is valid.

Google is examining ways to make its fraud-fighting efforts more transparent without revealing crucial information that might help swindlers elude detection, said Shuman Ghosemajumder, the company's product manager for trust and safety.

Outside help also may be on the way. The class-action settlement requires a report from a yet-undisclosed independent expert to verify that Google has made reasonable efforts to weed out click fraud. Separately, Fair Isaac Co. is studying the issue, drawing on its years of helping lenders fight fraud.

Click Forensics Inc. recently set up a free service that intends to issue quarterly reports on the frequency of click fraud, compiling information from more than 1,000 advertisers.

The index's initial findings, released in late April, estimated Google and Yahoo suffered a click fraud rate of 12 percent, translating to more than $1.5 billion (euro1.18 billion) of Google's ad revenue.

Given those findings, the settlement amount in the Arkansas class action ''was very surprising to us,'' said Tom Cuthbert, Click Forensics' chief executive. ''If I were an advertiser, I would take great care in studying that settlement.''

Attorneys suing Google in the California case say they will do everything possible to persuade advertisers to reject the Arkansas settlement.

''Google's motto is 'do no evil,' but it's not following its own advice by entering into this kind of settlement,'' lawyer Brian Kabateck said.

If enough advertisers balk, it might derail the deal. Google has the right to nullify the settlement if advertisers that supplied more than 5 percent of its revenue since 2001 reject the agreement.

Google spokesman Barry Schnitt said Kabateck and his colleagues are trying to rally opposition to the Arkansas settlement so they can revive the California lawsuit in an attempt to drum up more fees for themselves.

Stephen Malouf, a Dallas lawyer who negotiated the Arkansas settlement, doubts advertisers can get a better deal than what Google has offered. ''It's easy to take cheap shots now, but what is the alternative and what are the chances of success?"

Things you don't know about women. Serious things: From Kyra Sedgwick in the June issue of Esquire.
+ Sometimes we love you way more than we love ourselves.
+ Intimacy is the greatest foreplay. It's the 24 hour game.
+ You can never give us too many sincere compliments. To be honest, you can never give us too many exaggerated ones, either.
+ Our friends are not your enemies and our enemies better not be your friends.
+ It isn't our period that's making us moody; it's you.

+ Knowing that you love us makes us strong.

How to avoid a speeding ticket.
A Florida senior citizen drove his brand new Corvette convertible out of the dealership.

Taking off down the road, he floored it to 80 mph, enjoying the wind blowing through what little hair he had left. "Amazing!" he thought as he flew down I-75, pushing the pedal to the metal even more.

Looking in his rear view mirror, he saw the Highway Patrol behind him, blue lights flashing and siren blaring.

"I can get away from him - no problem!" thought the elderly nutcase as he floored it to 100mph, then 110, then 120mph.

Suddenly, he thought, "What on earth am I doing? I'm too old for this nonsense!" he pulled over to the side of the road and waited for the Trooper to catch up with him.

Pulling in behind him, the Trooper walked up to the driver's side of The Corvette, looked at his watch and said, "Sir, my shift ends in 30 minutes. Today is Friday. If you can give me a reason why you were speeding that I've never heard before, I'll let you go."

The man, looking very seriously at the Trooper, said, "Years ago, my wife ran off with a Florida State Trooper. I thought you were bringing her back."

"Have a good day, Sir," said the Trooper.

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. 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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