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Newton's In Search Of The Perfect Investment. Technology Investor.

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8:30 AM Monday, May 16, 2005: "Who's preying on your grandparents?" is the title of the New York Times business cover story. The Times highlights an annuity from American Equity Investment Life Insurance that proposed to pay 7% on your investment, but carried a staggering 17.5% surrender charge if cashed in during the first year. Exit charges were not scheduled to disappear for 17 years after purchase. That's higher than any mutual fund I know. It's eggregious.

Apart from warning against junk investments like this one, the article contained this advice: Go on the Internet and check. By checking, the family found lawsuits going on in California against the compnay. And then "we realized that we were not making a good decision."

Sunk costs are sunk, gone and irrelevant: My sister has a big investment in a company going awry. She won't let go because of the money and the time she has invested. I gave her my usual lecture on "What has gone before has gone. What counts now is the next nickel, the next hour of time. That's the decision."

The two hardest parts to investing are:
1. Falling in love with your investment.
2. Being obsessed with what went before.

Every new day is the first day of the rest of your life with your investments. Every day you own something is as if you bought it at that day at that price. Every day you should -- at least theoretically -- assess the potential rewards going forward with each investment. Are they there? If not, sell them and find something better.

Sometimes it makes serious sense to sell, to close it down, to walk -- if only to stem the daily mental anguish. After all, you earned the money. You can earn it back.

Is Your Apartment Like a Dot-Com Stock?
Henry Blodgett, ex-Merrill Lynch dot-com analyst, has written a cover story for New York Magazine: "What the tech-stock boom and bust can teach us about New York real estate — and what it can’t." Excerpts:

So are we living in a bubble? Well, the average New York apartment has more than doubled in price since 1996, and in some areas, prices have quintupled. New York real estate certainly looks like a lot of the bubbles we’ve seen in the past. Still, many of the commonly cited “signs of the top”—bidding wars, vertiginous prices, lines outside new condo projects, everyone and their brother becoming “real-estate developers” — can be deceptive. When Netscape went public in 1995, it, too, was dismissed as a “sign of the top,” but it was only the beginning (and the Internet is anything but a hallucination). ...

The most compelling evidence that house prices are, if not a bubble, at least way ahead of themselves is the diverging relationship between prices and rents and incomes. Most people prefer to own rather than rent, but when prices get too far out of line, renting becomes irresistibly attractive. Similarly, bigger salaries allow you to afford more house, but if prices grow faster than incomes, eventually people get priced out.

Nationally, over the last few decades, house prices have grown slightly faster than the rate of inflation and in line with the growth of rents and incomes. In the past ten years, however, real-estate prices have shot way ahead of all three. Smaller divergences in the seventies and eighties were followed by corrections, in which home prices fell in real terms. So, nationally we’re probably headed for trouble. ...

So is it a bubble? As with the rest of the country, the divergence between New York real-estate prices and incomes and rents over the last decade suggests that it is. Prices have risen at more than twice the rate of either rents or incomes since 1996, a trend that even the mayor’s office believes is unsustainable. The ratio of prices to rents is also higher than at any time in the past two decades, including the late eighties. On the other hand, in the longer term, the conclusion is not so clear. Business360, an economic-research firm, points out that if you go back to 1981, wage growth in Manhattan has significantly outpaced real-estate price growth.

Blodgett concludes:

For practical purposes, the bubble debate is academic: You can afford what you can afford, and no one knows what the market is going to do. As Keynes observed, prices can stay irrational longer than you can stay solvent.

The great error made in the nineties was not the failure to recognize that the stock boom might be a bubble: By 1999, in fact, most professionals thought that it might be a bubble but kept buying anyway, because they didn’t know when it would end. The great error was the belief that before the bubble burst, something would change that would tell everyone to get out—that somewhere, a light would turn from green to red.

Having lived through that bubble, and looked hard for the signal, I would respectfully suggest that this is wishful thinking. Lights were flashing yellow, of course — and had been for years — but conditions just kept getting better. Eventually, by the end of the decade, life had been so good for so long that almost no analyst or strategist on Wall Street saw anything that would bring the party to a halt. And in New York real estate, life has been good for quite a while.

To read Blodgett's piece, click here.

My own feeling: I'm not speculating in apartments. My real estate investments are cash flow based, with reasonable leverage -- sufficient to cushion a 10% to 20% potential drop in value. I'm also assuming that, as purchase prices ease off -- what with rising interest rates -- the rental market will strengthen. To me, that seems like a sound way to play the real estate "bubble."

The lesson in the Newsweek story:
Newsweek apologized for running the story on U.S. troops flushing a Koran down the toilet. But it seems to be unwilling to deny the story:

"Certainly the fact that the Pentagon and the top Pentagon spokespeople are denying it and saying we got the story wrong troubles us," editor Mark Whitaker said in an interview. "This is all we've been able to find out," said Mr. Whitaker. "We suggest we may have gotten something wrong, but we're not entirely sure what we got wrong at this point, frankly."

Mr. Michael Isikoff (one of the story's editors) had relied on an unnamed U.S. government official who had been credible in the past, said Mr. Whitaker. "I know who the source is and I know this source is in a position to have seen internal documents and who has been a good and credible source in the past," he said.

What would you have a done if you were Newsweek? Run the story based on the source being credible in the past? Check other sources? Drop the story? Background: you're in head-on competition with Time. You need "scoops." Your magazine is on deadline. You don't have time to check. Now what?

A big percentage of Americans no longer trusts the press. They "trust" the Internet. But it's as rife with mistakes (perhaps more) than the paper press is. There is even an Internet site ( devoted to checking out the truth of what it calls "urban legends." Adobe's PhotoShop software makes "fixing" photos easy, i.e. making them deceptive. For example, which one of these do you think is real?

Today's silly quiz:
This dining room set is for sale. How do you know that the photo was taken by a male? Look carefully. Remember, I don't make this stuff up.

The latest scam on the coast
This new scam is being pulled mainly on older men who are apparently passed the age of giving a running pursuit.

When the intended victim stops for a red light, a nude, beautiful young woman comes up and with body stretched to its full potential, she starts to wash your windshield.

While she is doing this, another person opens the back door of your car, taking anything you have on the back seat.

According to my west coast friend, "They are very good at this. They got me seven times on Thursday and five
times yesterday. I couldn't find them today."

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. That money will help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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