Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST Monday, May 29, 2006, Memorial Day. Markets
are closed. I repeat Friday's column:
remember the Americans who laid down their lives to protect the freedoms we
enjoy every day. The American military is made up of hard-working, under-appreciated,
underpaid men and women. They deserve a raise far more than we deserve another
tax cut. If you have any sway, mention this need to your local congressman or
makes me sleep well:
1. A broad diversification of investments (see
2. Sufficient bonds whose interest will pay our family's lifestyle --
if everything else collapses.
3. Saying NO more often, and saying NO to startup ventures I have no
control over or to investments I don't understand -- e.g. investments contrived
by Wall Street.
Here's my present allocation. Improvements needed: More bonds, especially now
they're paying more. More real estate. Problem remains sourcing quality investments.
end muni bond funds
estate syndications at cost
Real Estate Fund**
* Includes money
managers and hedge funds.
** No monies called yet.
Enron guilty verdict and the Enron collapse:
Will there be more Enrons? Yes. There are simply too many pressures on "the
golf course"to earn big, to live big, to give away big, to make oneself
"big." Ego reigns large in the boardroom, in politics, on stage, etc.
Ego and peer pressures will definitely cause more Enrons. How do you protect
yourself against investing in the next "Enron?" here's my Checklist:
Watch for huge outrageous payments or option awards to CEOs and chairman.
2. Watch for super optimistic statements by the executives on their new
businesses, their new ideas, etc.
3. Listen to the hype. You'll see a spate of favorable research reports.
The financial press will start writing hugely positive stories, bestowing "executive
of the year awards" on the company. Your friends will start talking about
the stock. Too much hype is a sure sign of too little reality.
4. Watch for growth in earnings and sales that boggle the imagination.
5. Watch for accounting irregularities and reports of "strange"
events that don't happen in the normal course of business. Watch for signs of
the company becoming a "Cockroach Stock" -- one small strange
report leads to another slightly larger one, then another one... and finally
the whole thing collapses.
Most importantly, don't violate our inviolate 15% Stop Loss Rule. When
the stock falls 15% from its high, get out. No Ifs, Ands, or Buts. Get out.
The world economy is strong.
leader (first story) this weekend is positive:
the rattled markets, the world economy is still relatively strong. Just don't
bet your house on it. If you meet a bear in the woods, try not to panic or scream;
on no account should you turn your back and run. As markets around the world
have turned grizzly over the past two weeks, some investors seem to have forgotten
the old hikers' maxim. After three years of big gains, many stockmarkets have
tumbled by 10% or more in less than ten days. The loudest growls have echoed
around emerging markets and commodities. Europe has surrendered most of this
year's gains. Americans have so far escaped lightly, but they would be unwise
to take comfort. Their housing market, the recent rock of their economy, is
where a much grizzlier creature lies in wait.
Alan Gordon, a reader, writes:
tend to look first at equity marketsand they have certainly had a good
run virtually everywhere. Yet a repeat of the slump after the bursting of
the dotcom bubble in 2001-02 remains highly unlikely. In 2000 shares were
wildly overvalued. Today price/earnings ratios in most stockmarkets are near,
if not below, their long-term averages. This suggests that the slide in shares
could be short-lived.
So what has
caused this burst of volatility? One popular explanation conjures up fears
of rising inflation and hence higher interest rates (see article). Yet this
sits oddly with the fall in bond yields and the gold price over the past week:
if inflation were the culprit, you would expect both to have risen. The real
puzzle is not why volatility has suddenly increased, but why it had been so
low in the past year or so. The answer seems to be an abundance of cheap money,
which lured investors into complacency. Now they are starting to demand higher
returns on riskier assets. Emerging-market equities and metals, not (generally
safer) bonds, suffered the biggest mauling in the past week. It could be a
recent jitters need not harm the world economy, which even bears admit has
performed stunningly. World GDP has grown at an annualised rate of more than
4% for 11 consecutive quarters (see our economic and financial indicators).
This is the strongest upturn for more than 30 years. Yet global inflation
remains historically low. Strong growth with mild inflation is all the more
amazing given the tripling of oil prices since 2003. Past oil-price shocks
have caused stagflation.
The world has
so far shrugged off higher oil prices with the help of two powerful economic
forces. The first is the opening up and integration into the world economy
of China, India and other emerging economies. This has given the biggest boost
to global supply since the industrial revolution. Their cheap labour has cut
the cost of goods. The threat that jobs in rich economies could move offshore
has helped hold down wages. Although demand from emerging economies has fuelled
the surge in oil and commodity prices, the newcomers' overall effect has been
to curb inflation in the rich world.
That, in turn,
has magnified the second stimulus. Since the bursting of the dotcom bubble,
central banks have pumped out cheap money. In 2003 average short-term interest
rates in the G7 economies fell to their lowest in recorded history. Because
inflation remained low, the central banks have been slow to mop up the excess
liquidity. Cheap money has encouraged households, especially American ones,
to borrow and spend lavishly. It is not just house prices that have surged
ahead; cheap money has encouraged investors across the world to take bigger
risks, creating several smaller bubbles. Together the huge boost to supply
(from emerging economies) and the huge boost to demand (from easy money) have
offset the burden of higher oil prices, creating the once-impossible combination
of robust growth and modest inflation.
The era of cheap
money is nearing an end. For the first time in 15 years, the three big central
banks are now all tightening monetary policy. The European Central Bank has
already followed the Federal Reserve's lead in raising interest rates; the
Bank of Japan has stopped printing lots of money and will start lifting rates
soon. Only now are the markets realising that interest rates may rise by more
than they had expected. In the long term, rates should be roughly equal to
nominal GDP growth, but in America and elsewhere they are still well below
it. Optimists argue that America's economy is coping well with rising interest
rates, but it hasn't really sniffed tight money yet. Without easy credit,
dear oil will cause more pain.
financial markets appeared to be betting that the Goldilocks economyneither
too hot, nor too coldwas safe from the bears. The rattled markets are
a reminder that sooner or later growth will slow or inflation will rise. Inflation
is not about to spiral upwards but with diminishing spare capacity, it could
edge up. America has an extra risk because Wall Street suspects that Ben Bernanke,
the Fed's new chairman, may be a soft touch on inflation. If that suspicion
persists, he will need to raise interest rates by more than otherwiseor
investors will do the tightening for him by pushing up bond yields. That would
make other assets look expensive.
It is in the
American housing market that the bear may growl loudest. By borrowing against
the surging prices of their homes, American consumers have been able to keep
on spending. The housing market is already coming off the boil (see article).
If prices merely flatten, the economy could slow sharply as consumer spending
and construction are squeezed. If house prices fall as a result of higher
bond yields, the American economy could even dip into recession. Less spending
and more saving is just what America needs to reduce its current-account deficit,
but for American households used to years of plenty it will hurt.
For the world,
it is best that America slows today. Later, imbalances will loom even larger.
A few years ago, Japan and the euro-area economies were flat on their backs.
Now they are growing above trend, so the world depends less on
America than it once did. The boost to the world economy from China and India
will last into the future, even allowing for mishaps. Wise investors should
resist the urge to flee, reduce their holdings of risky assets and stare down
I am happy to
report to you that you made a mistake in today's (5/25/06) column. ACI - Arch
Coal, went from 86 to 45 because they just had a 2:1 stock split, something
your chart did not account for.
I was lucky enough to buy it at 80...and it went to over 110, just before
the split. But I was stupid enough to hold it as it retraced back down to
its current $45. But still, I can't complain. It was my fault - no stop loss.
I should have had a 8-15% stop in place.
Now, why am I happy you made the mistake? Because reversing out the 40% loss
on Arch should change your Total Portfolio Profit/Loss from a Loss to a nice
old fashioned musical. If you're visiting New
York, see Pajama Game. Harry Connick, Jr., Kelli O'Hara and the cast
of singer/dancers are simply superb.
The Pajama Game. We saw it last night. Was wonderful.
The French Open Tennis begins this
Sunday: Set your TiVo -- but don't buy TiVo's stock. Its results
of late have been miserable.
For more, click
here or here.
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A British company is developing computer chips that store music in women's breast
implants. This is a major breakthrough since women are always complaining about
men staring at their breasts and not listening to them.
Law Cousins -- Part 2:
Law of Bio mechanics:
The severity of the itch is inversely proportional to the reach.
Law of the Theater:
The people whose seats are furthest from the aisle arrive last.
Law of Coffee:
As soon as you sit down to a cup of hot coffee, your boss will ask you to do
something which will last until your coffee is cold.
Murphy's Law of
If there are only two people in a locker room, they will have adjacent lockers.
Law of Rugs/Carpets:
The chances of an open-faced jelly sandwich landing face down on a floor covering
are directly correlated to the newness and cost of the
Law of Location:
No matter where you go, there you are.
Law of Logical
Anything is possible if you don't know what you are talking about.
If the shoe fits, it's ugly.
A closed mouth gathers no feet.
As soon as you find a product you really like, they will stop making it.
a great weekend. Hug the kids and the grandkids.
Do something nice for the spouse. Think of our servicemen and women.
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
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