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Harry Newton's In Search of The Perfect Investment Technology Investor. Auction Rate Securities. Auction Rate Preferreds.

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8.:30 AM EST Monday, May 5, 2008: Buffett is more optimistic about the stockmarket now (see my Friday "no more doom and gloom" column), but Buffett spends most of his life looking for companies to buy outright, not to invest in. Which tells you something. He likes businesses that earn their money in the euro or the sterling. Which means he's not optimistic about the dollar (neither am I). My favorite Buffett quote from his weekend Omaha shareholder meeting. Saying he was confounded by the ability of his municipal-bond insurer's biggest rivals, MBIA Inc. and Ambac Financial Corp., to retain their triple-A ratings.
"If you can find another illustration of a company whose stock that's gone down by 95% in one year and is still rated triple-A, I have yet to see it," Mr. Buffett said.

What’s an Investor to Do if a Star Firm Stumbles? I had money with Private Capital Management, a very successful money management firm run by Bruce Sherman. I took my money and fled when two things happened: its performance started to flag and I discovered it had invested heavily in newspapers -- an industry I knew was doomed (I had been in print publishing for 40 years).

I struggle daily with portfolio/manager selection. I am still sufficiently naive to believe that the right collection of managers will outperform a bunch of simple index funds -- like my favorite Vanguard funds. But, as I grow older, I'm increasingly favoring the index funds / ETFs. Several managers do well. But then one screws up and your average drops. That's also what a zillion years of financial research concludes. Please read this piece from the Sunday New York Times. There are useful portfolio management lessons.

What’s an Investor to Do if a Star Firm Stumbles?

IT has been a rough stretch for those who have invested with Bruce S. Sherman, the co-founder of Private Capital Management.

After years of stellar performance, his asset management firm has stumbled. Based in Naples, Fla., it was one of the big losers in the near-collapse of Bear Stearns, with total losses estimated at several hundred million dollars.

That debacle followed huge losses in newspaper company stocks, which Mr. Sherman abandoned by the end of 2007, according to public filings. (One of those losses was in the stock of The New York Times Company.)

Today, much of Private Capital’s glitter is gone — and some investors wonder whether they should bail out or hope for better days. It is the type of quandary faced by investors whenever money managers with strong records stub their toes badly — whether they run managed accounts, as Mr. Sherman does, or hedge funds or mutual funds. The common wisdom is to grit your teeth and hang on, said R. Allen Purkiss, the founder of Purkiss Capital Advisors, a financial planner in Ridgefield, Conn.

“If you have a fund where nothing has changed and performance wanes a bit, chances are you are better off staying with what you have,” he said, adding that it is only natural that highfliers sometimes falter. “There are times when they are ahead of the market and so their performance languishes.”

Mr. Sherman declined to comment for this article. Private Capital has operated as a unit of Legg Mason since 2001, when it was acquired for $1.4 billion. In a statement, Legg Mason said, “We continue to believe in Private Capital management’s disciplined, high-conviction investment process.”

But many investors have grown weary of Private Capital’s misadventures. The firm, which caters to wealthy investors, has shrunk to $15 billion in assets from $31 billion in 2005. Over the last three calendar years, Private Capital has reported a 4.52 percent average annual return, trailing Morningstar’s composite of similar investment funds by 5.47 percentage points, according to Morningstar. That contrasts with what had been a spectacular record: an average annual return of 16.95 percent over the 10 years ended on Dec. 31.

That return was propelled by savvy bets on small- and midcap stocks, but characterizing Mr. Sherman’s approach is tricky. While Private Capital calls its strategy a “value-oriented investment approach,” it has also had substantial holdings in Apple, which is not typical of value portfolios. Other early successes included bets on International Gaming Technology, the slot-machine maker, and Qualcomm, the wireless technology and chip supplier.

Private Capital’s performance was already weak in 2007, when it lost 2.07 percent, placing it in the lowest quarter of midcap value separate account funds tracked by Morningstar. This year, it declined 14.2 percent through March.

Harold Evensky, a financial planner in Coral Gables, Fla., said that he wasn’t sure that anything was significantly wrong at Private Capital, but that investors could look for signs that might help them decide whether to stick with any money management firm.

Abrupt growth in assets under management may be a problem, he said. “One of the criteria we look at is if a manager is in the small- and midcap space, and they have a huge inflow of funds, we are not likely to go there,” he said. “We need to be sure that they can continue to implement their style.” When a fund becomes very big, it’s harder to find opportunities in smaller-cap stocks.

Peter J. Tanous, a financial adviser whose 1997 book “Investment Gurus” included a profile of Mr. Sherman, said: “There is no question that as the asset pool grew, Mr. Sherman had to look at some larger companies. In some cases, such as Apple, it paid off. But the foray into newspapers, for example, was not successful.”

While any fund may hit a rough patch, Mr. Evensky says it is worrisome when one underperforms its benchmarks for five years. For Private Capital, he said, the most relevant indexes are the Russell Mid Cap Value and the Standard & Poor’s 400. The fund lagged those indexes for the five years ended in March, according to Morningstar.

Some analysts say problems at Private Capital may stem from the structure of Legg Mason’s purchase deal.

“The minute Bruce Sherman sold to Legg Mason, Private Capital Management became a different fund,” said Bedda D’Angelo, president of Financial Solutions, an advisory firm in Durham, N.C. Under the purchase terms, Private Capital had incentives to increase its asset base. “Rapid growth is an indication of sales rather than investment performance,” she said. “As a small investor, I would view any change of ownership, management or organizational structure as a reason to scrutinize a fund.”

When Legg Mason bought Private Capital, which then had roughly $8 billion under management, it agreed to pay Mr. Sherman and his team up to $300 million, depending on factors including how much money Private Capital managed in the ensuing years. Because Private Capital’s assets under management have shrunk in the last few years, the firm has not received 75 percent of that payout, although it may still receive a portion of the balance, according to a person with direct knowledge of the agreement who declined to speak for attribution.

MR. EVENSKY said it was hard to gauge the effects of a shift in ownership at Private Capital — or at asset management firms in general. Such changes need to be scrutinized, he said: “If there are new owners, they may give managers new responsibilities, thereby diverting their attention, but they can also provide more resources, which can be helpful.”

Ultimately, Mr. Tanous said, investors are likely to be disappointed if they rely entirely on a manager’s ability to beat the market, however impressive his record. “The lesson is never to put all your money with a single manager, whether it is Private Capital or any other investment firm,” he said. “The only way to protect your assets is to diversify into noncorrelating asset classes.” By holding a variety of assets, you may be protected by a rise in commodity prices, for example, when a series of stock picks go awry.

At this point in my life, my philosophy with managers is simple: One serious stumble and I'm gone. One serious idiocy (e.g. newspapers) and I'm gone. One day, my phone call isn't returned promptly and I'm gone.

The lesson from the Microsoft / Yahoo! mess:
Microsoft is desperate. Too large. Too much money. Too bureaucratic. If the best ideas it's had in the last year have been Vista and Yahoo!, the writing is on the wall for that poor company, now bereft of its brilliant founder, Bill Gates. Microsoft is way overpriced at a P/E of 17. Yahoo! is also doomed. It will never compete successfully against Google. End of story. It was dumb not taking Microsoft's $50 billion bid. It will never be worth that much money again.

The death of print media: The New York Times' front page boldly proclaims "All the news that's fit to print." For years, most of its subscribers believed this. Increasingly, none of them do. The reality is that editors choose the news and slant it their way. And worse, some editors (and writers) are just plain hopeless. See my this morning. Most of us now read our "news" on the Internet. And most of us choose web sites that address our day-to-day needs, like checking camera reviews or research on our ailments. This has huge implications for opportunities on the Internet we face. Mull on that for now.

Network Solutions, and my web site: You'd think that once I'd renewed my domain -- -- my troubles would be over. Wrong. It turns out there's something call "MX records." These are records which tell the key computer servers out there in the Internet where to send mail for Well, usually the company you register your *.com website with manages your MX records. But not always. In my case, my web hoster does. And he's a different company, namely Once we got them in line, it now all works. But the lesson is twofold:

1. When faced with fixing a complex technical problem, don't assume that your techie understands what the problem is or can fix it. Ask how it works. You need to have enough technical knowledge to be dangerous.

2. Check. Check. Check.

Lyme Disease -- Part 2: From my very dear friend who's sadly had Lyme for eight years. I'm obviously obsessed by this disease, now rampant throughout most of the U.S. Please read this. I don't want you to get it. You need to know this stuff:

Anyway, I've had it since 2000. I was bit by a tick, but also a midge. That midge bite site is where the bull's-eye rash was concentrated, but the spirochetes quickly spread to the rest of my body. I was also, unfortunately, given the second shot of the Lyme vaccine shortly after I was bitten, which made things worse.

I started going downhill, big time, when I first got it -- all the classic flu-like and heart/nerve/mind-degeneration symptoms. I got to the point where I could barely get out of bed. Clawed my way back to health -- first with IV antibiotics (stint in arm, full-time), then with supplements, then with all sorts of other techniques. I am about 95% there; the nerve and brain damage is minimal but the spirochetes have, as I mentioned in my previous email, taken up residence in my gut, in cystic form. I'm now back on antibiotics for three months in an attempt to eliminate this cystic bunch.

If I were giving someone advice about Lyme, knowing what I know now, I would say:

1) Check yourself for ticks frequently - between May and November - no matter where you live in the US. Lyme is not just in the northeast anymore. Check yourself daily if you have a dog, or if you've been outside. Even the black, young pin-head-sized tick, if left on your body for a few hours, can transmit the Lyme disease bacteria - syphilis-like spirochetes - to your body as the tick exchanges its saliva for your blood. Because the young ticks are so small, I think it's better to run your fingers over your skin - the tick will feel like a foreign bump on your skin. They do tend to like crevices, too, like the back of your knees, so be thorough. Usually they get on your shoe and crawl up into your pants leg, which is why everyone has been saying you should tuck your pants into your socks when you go out in the wild.

2) If you find a tick, remove it carefully - making sure you get the head out along with the body. Do not waste one minute wondering what you should do next. Go immediately to a doctor and get on a round of antibiotics. Stay on them for more than a month - the bacteria has a monthly lifecycle, and you want to make sure you get them all. If your doctor tells you not to worry, that you don't need antibiotics, go to another doctor. Why? Because if you catch the spirochetes while they're still in your blood, where the antibiotics can reach them, you stand a chance of getting well. If you don't, the spirochetes (see picture) will move to the "non-blood" areas of your body - your brain, heart, nerves, and joints - and will change your life forever. I know. They changed mine.

3) Lyme symptoms are all over the map (although there are now decent lists - see here and here). In the last eight years, my legs have been tingling and twitching; I have had technicolor nightmares; there are strange creaking sounds in my brain, especially at night; my finger joints have swollen up; my ears ring; my eyes have "floaters"; I've been so tired I can't get up; my heart has raced along about three times its normal speed; I've sat in front of my computer, writing, expecting the next word or sentence to flow - as it always has - and nothing comes; I've had raging headaches; strange rashes that appear out of nowhere and then disappear; eyelid twitches; aching all over, including a terrible muscle burning at night; and feelings of coldness in extremities. Most of those symptoms are gone now - or at least they are so minor that I feel almost normal. I'm lucky - some people just keep getting worse. What I'm battling now is what appears to be a community of spirochetes setting up shop in my abdomen, in cystic form. These are very adaptable bacteria, as doctors and scientists are finding out as they study them.

4) If you feel like you've gotten the flu, but it doesn't go away, you must find a "LLMD" (Lyme-Literate MD) and get proper treatment. Don't put it off, don't rationalize it. The bacteria, left to multiply, will slowly bore holes in your body - and your life.

5) The Internet is a great resource. There are Lyme discussion groups on Yahoo, and lots of Lyme organizations now. A friend of mine, Connie Strasheim, writes a great blog and has a helpful new book ("The Lyme Disease Survival Guide") coming out soon - see There's also a new documentary coming out called "Under Our Skin," which is fantastic - and unfortunately realistically portrays the political aspects of this disease, as well as its toll on people who suffer from it.

Long answer to a simple question, but I'm determined to do my part to make sure others are educated about Lyme.

Would you give up sex? Shortly before Valentine's Day, a study was released claiming that 47% of men in Britain would give up sex in return for a big-screen plasma TV. As with all matters relating to technology, numbers are key. How long were these men prepared to go without sex? And how large a screen? (Answers: six months, fifty inches.) The survey was conducted by a British electronics retailer. It forgot to ask men how many times (if any) they had had sex in the past six months. But the survey got the retailer oodles of publicity and presumably sold oodles of big screen TVs.

According to my own research, 74.3% of statistics are made up on the spot. My favorite statistics are:

+ On average, everyone has one testicle.

+ Four out of 5 people SUFFER from diarrhea. Hence one enjoys it.
And my absolute favorite:

+ Marriage is the number one cause of divorce.

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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