Harry Newton's In Search of The Perfect Investment
Technology Investor. Auction Rate Securities. Auction Rate Preferreds.
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.
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).
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.
an Investor to Do if a Star Firm Stumbles?
By GERALDINE FABRIKANT
IT has been
a rough stretch for those who have invested with Bruce S. Sherman, the co-founder
of Private Capital Management.
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.
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.)
of Private Capitals 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.
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.
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 managements
disciplined, high-conviction investment process.
But many investors
have grown weary of Private Capitals 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 Morningstars 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.
was propelled by savvy bets on small- and midcap stocks, but characterizing
Mr. Shermans 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.
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.
a financial planner in Coral Gables, Fla., said that he wasnt 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
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, its harder to find opportunities in smaller-cap
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
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 & Poors 400.
The fund lagged those indexes for the five years ended in March, according
say problems at Private Capital may stem from the structure of Legg Masons
Bruce Sherman sold to Legg Mason, Private Capital Management became a different
fund, said Bedda DAngelo, 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 Capitals 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.
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.
Mr. Tanous said, investors are likely to be disappointed if they rely entirely
on a managers 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.
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.
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 www.AuctionRatePreferreds.org
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
Solutions, Web.com and my web site: You'd think
that once I'd renewed my domain -- www.technologyinvestor.com -- 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 Person@TechnologyInvestor.com. 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 web.com.
Once we got them in line, it now all works. But the lesson is twofold:
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.
Check. Check. Check.
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:
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:
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
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 lymebytes.blogspot.com.
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.
to a simple question, but I'm determined to do my part to make sure others
are educated about Lyme.
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
+ 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.