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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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Updated and Censored -- as of late Friday, November 3

8:30 AM EST Thursday, November 2, 2006: Hedge funds are unregulated gambling machines. They were originally called "hedge" because they're meant to hedge their bets by selling short as well as going long. (Most mutual funds can't sell short.)

Hedging -- selling short -- can go disastrously wrong. You can lose gobs of money. You can lose everything and more. And since the hedge fund biz has become super-competitive -- with money flowing fast to the best-performers -- there's huge pressure on hedge funds to take concentrated bets (i.e. no diversification).

When things go bad, well, they really go bad.

A pattern is emerging -- A hedge fund does incredibly one year with a handful of successful (i.e. lucky) bets. The following year it falters badly and often goes out of business.

Harry's New Hedge Fund Rule: When the fund does incredibly well one year, take most of your money out. If you want to keep playing, play with the bank's money. No hedge fund can consistently achieve huge annual returns -- I'd say over 40% up one year is likely to lead to a significant drop the following year.

We saw that with Amaranth's disastrous natural gas gamble and with oodles of others. And now we have another one. The name of fund is not relevant. I'm not revealing it for now because I sadly (stupidly) have money in it.

What you need to know is that in October the Fund lost 20%, bringing its drop in 2006 so far to 30%. All the indexes it measures itself against are UP. In my original column of Thursday, November 2, I excerpted the letter sent by the fund's chief investment officer to investors in the fund. What was most interesting was the desperation and utter confusion in this letter. Here was a very successful manager making brilliantly researched decisions -- only to find that the market suddenly and consistently went against his logic -- time and time again. It's what hedge fund managers face at present -- especially as they try to guess the market from day to day. Sadly, few investors give hedge fund managers a long-term horizon -- like you might Warren Buffett's Berkshire Hathaway. You should be aware of this psychological environment before you put money with these guys.

Here was where the original letter was -- now removed because the hedge fund's director of investors relations asked that it be removed, claiming it was confidential to the fund's investors.

Use a laptop? Use this. This 3" x 5" corded keypad has an optical mouse, left and right buttons, a numeric keypad and -- best of all -- a scroll-wheel and a button for entering 000.

The thing costs $40 and is available from Cyberguys. Click here.

A movie worth seeing: The Departed:

Gripping movie. Great plot. Great action. Great stars -- Jack Nicholson, Matt Demon, Leonard DiCaprio and directed by Martin Scorsese. Highly recommended. Not for the queasy stomach. Oodles of violence.

Why Italians (or blondes, or whoever) can't be paramedics
Luigi and Salvatore are out in the woods hunting when suddenly Salvatore grabs his chest and falls to the ground. He doesn't seem to be breathing; his eyes are rolled back in his head. Luigi whips out his cell phone and calls 911. He gasps to the operator, "I think Salvatore is dead. What should I do?"

The operator, in a calm soothing voice says, "Just take it easy and follow my instructions. First, let's make sure he's dead."

There is a silence...... and then a shot is heard. Luigi's voice comes back on the line.

"Okay, now what?"

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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