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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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9:00 AM Monday, November 21, 2005: I've been investing recently with institutional, also called managed funds. To wit:

+ A private hedge fund devoted to biotech. The fund is run by an M.D. The returns have been phenomenal. Hard to believe that, with Avian Flu and the explosion of new potentially promising drugs, my fund won't continue to do well.
+ A pooled loan to a commercial development in Utah with Wal-Mart potentially as the anchor tenant. It's a perfect place for a Wal-Mart SuperCenter.

+ A commodities fund that buys a bundle of commodities at the beginning of the year, rebalances a little during the year, but does not sell short or borrow (i.e. go on margin). The concept is not to guess if commodities will rise or fall in price, but to have an investment in an area that is (theoretically) not correlated with the stock or bond market. Fact is I believe commodities will, over time, rise in price. The demand from developing India and China is too strong.
+ A private fund that invests in syndicated large commercial real estate. One of our buildings just sold, showing a 37% IRR.

I'd like to invest in a private equity fund that buys public companies, takes them private, fixes them, then sells them or takes them public again. This is a huge opportunity. Sarbannes Oxley has made running public companies onerous. Switching them to private saves enormous monies.

Vanguard funds my son likes:
+ Vanguard Balanced Index Fund Investor Shares (VBINX) or VBIAX, the Admiral shares.
+ Vanguard Health Care Vipers (VHT)
+ Vanguard International Value Fund (VTRIX)
+ Vanguard Mid-Cap Index Fund Investor Shares (VIMSX) or VIMAX, the Admiral shares.

I own two -- VTRIX and VIMAX. Both are above where I bought them and a little above what I would have earned had I put the money into muni bond floaters. Vanguard often has two classes of shares, normal and Admiral. Admiral has has lower expenses but you must invest more. To me, Vanguard is reasonably safe money. Its only downside is that the Vanguard online Internet site is just plain awful. In fact, beyond awful. You can live with it, but just.

How bad can a Wall Street analyst really be: Gretchen Morgenson in Sunday's New York Times tore shreds off one analyst. This is brilliant. You must read it. In fact, savor it.

PAUL E. JOHNSON, a former Wall Street analyst who never saw an overpriced technology stock he didn't like, is still reeling from a federal jury's finding 10 days ago that he violated securities laws by misleading investors with his research. But his shock is less than shocking. After all, this is a man whose favorite state seems to be denial. He continued to rate more than 20 bubble stocks a "buy" in 2002 even after they had lost most of their value. And he was so certain that it was O.K. to advise investors in 2001 to buy the shares of a company as he was selling that he chose to try his case rather than settle with regulators.

Bad move. While Mr. Johnson could be enjoying life after Wall Street à la those other fallen stock analysts, Jack Grubman or Henry Blodget, he instead faces unspecified civil penalties, disgorgement of illicit profits and disgrace. Unless, that is, the verdict is thrown out or Mr. Johnson wins his case on appeal.

Mr. Johnson's civil case really jumps out. It is the only one contending bias by an individual analyst that has gone to trial since the stock bubble burst in 2000 and investors learned how corrupt Wall Street research had become. And by finding Mr. Johnson in violation of federal securities laws for not disclosing personal stakes in stocks he was recommending, the jurors have slapped down the notion that conflicts among Wall Street research analysts were not illegal or that the biases were so well known as to be irrelevant.

The trial concerned the time that Mr. Johnson spent as an analyst at Robertson Stephens, a unit of Bank of America and then FleetBoston Financial. Lawyers for the Securities and Exchange Commission argued the case before United States District Court Judge John F. Keenan. Representing Mr. Johnson were Mark Pomerantz and Eric Goldstein of Paul, Weiss, Rifkind, Wharton & Garrison.

The whole thing lasted two weeks, and Mr. Johnson spent three days on the stand. There, he explained why in 2001 he did not tell investors that he was selling shares in the Corvis Corporation, a company he was recommending. He also discussed his failure to disclose how he stood to gain more than $12 million from stakes in two private concerns about to be acquired by public companies he followed. He praised both acquisitions in his reports and in comments to print and television reporters.

Mr. Johnson declined to be interviewed for this article. But his lawyers said he would fight to restore his reputation. "Paul Johnson is an honest and decent man, who did not commit securities fraud," Mr. Pomerantz said in a statement. "His research always reflected his actual opinion of the companies he covered, and his behavior was fully in accord with industry practice, his firm's practice and the rules and regulations then in force."

The jurors rejected that argument entirely. There seemed to be little doubt among them: their verdict came after just a few hours.

Federal securities laws are based on full disclosure, and the jury had to decide whether Mr. Johnson's omissions were material. "The heart of it is the materiality test," said Lewis D. Lowenfels, a specialist in securities law at Tolins & Lowenfels in New York. "An omitted fact is material if there is a substantial likelihood that a reasonable investor would consider it important in making his or her decision. It's a Supreme Court opinion; if you were an investor, wouldn't you want to know if the guy who was recommending that you buy the stock was selling his own holdings in the same stock at the same time?"

OBVIOUSLY, the jury thought so. Mr. Johnson's testimony on Nov. 7, 8 and 9, however, shows a man deep in denial. For instance, when asked by a prosecutor if he would agree that one of the major purposes of the securities regulations is to protect investors, Mr. Johnson responded: "I don't know."

And when Russell Duncan, an S.E.C. lawyer, inquired why he did not disclose to a Bloomberg News reporter that he had a financial interest worth $1.8 million in a merger that he was supporting in his writings and his comments, Mr. Johnson said: "It wouldn't have occurred to me. Sorry. It would not have occurred to me to mention that, no."

And why didn't he disclose this financial interest to anyone in Robertson Stephens's research department? "Again, it wouldn't have occurred to me, so no," Mr. Johnson said.

On other matters, jurors got a glimpse of how Wall Street's haves become have-mores. He described in some detail how he often bought stakes in private companies looking to issue stock publicly, positioning him for hefty profits.

"I was a very prominent analyst in this area during this time," Mr. Johnson allowed. "I did make investments in these private companies; I visited these private companies on numerous occasions; I developed a very close relationship with the management; and when it came time to become their investment banker we had a leg up, we had an advantage against our competitors."

Now we know why Mr. Johnson only uttered the word sell privately, not publicly. How can you stay close to executives if you advise stockholders to sell?

Other testimony from Mr. Johnson seemed ripped out of the pages of "The Bonfire of the Vanities," Tom Wolfe's phenomenal study of Wall Street arrogance. Asked why he sold stock in the same company he was advising his clients to buy, Mr. Johnson said that he still believed in the company but that he needed cash for a $6 million apartment he and his wife were buying on the Upper East Side of Manhattan.

Then he treated the jury to an account of the New York real estate market, circa 2000, that each and every one of them could no doubt relate to. "When we bought - in the real estate market in New York things move really fast," Mr. Johnson said. "When I tell my friends outside of New York, they are sort of horrified. We bought this apartment, my wife had seen it for 20 minutes, and I had seen it for 20 minutes. We had heard the apartment was about to come on the market, and we were allowed to see the apartment before it came on the market. She saw it on a Friday, I saw it on a Sunday, each for about 20 minutes. Sunday night we put in a bid. The apartment was going on the market on Monday morning. We put in a bid, they accepted our bid, and we owned the apartment - well, technically we owned the apartment Sunday night. This was in late November.

"In the ensuing six weeks," he continued, "We got to see the apartment one more time for about 40 minutes. We decided at that point that we thought that we would repaint, we would clean up the kitchen - the kitchen was not in great shape - and we would redo one of the bathrooms.

"As we moved forward and started to do inspection on the apartment, we were informed that the electrical in the apartment was not up to code; we were informed that the plumbing in the apartment was not up to code. The building informed us that if we opened even a single wall we would have to bring up the plumbing and the electrical throughout the apartment up to code."

Alas, Mr. Johnson explained, this was going to cost money. And that meant selling his Corvis shares at around $23, even though he was advising clients to buy. The stock later went to 49 cents.

The original budget for renovations was $300,000, he said. "By the time we heard we had to bring the electrical and plumbing up to code," he continued, "we were quickly approaching the better part of a million dollars, at which point we knew we would have to open up every wall to replace the electrical and replace the plumbing, at which point my wife said now that we're into this, let's just gut the place."

That ratcheted the renovation budget to $1.2 million, Mr. Johnson continued, "which was a pretty good estimate but low by about 50 percent than what we ultimately paid. And that was before we decorated. Well, before she decorated."

Oh, that explains it.

And what of the folks who followed Mr. Johnson's advice, riding stocks like the Clarent Corporation, Sonus Networks and Oni Systems into the cellar? You know how it is: when you're in the nightmarish throes of a Manhattan renovation, everything else just pales.

While Mr. Johnson and his legal team decide how to proceed, he is running Nicusa Capital, a private investment partnership he started in January 2003. According to his Web site, the partnership is named for Nicholas of Cusa, "a 15th-century scholar and theologian who is considered by some historians to be the father of modern science."

MR. JOHNSON is also an adjunct professor at the Columbia Business School, where he has taught securities analysis since 1992. A copy of his syllabus noted that students would earn bonus points "for creative thinking and insightful analysis." Proving that truth is stranger than fiction, Mr. Johnson's most recent course, offered last spring, was on value investing.

Maria Graham, a Columbia Business School spokeswoman, said that Mr. Johnson was not teaching this year. Asked whether the jury's verdict in his securities law case would have a bearing on his employment as a professor, Ms. Graham said: "We can't comment on future employment prospects for any individual person."

Well, at least Mr. Johnson is not teaching business ethics.

100% Chicanery: You'll probably get one of these. I got three. Discard it. It's pure fraud. It has nothing whatsoever to do with eBay.

Only in New York. Taken during the New York Marathon, somewhere in Brooklyn.

The joys of retirement:
Question: When is a retiree's bedtime?
Answer: Three hours after he falls asleep on the couch.

Question: Among retirees what is considered formal attire?
Answer: Tied shoes.

Question: Why do retirees count pennies?
Answers: They are the only ones who have the time.

Question: Why are retirees so slow to clean out the basement, attic or garage?
Answer: They know that as soon as they do, one of their adult kids will want to store stuff there.

Question: What's the biggest advantage of going back to school as a retiree?
Answer: If you cut classes, no one calls your parents.

Recent column highlights:
+ Dumb reasons we hold losing stocks. Click here.
+ How my private equity fund is doing. Click here.
+ Blackstone private equity funds. Click here.
+ Manhattan Pharmaceuticals: Click here.
+ NovaDel Biosciences appeals. Click here.
+ Hana Biosciences appeals. Click here.
+ All turned on by biotech. Click here.
+ Steve Jobs Commencement Address. The text is available: Click here. The full audio is available. Click here.
+ The March of the Penguins, an exquisite movie. Click here.
+ When to sell stocks. Click here.

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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