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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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8:30 AM EST Wednesday, November 22, 2006: There are more than 8,000+ hedge funds. They typically charge a 2% annual fee and a 20% incentive fee. This is a lot more than mutual funds. The theory is that hedge funds attract the best and brightest money managers and therefore perform better for their investors. That's the theory.

In reality, two of my hedge funds have performed significantly worse than all my Vanguard mutual funds -- which typically charge around 0.25% annual fee and no incentive fee. One of my hedge funds is down 38% and one is down 7.5%.

Hedge funds are so called because they're meant to "hedge" their bets. This means they're meant to have part of their funds invested in longs and part invested in shorts. Somehow this means the riskiness of their portfolio is reduced. If the market goes up, they benefit. If the market goes down, they benefit. There are problems with this:

1. It's really hard to think long and think short simultaneously. It's a different mindset.
2. So called funds-of-funds often also invest in the hedge funds which you might invest directly in. The fund-of-funds bring their own demands -- and one of which often is "You will be this percentage short all the time." This ties the hedge fund manager's hands, forcing him to search for shorts at the wrong time -- when the market is going up or his brain is simply into searching for undervalued companies.

I bring all this up because hedge funds have lately achieved a glamor -- the press is rife with stories of hedge fund managers (like Stevie Cohen) who earn hundreds of millions each year and live like kings in castles that put Buckingham Palace to shame. Fact is there is a handful of hedge fund managers who are geniuses. But the bulk are like you and I -- scrounging their next stock idea, praying they'll get in before it turns and trying to predict the unpredictable (like the FDA).

Hedge fund rewards are potentially so high and the competition for investors' money so intense that it makes many hedge fund managers desperate. They churn their portfolios, trying to catch every little bounce or plummet in the market. Eventually, some mature and learn they're driving themselves nuts and hurting their fund's performance. And eventually most (at least the good ones) calm down and search out value. They do their research, visit the companies, stay close to management and hope for the best. In this way, they begin to look like mutual fund managers and standard 1% to 1.5% money managers.

I spent an hour on the phone yesterday with a hedge fund manager who's lost me 7.5% so far this year. He patiently went through every position in his portfolio, why he owned them and what he hoped for each of the stocks. He explained what he'd learned this year -- chasing gyrations is a fool's game, staring at Bloomberg screens all day is a gigantic waste of time. Some of his new hires were not suited for the hedge fund world. He has to do a better job of dealing with the demands of the funds of funds, etc.

In contrast, my 38% down fund is staying secret, refusing to divulge his holdings (despite promises) or its strategies. It's feeding its investors the Mushroom Strategy, defined in my dictionary as:

A technique for dealing with dissident shareholders, recalcitrant employees, difficult families and hedge fund investors. The strategy is threefold: Keep everyone in the dark, feed them a lot of organic bovine waste (i.e. bullshit) and harvest them (i.e. bring them into the real world) when they are truly ripe, i.e. when you're ready to bring them out of their misery, or ignorance.

I have one hedge fund I love. I'm close to the manager. He explains what he's doing and why. I feel comfortable that he's my "kind of guy" -- believes in capital preservation, low risk, broad diversification and, most importantly, has a lot more of his own money in his fund than my money.

In short, finding money managers is not easy. If someone were to ask me this morning, "Give me the least aggravation way to invest my money," I'd answer, "Put half in Vanguard funds and half in muni bonds, especially if you live in a high-tax state. And go play tennis."

My Vanguard funds are doing splendidly. Thank you very much. My favorites: the International Value Fund, the Total International Stock Index, the Emerging Markets Stock Index, and the Mid-Cap Index Fund.

In short, the big tradeoff in investing is not risk for reward. It's aggravation for peace. With tomorrow Thanksgiving, I'll opt for peace.

But on Friday, I will probably feel different... (See yesterday's column. Click here.)

Is the Worst Over for the Housing Bust? In today's Wall Street Journal, economists surveyed say "Yes." But they still predict that the average selling price of a house will fall next year. Of course, all real estate is location, location, location. I've been surveying my own friends who are in real estate. They say:

1. After a total drought for several months, residential in erstwhile "hot" places like California is now -- remarkably -- picking up. Houses and condos are selling.

2. Commercial rents continue to firm. Commercial office buildings -- especially in "hot" cities like New York, Washington and Los Angeles -- continue to rise in price.

Don't waste your time with this movie:

It's boring. End of story.

How I screwed up: I recommended Dyson's new hand vac, the Dyson Root 6

because I loved their upright, the DC-07

which I have two of. I also recommended the hand vac because the trade press had recommended the hand vac. But I hadn't personally tested it. Wrong! All the user reviews on the Internet (Amazon and mySimon, etc.) talk of great suction -- but horrible 5 minute battery life. Yes, you read right. Fully charged, the thing only lasts five minutes. In short, stick with the corded DC-07.

Harry vows never to recommend anything he personally hasn't personally tested. Harry vows also not to believe the magazines and the 2006 Gift Guides. Most of them have never seen the product and are simply filling their magazines with press releases.

The logic of technology:
After having dug to a depth of 1000 meters last year, Scottish scientists found traces of copper wire dating back 1000 years and came to the conclusion that their ancestors already had a telephone network more than 1000 years ago.

Not to be outdone by the Scots, in the weeks that followed, English scientist dug to a depth of 2000 meters and shortly after headlines in the UK newspapers read; "English Archaeologists have found traces of 2000 year old thin glass." They concluded their ancestors already had an advanced high-tech digital fiber optic communications network a thousand years earlier than the Scots.

One week later, Irish newspapers reported the following: 'After digging as deep as 5000 meters in a County Mayo bog, Irish scientists have found absolutely nothing. They have therefore concluded that 5000 years ago Ireland's inhabitants were already using wireless!"

Don't forget to try this tomorrow:
One year at Thanksgiving, my mom went to my sister's house for the traditional feast.

Knowing how gullible my sister is, my mom decided to play a trick.

She told my sister that she needed something from the store.

When my sister left, my mom took the turkey out of the oven, removed the stuffing, stuffed a Cornish hen,and inserted it into the turkey, and re-stuffed the turkey. She then placed the bird(s) back in the oven.

When it was time for dinner, my sister pulled the turkey out of the oven and proceeded to remove the stuffing.

When her serving spoon hit something, she reached in and pulled out the little bird.

With a look of total shock on her face, my mother exclaimed, "Patricia, you've cooked a pregnant bird!"

At the reality of this horrifying news, my sister started to cry.

It took the family two hours to convince her that turkeys lay eggs!

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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