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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 Friday, November 3, 2006: Is art a good investment? My knowledgeable friends say "Buy if you enjoy it, but don't buy it for investment." The art market is hot. It's setting records. The New York Times referred to this 4 x 8 feet canvas by Jackson Pollock as a "classic drip painting." It sold for $140 million -- the highest price paid for any "painting" ever.

Ronald S. Lauder (of Estée Lauder fame) paid $135 million in June for Gustav Klimt's portrait of Adele Bloch-Bauer II -- the previous top seller.

What about art as an investment? According to the Times, a Cézanne which goes to auction shortly and should get between $28 million to $35 million, was bought six years ago for $!8.1 million. That gives an annual compound return of 7.54% to 11.62%. A Picasso bought by Andrew Lloyd Weber 11 years ago for $29.1 million is now expected to sell for between $40 million and $60 million. That gives it between a 2.93% and 6.80% compounded annual return. I suspect these rates might be even lower since there may have been (probably was) a "buyers' premium" (a 20% commission added to the sales price at auction) and local sales tax. In short, art is a pretty lousy investment -- even in hot markets.

My personal preference is buy art I like from young artists who have a flair for self-promotion. I enjoy the art on my wall. I hope my artists spend lots of time promoting themselves and their art -- by getting into museums, galleries, etc.

The real story on hedge funds:
I was a little harsh on hedge funds yesterday -- if only to make a point that they can be dangerous animals and to reiterate my basic rule -- if returns are huge one year, take some (or all) of your money back. Chances are the following year won't be that big. In fact, the following year may be negative. My rule starts at 40% up one year and ends with "it's better to play with the bank's money."

Robert Wolgemuth runs a hedge fund called Insight Fund in Wheaton, Il. His returns have been

Annual Returns
155.94 %
2.78 %
26.57 %
3.54 %
* to end October

Mr. Wolgemuth writes: I disagree with your generalizations of Hedge Funds. You wrote:

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.)

The fact is there are literally hundreds of hedge fund strategies out there - so trying to generalize or say they have similarities is inaccurate in my opinion. Any more, the term hedge fund refers to structure (private, limited partnership) and that is where the similarities between many funds stop -- except within certain specific strategies. I think when making your generalizations, you are referring more to long/ short funds than any others. We run a long/ short fund but it is quite different than what you described. In fact, some long/ short funds use little to no leverage (potentially decreasing volatility) and still produce consistently outstanding returns not necessarily correlated to the overall market (like ours). To group all hedge funds together (or even all long/short funds) and consider them gambling machines is irresponsible. Of all journalists, I would think you would be a little more savvy than to make that sort of generalization. A few bad apples doesn't mean the whole bushel is rotten. You are a real estate investor. If you heard that one or two real estate partnerships blew up recently, does that mean that you encourage all your readers to exit all real estate investments? Don't you agree that HF 's naturally attract the best talent (due to the compensation model)? Yet every one of them is a gambling machine? Is SAC Capital a gambling machine? Is Eddie Lampert's fund? What about Michael Steinhardt's back in the day? Or George Soros'? Or Julian Robertson's? Or Citadel here in Chicago (run by Ken Griffin)? Or take a smaller Fund like the $1 bil Libra Fund in NYC. They have averaged over 30 % (net of fees ) a year since inception in 1990. Sounds to me like skill not gambling.

Hedging -- selling short -- can go disastrously wrong. You can lose gobs of money. 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.

Once again you're generalizing. Our fund has about 33% of its portfolio short and yet has a return over 250% (net of fees ) since inception 3.5 years ago . If you are skilled, you can make money shorting stocks - though it is challenging. Doug Kass is out in the media a lot and seems to know what he is doing (runs a short only fund) - not sure about his overall performance though.

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.

This statement to me is the most inaccurate piece of information I have ever seen in your column. We were up 156% (net) in 2003 and followed that with a positive year in 2004. We were up close to 27% (net) in 2005 and this year we are positive again. We attempt to get great returns for our investors but we spend a lot of time making sure that we don't subject our investors to too much negative volatility and drawdown. If you are a skilled money manager you should be able to manage drawdown and being up a lot one year should not necessarily lead to negative returns the next year.

Harry's Rule: When the fund does well one year, take most of your money out. If you want to k eep 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.

I am sorry Harry, but this is bad advice and you are smart enough to know it. It all comes down to the talent and strategy of the asset manager . There have been a number of hedge funds that have achieved exceptional returns over time- blowing away any ETF or mutual fund. Like any long range investment hedge funds should be measured over years not months and though all managers have periods of time when they underperform -- the great ones will have great returns over time. Your argument also doesnt hold water- because hedge funds are in every asset class and have such a wide variety of strategies / risk tolerances you cant group them together like you are attempting to. Maybe we should not invest our money in anything? It is all risky! And heaven forbid our investment appreciate - then it becomes ultra risky!

Bottom line, if you want to invest in hedge funds know the risks -- but also know that the most talented money managers are running hedge funds -- and that is because they get paid based primarily on their performance. If they have handsome returns they get paid handsomely. Steven A. Cohen (started SAC Capital) got rich because he is a talented stock picker. My guess is he didn't want to waste his time running a mutual fund or a desk at Goldman Sachs -- rather he wanted to run a hedge fund because that was the best way to be compensated for his skill.

In my opinion, if you decide not to invest in hedge funds (assuming you are accredited) you are turning your back on some of the world's most talented money managers. And for heaven sakes don't get intimidated by good returns -- they are often an indication of skill and solid volatility management. Always be alert and as you, Harry like to say have your stop losses in place (even when investing in hedge funds)- but let your winners run.

As America slows, Europe is picking up, finally. My friend returned from an investor meeting in Germany. He's psyched. This chart is from the Economist.

The Economist wrote:

The European Commission's indicator of business and consumer economic sentiment in the euro area rose in October to its highest level in more than five-and-a-half years. Among the bigger countries in the currency block the uptick in optimism was particularly strong in Germany and France (where the unemployment rate is at a five-year low), but in Italy confidence fell.

Next Tuesday is Election Day. But you can vote earlier -- like today -- if you're going to be out of town next Tuesday. It's called casting an absentee ballot. You can vote in person. I'll be doing that today. These elections will be close. Your vote is needed.

How to avoid the flu
Miss Beatrice, the church organist, was in her eighties. She was admired for her sweetness and kindness to all. One afternoon the pastor came to call on her and she showed him into her quaint sitting room. She invited him to have a seat while she prepared tea.

As he sat facing her old Hammond organ, the young minister noticed a cut-glass bowl sitting on top of it. The bowl was filled with water, and in the water floated, of all things, a condom! When she returned with tea and scones, they began to chat.

The pastor tried to stifle his curiosity about the bowl of water and its strange floater, but soon it got the better of him and He could no longer resist. "Miss Beatrice", he said, "I wonder if you would tell me about this?" pointing to the bowl.

"Oh, yes," she replied, "Isn't it wonderful? I was walking through the Park a few months ago and I found this little package on the ground. The directions said to place it on the organ, keep it wet and that it would prevent the spread of disease. Do you know I haven't had the flu all winter?"

Two nuns go painting
Two nuns are ordered to paint a room in the convent, and the last instruction of the Mother Superior is that they must not get even one drop of paint on their habits.

After conferring about this for a while, the two nuns decide to lock the door of the room, strip off their habits, and paint in the nude.

In the middle of the project, there comes a knock at the door. "Who is it?" says one of the nuns.

"Blind man, " replies a voice from the other side of the door.

The two nuns look at each other and shrug, and deciding that no harm can come from letting a blind man into the room, they open the door.

"Nice breasts," says the man, "Where do you want the blinds"?

The weekend is about to be glorious. Thank the Lord you're not going to prison for 12 years -- like this man, Sanjay Kumar, ex-chief of Computer Associates:

Mr. Kumar, center, is going to jail for fraud. His gorgeous, pricey suit won't do him any good for the next 12 years.

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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