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Harry Newton's In Search of The Perfect Investment Technology Investor.

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9:00 AM EST, Friday, October 17, 2008: Let me make several things perfectly clear:

1. I don't like this market. I don't believe it's possible to make real money investing in stocks today. My "recommendations" on ultra-short ETFs, shorting and other plays are what they are -- "plays." What other people call speculation, or gambling. They're for 1% to 2% of your money, for play, for amusement. That said, we lost money on our ultra-shorts yesterday -- but not enough to wipe out the gains from the previous day. This is what they look like early this morning:

Put them on your screen and watch them gyrate. Remember we're looking for them to go up, i.e. as the market goes down.

2. Though there are more and more articles are appearing that "we have hit bottom," I see them as less reality and more the press's need to write headlines that sell. USA Today newspaper has a piece today "Signs grow that stock market may have hit bottom." Their reasons: rising fear, big and small investors bail, large swings during the day. Barrons' last cover was "Closer to the Bottom." Barrons said:

There's reason to believe that the stockmarket averages will hit bottom sometime in the next few months, even if the economy is still in the middle of a recession. The buy-and-hold approach still applies.

Warren Buffett had an OP-ED piece in today's New York Times headlined "Buy American. I Am." He explains why he's buying equities today.

3. Everyone who predicts the market has an ax to grind. That includes Warren Buffett, who clearly would like investors to follow him into the market and make his recent purchases look good.

4. I am prepared to miss the bottom and become fully invested once I feel more comfortable with the economy and where it's headed. The bailout has saved a handful of favored banks, but it has not made them lend (that part is missing from the bailout plan), earnings still stink and we're still losing jobs.

5. I don't like catching falling knives. Buffett says, "Be fearful when others are greedy and be greedy when others are fearful," i.e. buy today..

Buffett could have bought his shares in GE and Goldman Sachs cheaper yesterday, despite yesterday's big 400 point bounce.

Does stockmarket timing make sense? Academic studies say No. I recommended getting out of equities last November. That made huge sense. Does it make sense to get out of them now? It depends. Here's the recent boom/bust cycle.

The BIG thing to know about boom/bust cycles is that a whole category (or categories) of stock crash. Had you stuck with your portfolio of last November, you'd probably still own stocks that have suffered horrendously -- the financials, the car makers, the house builders. One big advantage of piling out of the market completely, is that it forces you to affirm what you really want to own going forward. I'm not sure that I really want to own GE or Goldman Sachs -- both heavy financials with problems still to be revealed. I don't want to own oil stocks. I don't want to own most technology stocks -- though Apple and Google looking interesting. Frankly, at this point, I'm not sure what I want to own going forward.

What got me started is a New York Times piece on stockmarket timing. It's one of their top five most viewed pieces. See what you think:

Switching to Cash May Feel Safe, but Risks Remain by Ron Lieber

It’s a question we’ve all asked in our darker moments of late: Why not just put all of our investments in cash, 100 percent, just for a little while, until things calm down?

Some people already seem to be acting on that instinct. In the first six days of October (through Monday), investors pulled $19 billion out of mutual funds that invest in United States stocks, matching the outflows for the entire month of September, according to TrimTabs Investment Research.

“What clients are looking for is safety,” said John Bunch, president of retail distribution at TD Ameritrade. “They are seeking solutions that are backed by the federal government. Specifically, F.D.I.C-insured money funds and certificates of deposit. All of it is under the umbrella of, ‘Am I safe and insured?’ ”

By fleeing for the comfort of safe and insured, however, investors with a time horizon beyond a few years may be doing real damage to their long-term finances. If you’re tempted to make a big move to cash right now, you’re doing something called market timing. It’s an implied statement that you’ve figured out the right moment to get out of stocks — and will also know the right time to get back in.

So let’s dispense with the first part straight-away. The right time to move out of stocks was a year or so ago, before various stock indexes the world over fell by one-third or more.

If you missed that opportunity, you’re hardly alone.

But if you sell now, you’ll be locking in your losses. And once you’re in cash, there isn’t much upside. In fact, with interest rates low, you’re likely to lose money in cash, because inflation will probably eat up the after-tax returns you earn from a savings or money-market account.

A guarantee of a small loss may sound good right now. But if you’re not bailing out of stocks once and for all, how will you know when it’s time to get back in? The fact is, any peace of mind you gain by being on the sidelines now will turn into a migraine once you see how much you can harm your portfolio over time by missing just a bit of any rebound.

H. Nejat Seyhun, a professor of finance at the Ross School of Business at the University of Michigan, put together a study in 2005 for Towneley Capital Management, where he tested the long-term damage that investors could do to their portfolios if they missed out on the small percentage of days when the stock market experienced big gains.

From 1963 to 2004, the index of American stocks he tested gained 10.84 percent annually in a geometric average, which avoided overstating the true performance. For people who missed the 90 biggest-gaining days in that period, however, the annual return fell to just 3.2 percent. Less than 1 percent of the trading days accounted for 96 percent of the market gains.

This fall, Javier Estrada, a professor of finance at IESE Business School in Barcelona, published a similar study in The Journal of Investing that looked at equity markets in 15 nations, including the United States. A portfolio belonging to an investor who missed the 10 best days over several decades across all of those markets would end up, on average, with about half the balance of someone who sat tight throughout.

So moving to cash right now is just fine as long as you know precisely when to get back into stocks (even though you didn’t know when to get out of them).

At some point, stocks will indeed fall enough that investors will remove the money from their mattresses and put it to work, causing prices to rise significantly. But, as Bonnie A. Hughes, a certified financial planner with the Enrichment Group in Miami, put it to me, there won’t be an e-mail message or news release that goes out when this is about to happen. It will be evident only afterward, on the few days when the market surges.

And it gets worse for those who think they won’t have any trouble investing in stocks again later. Medium- or long-term investors who are considering a big move into cash right now are probably making an emotional decision, at least in part. For those who follow through, the same instincts will probably hurt when trying to figure out when to reinvest in stocks.

“The emotional forces that drove them out of the market aren’t likely to let them back in ‘until things are better,’ ” Dan Danford of the Family Investment Center in St. Joseph, Mo., said in an e-mail message. “And for most people, things won’t feel better again until the market has already moved back up.” In fact, he added, plenty of people may not allow themselves to get back in until the market has already risen significantly.

That situation is worth considering if you think your mood, or returns, can’t get any worse. “People feel worse missing out on the bounce-back that will inevitably come than they do hanging in there through the down period,” said Elaine D. Scoggins, a certified financial planner with Merriman Berkman Next in Seattle.

The truly downbeat do not see the bounce as inevitable. This outlook is essentially a bet that our current predicament is so different that the equity markets won’t bounce back at all, even though they survived 1929, the Great Depression, 1987 and a major terrorist attack. I do not believe that the markets are in some kind of permanent decline, and I haven’t found an expert who does.

That said, some retirees, or those close to leaving the work force, may be well-off enough to leave stocks behind for now. If the tumult in the economy and the decline in the markets have altered your risk tolerance, then it may make sense to move to a portfolio of Treasury bills, certificates of deposit and money market funds.

Michael G. Coli, 56, of Crystal Lake, Ill., decided to take his 401(k) money out of the market in February. As an investor in his sons’ pizza restaurants, he noticed that an increasing number of customers were relying on credit cards. And as the owner of a winter home in Naples, Fla., he witnessed the housing market dive. Taken together, he decided to pull his retirement money, which he would need in five years, from the Vanguard Balanced Index Fund and move it all into certificates of deposit.

“I had the feeling the economy was not on real firm ground,” Mr. Coli said. “I decided to get out and put it all in C.D.’s, and that is where I’ve been ever since.”

If you can’t afford to live off the proceeds of cash investments (or dividends from your investment in your kids’ pizza joints), you may have no choice but to hold on to whatever stocks you have left. Then, you can hope for a rebound that will allow you to live out your later years more comfortably. Selling now and moving to cash could mean guaranteeing a lower standard of living for the rest of your life, because you’d be locking in your losses.

But if you’re a bit younger, try to think of your investment portfolio in the same way you consider the value of your home, if you own one. After all, if you’re not moving anytime soon, your home is a long-term investment, too.

“Today’s price is not your price. Your price is 10 or 20 years from now,” said Thomas A. Orecchio, of Greenbaum & Orecchio, a wealth management firm in Old Tappan, N.J. “Unfortunately, stock market investors don’t always see things that way.”

The profound change in banking and lending. One of my favorite financial writers does an occasional piece called The Financial Page for the New Yorker. This is good weekend reading.

The Trust Crunch
by James Surowiecki October 20, 2008

In December, 1912, J. P. Morgan testified before Congress in the so-called Money Trust hearings. Asked to explain how he decided whether to make a loan or investment, he replied, “The first thing is character.” His questioner skeptically suggested that factors like collateral might be more important, but Morgan replied, “A man I do not trust could not get money from me on all the bonds in Christendom.” Morgan’s point was simple but essential: systems of credit depend on trust. When trust is present, money flows smoothly from lenders to borrowers, allowing new enterprises to start, existing ones to expand, and daily business to move along without a hitch. When it’s absent, we find ourselves in a world where lenders hoard capital, borrowers are left empty-handed, and the economy’s gears grind to a halt—a world, in other words, like the one we’re now living in.

A few years ago, banks and other lenders seemed indifferent to risk, as they doled out loans to people with dubious incomes and poor credit records. Today, they are positively paranoid, distrusting even the best borrowers and forcing companies to pay far more interest on money borrowed. The interest rate on the most highly rated two-year corporate bonds has risen by fifty per cent in the past month, even as the interest rate on government bonds has fallen.

Shocking as the current stock-market drops have been, the freezing up of the flow of credit is far more damaging to the health of the U.S. economy. So, during the past few weeks, the Treasury Department and the Federal Reserve have been desperately trying to fight that freeze. Scarcely a day goes by without some dramatic new initiative, even as market chaos makes each new idea soon seem like ancient history. (It’s been just over a week since the Treasury’s plan to buy seven hundred billion dollars’ worth of “toxic assets” became law, but already it feels like a year.) Last week, in a potentially crucial move, the Fed announced that it would start buying billions of dollars in commercial paper—which means that it will be issuing short-term unsecured loans to corporations. The Fed has historically been the lender of last resort to banks. Now it’s becoming the lender of last resort to everyone.

Commercial paper is the name for short-term promissory notes that companies sell to raise money for daily operations, to meet payroll, and to bridge the gap between when they spend and when they get paid, while keeping their own cash in higher-yield investments. Commercial paper is not a new innovation—Goldman Sachs actually started as a commercial-paper firm, in the late nineteenth century—but it has become essential in day-to-day business in the U.S. Since 1980, annual commercial-paper issuance has gone from $124 billion to $1.6 trillion. Most of these loans are unsecured—companies don’t put up collateral but simply promise to pay the loans back out of cash flow—so only well-established, financially solid companies can tap the commercial-paper market.

Because commercial-paper loans are short-term and are made only to companies with sterling credit ratings, they’ve always been assumed to be practically riskless, and lenders (most notably money-market funds) have been willing to lend at low interest rates. But the past year has called into question the very idea of a low-risk loan. Lehman Brothers, after all, still had an A2 credit rating when it went under, taking down with it billions in commercial paper. Since its failure, lenders have adopted a gimlet-eyed approach to everyone, making it hard for key companies to perform basic transactions, and thereby exacerbating the market panic. A company like A. T. & T. is hardly likely to go bankrupt in the foreseeable future, but, after Lehman’s collapse, lenders were so skittish that A. T. & T. couldn’t get commercial-paper loans that lasted longer than overnight.

The fear that has overpowered lenders is not just about the current market chaos. It also reflects their lack of faith in the models and systems that they rely on to evaluate risk. For Morgan, that process of evaluation was all about relationships. In the modern financial system, by contrast, risk evaluation involves two things: impersonality and outsourcing. Personal judgments about the reliability of a borrower—the sort of judgment that Morgan, or a small-town banker, would make before issuing a loan—have been replaced by mathematical models. And lenders have delegated much of the responsibility for evaluating borrowers to other players, such as credit-rating agencies. In many cases, an AA rating was all a company needed to get a loan.

There’s no doubt that this system has had huge benefits. It has made it easier for money to connect lenders and borrowers. It has removed the kinds of personal bias that kept capital in the hands of people whom men like J. P. Morgan approved of. And it has vastly expanded the amount of lending as well. But all those benefits have come at an exorbitant price. The problem with an impersonal system is that when the models fail, and when companies’ ratings become suspect, everything is called into question. Lenders can’t fall back on their own judgments of a specific company or individual, because such judgments aren’t part of their typical decision-making process. Instead, they’ve adopted a deep-seated distrust of all borrowers, even financially secure ones. If the Fed is now taking corporate I.O.U.s, it’s because everyone else is acting according to that old motto: In God we trust—all others pay cash.

The differences
The Italian says, 'I'm tired and thirsty. I must have wine.'

The Frenchman says, 'I'm tired and thirsty. I must have cognac.'

The Russian says, 'I'm tired and thirsty. I must have vodka.'

The German says, 'I'm tired and thirsty. I must have beer.'

The Mexican says, 'I'm tired and thirsty. I must have tequila.'

The Jew says, 'I'm tired and thirsty. I must have diabetes.'

Jewish curse
May all your teeth fall out - except one, so you can have a toothache.

From the El Al pilot
"Ladies, gentlemen and children. Shalom to you all. This is your pilot,. I welcome you on board this flight to Tel Aviv. We will do all we can to make sure you have a great flight with us this afternoon.

"But if, God forbid, by some remote chance, we run into trouble, keep calm, don’t panic. Your life jacket is under your seat. Please wear it in the best of health."

This short video clip is hysterical.
A sad, funny commentary on today's hard economic times. Use Internet Explorer. Click here.

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.