Harry Newton's In Search of The Perfect Investment
9:00 AM EST, Tuesday, October 21, 2008: The
price you pay is the biggest determinant of the success (or otherwise) of your
investment. That's the number one rule of investing. In an awful economy (like
the one we have) we should be able to pick up bargains. As I chase around looking
for them, I see:
1. The banks
are not yet offloading their real disasters. The major reason for this is
bank management inertia. Second reason is it's easier to join the bailout line
at the Fed. Being on the dole is easier than working for a living.
Banks have huge
construction loans out to failed real estate developers. These loans should
go for less than 30% on the dollar -- possibly even 20 cents on the dollar.
But they come with the heavy baggage of the extra money it will cost to complete
the project and finance the marketing of the condos or the rental units. (A
side issue: Think of all the personal guarantees that are no longer worth the
paper they're written on.)
2. Much money
is still floating around, also called sitting on the sidelines, ready to
pounce on great deals. These monies drive the price up -- especially for properties
which are finished, clean and profitable. I saw one yesterday offering, on a
presently fully-rented property, a 13.5% IRR -- a nice yield for a passive investor.
When I asked, "could we get the property for less?" I was told emphatically
NO. There were too many potential buyers. The property came with its
own mortgage. That's a huge plus.
falling knives is incredibly difficult. Remember Tracinda's purchase of
Ford shares earlier this year at between $6.50 and $8.50? It sold most of them
-- 7.3 million -- this week at $2.43. That's a great way to make a small fortune.
Start with a large one. Remember the big hedge fund that lost $1 billion plus
on WaMu catching a falling knife also earlier this year?
How difficult is to make money in today's squirrelly stockmarkets. If an insider
like Jeff Immelt CEO can't figure it, what about us? From the the October 27
issue of Fortune magazine:
GE closed last night
at $20.05. It's been as low as $18.31 recently.
pattern of confronting problems only after they could no longer be fixed was
disturbing, but Immelt remained confident in GE Capital coming into this year.
Despite its stumbles, GE has a long history of strict financial discipline.
Immelt told shareholders in February, and repeated to employees recently,
that GE had no exposure to collateralized debt obligations (CDOs) or structured
investment vehicles (SIVs). It uses derivatives for hedging, which is relatively
safe, but prohibits speculating in them, which is dangerous. It subjects its
financial positions to shock tests - for example, assuming that interest rates
rise a full percentage point across the board and stay there for a year; if
that happened in 2008, Immelt said at the beginning of the year, GE's positions
were so well hedged that the effect on profits would be negligible. His upbeat
conclusion in February: "Our financial businesses should do well in a
year like 2008."
That was more
than just talk. In late 2007 and early 2008, Immelt spent about $10 million
of his own money buying GE stock at prices in the middle to upper 30s.
4. The biggest
threat to having money sitting around is having it sitting around. The temptation
to do something stupid is overwhelming -- in good times and bad. Wall Street
calls it "putting money to work." This phrase is unmitigated
rubbish. You have to fight it. Outlaw it from your vocabulary. There's actually
real benefit to buying six month CDs at your local bank. The interest rate you'll
get -- around 5% -- is less valuable than having the money thoroughly tied up,
isolated from your own stupidity.
to tennis, bicycle riding and reading. All
bear market have big rallies -- like the ones of the last two days. Do not be
fooled. Happy days are not here. You can see that from third quarter earnings
reports showing nice earnings and lousy outlooks. The key is to avoid the temptation
to do something stupid.
speak from vast experience of ultra-stupid "cute" investment decisions
made because my money was not "at work." My last cute decision was
buying Australian dollars at 96 cents. They're now 68 cents. Who knew that the
flight to safety would mean a sharply rising U.S. dollar, a falling Australian
dollar and falling gold and silver prices? Who knew?
is key. We need to live for another day. Maybe then, things will be respond
to "logic," or at least my logic? I pray daily for that day.
books into a hotel
Vicar books into a hotel and says to the receptionist 'I hope the
porn channel in my room is disabled!'
'No it's just ordinary porn.'
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
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