Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
AM EST Thursday, September 21, 2006: You
make money on what you know -- not what's fashionable.
be what your friends are talking about. Fashionable can be what made money on
last year. Fashionable can be commodities. Fashionable can be real estate. Fashionable
can be indexed currency notes. Fashionable can be buy-out targets -- the latest
Wall Street is
a financial product machine. It makes products, then "sells" them
to you and I for a commission. Sometimes it sells them outright. That's one
commission. Sometimes it sells that it will manage the bet for you. That's many
commissions for a long time. Better still, Wall Street often gets it up front
-- long before you earn a nickel.
The odds are stacked
against you. Yet it's amazing how many of us fall for their sales pitch.
The mess at hedge
fund Amaranth with the big, failed natural gas bets is still unfolding. There
are lessons for us all:
1. Because there's
so much money around, because so much of it is money desperate for the latest
hot new thing, prices of "hot" things rise and fall much faster than
they've ever done. This means you need to be in and out faster than ever before.
If you're going to play this game, you need to set a modest profit target, achieve
it and get out. Think gold, oil, natural gas. The price swings in the past year
alone have been horrendous.
Look at these
two charts. They cover gold prices. Check out 2005. Gold just kept climbing
and climbing. Time to jump in? Clearly.
Now look at 2006.
If you waited too long to get in, you lost your shirt. Who could predict the
high was $725 or so? Getting in at that price made sense in May. Look at the
run-up just before it hit peak. Gold was going for the moon and the stars.
Some lessons I
take from all this:
1. When an area
of investing gets too popular, it gets overpriced and ripe for a fall. This
means you have to be nimble. Grab a small profit. Moves your stops up. Set a
tight stop loss. And get out.
2. The problem then is "How do you put your new cash money to work?"
That's one of Wall Street's great myths. There's no such thing as "putting
your money to work." That's their euphemism for gambling. There is absolutely
nothing wrong with having your money in cash. Follow my old tired aphorism:
"When in doubt, stay out."
3. That means
you have to be ultra-patient. I mean super-patient. Cash is good. It's as good
as money, and in many respects, better than happiness. Money will buy happiness.
Happiness won't buy money.
4. It's perfectly
reasonable to make only one trade a year. A friend invested $1 million in a
company he felt comfortable with because his people had done the due diligence.
In a few months (after one year and a day have elapsed) his investment will
be worth $1.6 million. I only invested $100,000. I was dumb. I still have money
in commodities. More money. Super dumb. Suckered by the press and the noise.
5. When information
is imperfect, that's your advantage. There are too many smart people with more
information on public things -- like stocks and commodities -- than you will
have. Even if you devoted your life to studying that area. Stick with stuff
five people know something about. Only five people. The apartment building across
the road. The company you're the only buyer of. Stay away from crowds. I recommend
you read "The Wisdom of Crowds" by James Surowiecki and "Extraordinary
Popular Delusions and the Madness of Crowds"
by Charles MacKay.
6. Don't buy into
a fund of funds. They're sold by Wall Street because of "diversification."
But .... you don't know what you're buying into. Your fund of funds may buy
into a Amaranth, with heavy energy exposure, which you may not want.
7. Don't buy into
vehicles with a long lock-up period. That severely limits your flexibility.
8. And don't buy
into vehicles where you don't know what your brilliant management is doing.
And above all
don't buy into an area because it's hot. These two paragraphs from today's Wall
Street Journal are indicative:
to Amaranth, a fascinating story. There's
an old adage:
Much as they
did with tech-oriented investments shortly before they tanked in 2000, individual
investors also have rushed into commodities, via stocks of commodity-related
companies and mutual funds that specialize in such investments. There are
48 mutual funds that invest in commodities and related shares managing $56
billion, up from 34 funds with less than $10 billion three years ago, according
to fund tracker Morningstar Inc. The Commodity Real Return fund of Allianz
AG's Pacific Investment Management Co. has grown to more than $12.2 billion,
from $8 billion about a year ago.
holder of gold in the world isn't a central bank but an exchange-traded fund,
a type of security that trades like a stock and tracks the price of an underlying
investment class. StreetracksGold Trust, the largest gold ETF, has assets
of $7.5 billion, up from $2.7 billion a year ago, mostly from new investments.
a loan of $100, you're in trouble.
Default on a loan of $1 million, your bank's in trouble.
From today's New
can feel the frustration:
Hedge Fund Shifts
to Salvage Mode
A day after disclosing that a disastrous bet on natural gas prices had produced
losses of more than $3 billion, Amaranth Advisors, once among the nations
largest and hottest hedge funds, was scrambling yesterday to salvage something
from its battered portfolio of energy trades.
as it had been since the weekend, Amaranth was locked in negotiations with
several Wall Street banks and other hedge funds in an effort to sell its energy
portfolio to try to keep the fund company afloat.
At the same
time, it was working with commodity exchange officials to reassign trades
to try to minimize disruptions to the market.
investors, locked into their holdings by Amaranths stringent liquidation
terms, awaited further word on the status of the funds holdings, while
regulators and traders watched for signs that the hedge funds losses
might disrupt markets beyond those relating to energy.
The losses at
Amaranth have followed another blowup in natural gas at a smaller fund, MotherRock,
but financial markets have hardly felt a murmur, largely because the volatility
has been contained so far to a corner of the energy market,
and is not tied to markets in stocks and bonds. And with so much investment
money pouring into energy, it is likely that others profited from the billion-dollar
effects have been fairly limited, confined mostly to the natural gas market.
Amaranths portfolio, valued at $9.25 billion as recently as a
few weeks ago, was apparently halved by a wrong-way wager that natural
gas prices would rise, a bet that had produced enormous gains for the fund
in recent years. Amaranth traders had reckoned that the difference, or spread,
between the prices of gas futures in the months of March and April in coming
years would increase. But rising gas inventories caused prices to decline,
putting Amaranth on the wrong side of a brutal and accelerating market trend.
the New York Mercantile Exchange, where natural gas futures contracts trade,
were matching up Amaranths trades with holdings of other market participants,
neutralizing their positions. The exchange would say only that Amaranths
account and the firm that cleared its trades were in good standing.
seems to have recovered a little bit from the fall in price we had over the
weekend, said Kent Bayazitoglu, head quantitative analyst at Gelber
& Associates, referring to natural gas prices. Its leveling
out a little bit at $5, and the volume has fallen. Its slowing down
and accepting the prices.
Last week, the
market fell to $4.80, the lowest level since September 2004, according to
Mr. Bayazitoglu. ...
says men don't remember anniversaries?
A woman awakes during the night to find that her husband was not
in their bed. She puts on her robe and goes downstairs to look for him.
She finds him
sitting at the kitchen table with a hot cup of coffee in front of him. He appears
to be in deep thought, just staring at the wall.
She watches as
he wipes a tear from his eye and takes a sip of his coffee. "What's the
matter, dear?" she whispers as she steps into the room, "Why are you
down here at this time of night?"
The husband looks
up from his coffee, "I am just remembering when we first met 20 years ago
and started dating. You were only 16. Do you remember back then?" he says
The wife is touched
to tears thinking that her husband is so caring, so sensitive. "Yes, I
do" she replies.
The husband pauses.
The words were not coming easily. "Do you remember when your father caught
us in the back seat of my car?"
"Yes, I remember,"
said the wife, lowering herself into a chair beside him.
The husband continues.
"Do you remember when he shoved the shotgun in my face and said, "Either
you marry my daughter, or I will send you to jail for 20 years?"
that too" she replies softly.
He wipes another
tear from his cheek and says...
have gotten out today."
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 .
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