Previous Columns
8:30 AM Friday, September 30, 2005: Investing is gambling. The only "control" you have over a listed security is being able to sell it. You have a tiny bit more control if you're a director. A friend is a director of a public company. Each year, he goes to six meetings, each of five hours. That means he spends 30 hours helping run a gargantuan company. He has only the faintest clue what's going on -- which he readily admits.

You have more control if you own the company or a big chunk of it. At least that's the theory of private equity funds. I own a tiny piece of a huge fund which this week had its annual meeting. My fund started in 1999 -- a bad time to start a fund. Six years later, how has it done? Not brilliantly is the simple answer, but brilliantly, given that at one stage the fund was down 50%. It's now up a few percent. At this stage, it looks as though I would have done far better leaving my money in muni bonds paying around 5%.

Good things may still happen with the investments the fund still own. Cross your fingers.

To illustrate my point about gambling, I'm going to show you how the fund's investments did and/or are doing. First, the investments sold:

Investments Realized (also called Sold)
	At Acquisition		At Exit (i.e. when they sold it)
	Enterprise Value	EBITDA Multiple*	Enterprise Value	EBITDA Multiple
Company A	$260.0 million	12.4x	$618.0 million	12.4x
Company B	$13.9 million	11.6x	$63.1 million	17.5x
Company C	$98.1 million	8.6x	$573.8 million	11.4x
Company D	$540.0 million	7.9x	$1,065.6 million	11.4x
Company E	$294.3 million	8.4x	$546.5 million	11.4x
Company F	$932.4 million	8.2x	$2,185.8 million	11.4x
Total	$1,206.3 million	8.8x	$2,867.0 million	11.7x

Notes:
+ EBITDA means earnings before interest, taxation, depreciation and amortization. Using this measure instead of the more common net income that's used for public companies allows the buyers and sellers to have a comparable number -- bereft of changes they could and might make in borrowing, taxation, depreciation and amortization. It also lets the seller show higher earnings, or even earnings at all. Sometimes those charges eat up all the profits and the company is losing money on net income.

+ Notice how the sales multiple has risen. That's a reflection of two things: First, the economy recovering from the Tech Wreck/Recession of 2000-2001. And second, the general shortage of investment opportunities versus the money available to buy things. I've written about this before.

Now to the investments we're still holding:

Unrealized Investments (We're still holding and praying)
	Capital invested	Valuation today	IRR	Multiple of invested capital
Company A	$48.4 million	$33.0 million	NM	0.7x
Company B	$101.6 million	$59.3 million	NM	0.6x
Company C	$117.1 million	$24.7 million	NM	0.2x
Company D	$39.9 million	$0	NM	0.0x
Company E	$47.9 million	$49.1 million	0.9%	1.0x
Company F	$38.6 million	$45.2 million	10.0%	1.2x
Company G	$35.8 million	$35.8 million	NM	1.0x
Company H	$55.8 million	$55.8 million	NM	1.0x
Company I	$27.8 million	$60.0 million	110.6%	2.2x
Total	$464.5 million	$362.8 million	NM	0.8x

NM means not measurable. These investments are not measurable because they're duds or we just bought them and it's too early to tell. Company D filed for Chapter 11 bankruptcy in August.

Today is the end of the quarter: (I checked -- not like last time.) Yesterday stock prices rose strongly. Some friends said it was mutual funds buying stocks to make their purchases and their managers look intelligent. If things happen as the theory forecasts, prices should rise strongly late this afternoon -- especially in hot stocks, like Valero. If you need to sell anything, this afternoon might be a good time. I make no guarantees.

Bayou's founders pleaded guilty to criminal-fraud charges in the collapse of their hedge-fund firm. Authorities said the firm never made a profit despite years of sunny (i.e. bullshit) reports to clients and mostly stopped trading securities last year. The moral of this story is You can't believe all the performance reports you see. Some may literally be worth less than the paper they're written. Hint: check the auditors. Bayou's were flimflam artists.


This is Samuel Israel III. He co-founded Bayou. He pleaded guilty yesterday to criminal fraud charges. Crooks don't have horns and a tail. They look like you and me. This makes picking them so difficult, and doing thorough due diligence so important. I hear Israel has been living in a gigantic house he rents from Donald Trump for $35,000 a month. Trump is not an investor in Bayou. He smelled a rat early on.

The Energy boom: There's clearly money to be made by putting together an "Energy Portfolio" -- covering stocks that own, mine and supply the industry with the equipment it needs. I'm working on that this weekend. Ideas are welcome.

When your PC goes awry: One of my laptops takes too long to boot. The other needs turning on and off a couple of times and then finally boots. I suspect the problem is that one or more of my machine's drivers are old. I need to pick up newer ones from the manufacturer. I suspect this because I was able to run my machines with a "clean boot," i.e. starting them without all the drivers. For more on how to do this, click here.

Wanted: A good time.
I checked into a hotel on a business trip recently and was a bit lonely so I thought I'd get me one of those girls you see advertised in the phone books under "Escorts and Massages".

I opened the phone book to an ad for a girl calling herself Erogonique, a lovely girl, bending over in the photo She had all the right curves in all the right places, beautiful long wavy hair, long graceful legs all the way up. You know the kind. So I'm in my room and figure, what the hell, I'll give her a call.

"Hello? May I be of service?" the woman says.

Good she sounded sexy.

"Hi, I hear you give a great massage and I'd like you to come to my room and give me one. No, wait, I should be straight with you. I'm in town all

alone and what I really want is sex. I want it hard, I want it hot, and I want it now. I'm talking kinky the whole night long. You name it, we'll do it. Bring implements, toys, everything you've got in your bag of tricks. We'll go hot and heavy all night; Tie me up, wear a strap on, cover me in chocolate syrup and whip cream, anything you want baby. Now, how does that sound ?"

She replies, "That sounds fantastic, but for an outside line you need to press 9."

Recent column highlights:
+ Blackstone private equity funds. Click here.
+ Manhattan Pharmaceuticals: Click here.
+ NovaDel Biosciences appeals. Click here.
+ Hana Biosciences appeals. Click here.
+ All turned on by biotech. Click here.
+ Steve Jobs Commencement Address. The text is available: Click here. The full audio is available. Click here.
+ The March of the Penguins, an exquisite movie. Click here.
+ When to sell stocks. Click here.

Harry Newton

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. That money will help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
Go back.