Dave Barry's Money Secrets (11 page)

THIRD EXPERT:
Signs point to yes, Bob.

So, to summarize: Nobody really knows what the stock market is going to do. There may be some people who have some inside information about individual stocks, but they sure as hell are not going to go on television and tell
you.

Does this mean that the stock market is really no more than a giant gambling casino? No! Gambling casinos are
much
more rational. The roulette wheel doesn’t give a damn what’s going on in the Middle East.

Don’t get me wrong: I’m
not
saying you should take all your money out of the stock market and bet it on roulette. You get much better odds with blackjack.

13

HOW TO READ A CORPORATE ANNUAL REPORT

Mainly You Should Look at the Pictures

T
HE BEST WAY FOR YOU, the investor, to evaluate a corporation is to look at the corporation’s annual report. This is an expensive, glossy, high-quality publication that the corporation puts out every year to reduce the likelihood that it will have any money left over to give to its stockholders.

There are four crucial elements of a standard corporation annual report:

•                  It should have a
formal photograph of the top corporate officers
posed in such a manner as to assure you, the investor, that the corporation is run by serious businesslike white men who, to judge from their facial expressions, have zucchinis up their butts.

•                  It should contain
random wads of corporate prose,
generated by a computerized corporate-prose generator, explaining, in a manner that is vague and yet at the same time virtually incomprehensible, what an excellent year the corporation had thanks to the Vision and Leadership of its officers.

•                  It should have
photographs of impressive visual things—
molten steel molting, large robot machines doing things with their robot arms, cheerful workers working, industrial pipes going in all directions, etc.—to indicate that the corporation has been a very busy beaver, which is why it does not have time to stop and explain in any detail what it actually does.

•                  It should have
many charts, graphs, and columns of big numbers
designed to impress upon you, the investor, the fact that there are complicated financial things going on in the corporate world that you would never in a million years understand, so it’s better if you leave these things to your corporate officers and go back to watching
American Idol.

When all of these elements come together, you get a high-class annual report that should look something like this:

Photography Credits

Photography Credits

Photography Credits

Photography Credits

Photography Credits

14

HOW TO MANAGE A HEDGE FUND

Step One: Go to Lunch

A
SK YOURSELF THIS QUESTION: Could you use an extra $200 million or more in income per year?

If your answer is “yes” or “I guess so,” you should start a hedge fund. This is the hot new thing to do in the investment world. Remember in the late 1990s, when all those twenty-five-year-olds were starting dot-com businesses and getting rich on paper until the dot-com boom collapsed like a cheap lawn chair under a sumo wrestler and they all had to go back to boring, mediocre-paying, dead-end jobs like everybody else, and your heart was filled with joy?

Well, that’s similar to the boom going on with hedge funds now.
Everybody
is starting them. Even as you read these words, there’s a McDonald’s employee somewhere saying, “I’m
tired
of asking four-year-olds which toy they want with their Happy Meal! I’m going to start a hedge fund!”

The reason hedge funds have become so popular is that there is big money being made. HUGE money. Top hedge fund managers make
hundreds of millions of dollars a year.
These people don’t vacation in Maui. These people leave Maui as a
tip.

You need to get in on this. You don’t want to be the last person in your car pool to start a hedge fund. So stop always letting “the other guy” start a hedge fund! Get off your butt and
start a hedge fund of your own.

“But Dave,” you object. “I don’t know how to manage a hedge fund! I don’t even know what a hedge fund is. I never even look at the newspaper business section unless for some reason it has a photo of Angelina Jolie.”

No problem! I’m going to tell you everything you need to know in this chapter. I happen to be an expert in this field because I read an entire article about hedge funds in the
New York Times Magazine.
It took me nearly a half hour to finish the whole thing, and I had to read many big technical words such as “quantitative,” “portfolio,” “cognoscenti,” “ferment,” “whopping,” and “Switzerland.” But I did it. That is the kind of research that makes this book the kind of book that it is.

The first issue we need to address is: What, exactly, is a hedge fund? Basically, it is a large quantity, or “pool,” of money, or “dough,” usually billions of dollars, which you get from investors. You, the hedge fund manager, invest this money in various things, or “instruments,” such as stocks, bonds, currencies, commodities, harmonicas, etc. If the fund makes a profit, you take a healthy percentage; if the fund loses money, you take a plane to Venezuela.

To be a good hedge fund manager, you can’t base your investments on a hunch or whim. You must base them on research and hard data. Like, suppose you’re at a restaurant with some people you know, and one of them, for the first time in your recollection, orders a bacon, lettuce, and tomato sandwich. And then another one says, “Hey, that sounds good! I’ll have a BLT also!” And a third one goes, “What the heck! Me too!”

Now, to a normal person, this is nothing more than three people ordering the same sandwich. But you are not a normal person. You are a
hedge fund manager,
and you recognize that what you are seeing here could very well be a significant trend. Every day, hundreds of millions of people order sandwiches, and if even just, say, 5 percent of them suddenly order BLTs, the economic effect could be significant, as is shown by this simple formula:

B = LT
²

This tells us that there is going to be a major upsurge in the demand for bacon, which in turn means that bacon will be affected by the Law of Supply and Demand, as represented by this graph:

So now you know for a fact that the price of bacon will definitely go up, unless for some reason it goes down or remains the same. You
also
know that bacon actually comes from pigs, or, as they are known in the investment world, “porks.”

Armed with this information, you call your commodities broker, and you purchase an option to buy, let’s say, $1 billion worth of pork bellies. Then—this is very important
—
you write this information down on a piece of paper,
so you will remember to sell this option before it expires. Otherwise, you’re going to wake up one morning and find a UPS man at your door with like 517,000 tons of pig carcasses, and unless you have a really huge freezer, you are going to have to invite everybody you know to an emergency barbecue.

OK, now pay close attention, because here is where the “hedge” part of the hedge fund comes in. At this point, you have invested on the assumption that the price of pork will increase, which is called taking a “long position,” or “going long,” on pork. At least I’m pretty sure that’s what it’s called. It might be called “going short” on pork; I’m always getting those two confused. Just to be sure, ask another hedge fund manager which is which before you actually attempt this.

But whichever one it is, you need to “hedge” your bet on pork bellies by, at the same time, placing a financial bet
in the opposite direction.
How do you do that? You do it by asking yourself this question: If people are ordering
more
BLT sandwiches, what kind of sandwiches are they ordering
less
of?

Exactly: tuna. So at the same time you are going long (or short) for $1 billion in pork bellies, you want to go $1 billion
short
(or long) in tuna bellies. Then, having hedged your fund, you can go shopping for the helicopter-equipped yacht that you will be able to purchase with your share of the hedge fund profits.

That’s it! That’s all there is to running a hedge fund! The whole process should take you less than two hours per day, including lunch. And the beauty of it is, no matter what happens to the market, you are guaranteed to make huge amounts of money, according to the
New York Times Magazine,
which is solely responsible for the contents of this chapter.

I realize that you may have one or two lingering questions, such as: “Shouldn’t I also take a strong position in mayonnaise?” and “How, exactly, do I get investors to give me $2 billion in the first place?” Those are good questions, and I wish I had time to answer them. But right now I really need a sandwich.