Investment tips for the fearless

November 22, 2002

Any of these strategies could pay off big, but most require you to be patient and have nerves of steel.

 

Investment tips for the fearless

Jump to:Choose article section... A few stocks for your "mad money" Snap up the bonds of distressed companies Heard of a good idea? Become a venture capitalist Profit from oil and gas without getting dirty hands Purchase a prime piece of real estate Rules for alternative investing

Any of these strategies could pay off big, but most require you to be patient and have nerves of steel.

By Dennis Murray
Senior Editor

In the wake of the bruising they've received in the major stock markets over the past two years, many investors have sold their aggressive-growth portfolios and retreated to the safety of bonds and other fixed-income vehicles.

Are the outsized gains of the roaring '90s—15 percent a year or more—a thing of the past? Not necessarily. But you have to know where to look for them.

Here are some possibilities—but first, some strong words of caution: Even if you're comfortable with a lot of risk, you shouldn't put more than 10 percent of your total assets in the following stocks or "alternative" investments, because you might lose every nickel you put in. And if your psyche—and your wallet—can't handle that possibility, don't climb on board at all.

A few stocks for your "mad money"

Say your house is paid off, the kid's tuition is covered, and your retirement kitty is secure. You've got some extra dough to plunk down on a couple of long shots that, if they hit, could return many times your initial investment.

One company you might consider is Atmel, which makes advanced semiconductors for manufacturers across a wide range of industries. A major part of its business is producing flash memory chips, a technology used in cell phones. Prices for these chips can be volatile, but they now appear to have stabilized, says Carmine D'Avino, a portfolio manager with Pinnacle Associates, a money management firm based in New York City.

Another plus: "Atmel's management has been lowering the company's overhead, which should result in higher profit margins once demand for semiconductors picks up," he says.

That recovery could be slow in coming, but if you're willing to hold Atmel for two or three years, you could double your money, D'Avino says. The stock currently sells at around $1 a share.

Another aggressive-growth stock worth a roll of the dice is Cablevision Systems. It was trading at 49 a share about a year ago; it's at 10 today. Of course, a good hammering doesn't necessarily mean a stock is undervalued, but Cablevision's price appears to have suffered in part from the collapse of another cable operator, Adelphia Communications. Cablevision has been found guilty by association, if you will.

Yes, the company has some serious debt, but it's cutting back its spending and may be divesting some noncore assets, including its Clearview Cinemas chain. Those moves will help. Assuming they're not too little too late and Cablevision gets its house in order in the next year or two, you could be richly rewarded. Gains of 200 percent or more are possible, D'Avino says.

If your insides aren't churning yet, here's a third stock to consider: Xoma, a small biotech company based in Berkeley, CA. Xoma, which reported just $17 million in revenues last year, is spending more on overhead, including research and development, than it's taking in. Its future may ride on the success of Raptiva, a treatment for psoriasis, which is currently in Phase III clinical trials. "We expect the FDA to approve Raptiva in 2003 or early 2004, and there are several other promising drugs in Xoma's pipeline," says D'Avino. FDA approval, he adds, should cause Xoma stock to double from its current price of 6.

Snap up the bonds of distressed companies

High-yield, or "junk," bonds are risky enough. But if you want a real long shot, dig down to the bottom of the bonds barrel for those issued by distressed or bankrupt companies—among them Adelphia Communications, Enron, United Airlines, and WorldCom. While most of these corporate bonds offer "coupons" (interest rates) of 6 to 11 percent, their prices could appreciate at an even greater rate if the issuing companies emerge from their doldrums.

More likely, the bonds will wind up in default. That would wash most, or all, of your principal down the drain. Nevertheless, fools aren't the only ones who've rushed in to purchase junk bonds. Legendary investor Warren Buffett recently plunked down a cool $100 million for debt issued by Level 3 Communications, a foundering telecom company. Other professional investors have jumped in too, figuring that troubled companies will continue to honor their bond obligations while they work to solve their financial problems.

Just because a big hitter like Buffett is in the game doesn't assure success, however. Lots of things have to happen to give these bonds a double-digit boost: The companies' cash flow has to improve, some of their loans may have to be forgiven, and further layoffs and budget cuts may be necessary. It's very difficult to predict when—or whether—those things will happen.

Heard of a good idea? Become a venture capitalist

Who doesn't want to get in on the ground floor of the next Home Depot or Microsoft? And these days, you may find yourself receiving more ground-floor invitations than ever: With venture capitalists being much more selective about what they'll invest in, many entrepreneurs have turned to doctors and other high net-worth professionals for backing.

"Serious venture capital has pretty much dried up," says Craig E. Carnick, a financial planner in Colorado Springs. "Our physician clients have been approached regarding everything from an Internet-based company that wants to sell and deliver restaurant-prepared meals, to a venture that would supply long-distance phone service to prisoners." Another proposal involved the marketing of an adhesive for healing cuts, a sort of "sutureless" medicine. None of Carnick's clients invested in these ventures—which proved fortunate, because all of them fizzled.

Rather than back one idea that you hope will hit a home run, you can spread your risk by investing in several deals simultaneously, through a large brokerage house—sort of a mutual fund of start-ups. "Most of these individual deals will lose money, and some will be complete write-offs," says Lewis J. Altfest, a New York City financial planner. "Your hope is that one of them will do so well that it will make up for the losses in the others."

A safer bet is to become a partner in a fledgling business in your own back yard: a restaurant, wine shop, coin-operated laundry, copy center, etc. "Because the business is local, you can better evaluate the people and obstacles involved," says Carnick. If you're approached to provide, say, $100,000 or more in start-up costs, Carnick recommends that you co-sign a business loan from a bank rather than write a check or sell an investment to raise the cash. This way, the debt can be paid down from the business' cash flow, and you've "loaned" nothing but your signature. If the business fails, you'll owe the remaining principal, but you'd be no worse off than if you'd given the cash up front and lost it all.

Profit from oil and gas without getting dirty hands

Private partnerships in oil and gas are subject to far less regulation than publicly traded equities, and they provide less liquidity. Moreover, your profits are often taxed at ordinary income rates, not the lower capital gains rates.

Worse, there's precious little public information on them, and what does come out is usually revealed too late to help investors. For example, some people had already been fleeced by the time securities regulators in Arkansas recently caught up with two companies marketing a "can't lose" investment in a natural gas well that hadn't produced in years.

"The key to any private partnership is the character and integrity of the person who runs it," Altfest says. "Honesty is very important." For instance, you don't want to invest with someone who'll use profits from the partnership to boost the bottom line on oil wells that he or she owns separately.

With few safeguards in place, why would anyone invest in an oil and gas partnership? For one, given uncertainties in the Middle East, oil and gas prices could rise significantly over the next few years. That would provide investors with returns that could beat stocks handily. In fact, Altfest says that his personal stake in an oil and gas partnership returned 50 percent in 2001 and has produced a positive return in each of the 10 years he's owned it.

Initial minimum investment amounts are around $10,000, which is in line with what many mutual funds require. A good financial planner who works with a lot of high-net-worth clients can usually recommend a reliable partnership headed by a trustworthy manager.

Purchase a prime piece of real estate

You've heard the stories of folks who've been burned in real estate. Maybe they bought an apartment building in a bad neighborhood, or raw land that couldn't be developed because a Native American burial ground was found on it.

To avoid a similar fate, you have to understand appraisal methods, zoning laws, the whims of local planning boards, and any number of other factors. Again, as with business start-ups, staying local makes the most sense. "If you're prepared to be a superintendent, you can buy a home or small office building and rent it out," Altfest says.

The trouble is, few physicians have the time or the inclination to repair a broken stoop, remodel a bathroom, or chase after deadbeats. A smarter and less risky play on real estate may be right under your feet: your office space. For example, say you own a 4,000-square-foot building, which you share with a young associate. When you retire, instead of selling the building, you might decide to lease it to your successor—or maybe even divide the space in half and collect two rents. "The rental income is taxed as ordinary income but can be offset by depreciation and other write-offs," Craig Carnick says.

If you don't own office space and are looking to purchase some, consider buying more than you need. This strategy can allow for rental income that will offset the mortgage on the building, and perhaps provide a nice revenue stream in retirement.

 

Rules for alternative investing

• Don't gamble more than you can afford to lose.

• Remember that if a deal seems too good to be true, it probably is.

• Stick with investments that a financial planner can evaluate independently.

• Avoid buying real estate in unfamiliar places.

 



Dennis Murray. Investment tips for the fearless.

Medical Economics

2002;22:37.