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Bill Miller: The Stock Picker's Defeat

2008-12-10T16:20:00.002-05:00

William H. Miller spent nearly two decades building his reputation as the era's greatest mutual-fund manager. Then, over the past year, he destroyed it.

Fueled by winning bets on stocks other investors feared, Mr. Miller's Legg Mason Value Trust outperformed the broad market every year from 1991 to 2005. It's a streak no other fund manager has come close to matching.

Mr. Miller was in his element a year ago when troubles in the housing market began infecting financial markets. Working from his well-worn playbook, he snapped up American International Group Inc., Wachovia Corp., Bear Stearns Cos. and Freddie Mac. As the shares continued to fall, he argued that investors were overreacting. He kept buying.

What he saw as an opportunity turned into the biggest market crash since the Great Depression. Many Value Trust holdings were more or less wiped out. After 15 years of placing savvy bets against the herd, Mr. Miller had been trampled by it.

The financial crisis has created losers across the spectrum -- homeowners who can't afford their subprime mortgages, banks that loaned to them, investors who bought mortgage-backed securities and, as financial markets eventually crumbled, just about everyone who owned shares. But it has also brought low contrarians like Mr. Miller who had been lionized for staying a step ahead of the market. This meltdown has provided a lesson for Mr. Miller and other "value" investors: A stock may look tantalizingly cheap, but sometimes that's for good reason.

"The thing I didn't do, from Day One, was properly assess the severity of this liquidity crisis," Mr. Miller, 58 years old, said in an interview at Legg Mason Inc.'s Baltimore headquarters.

Mr. Miller has profited from investor panics before. But this time, he said, he failed to consider that the crisis would be so severe, and the fundamental problems so deep, that a whole group of once-stalwart companies would collapse. "I was naive," he said.

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David Dreman: It's Time to Buy

2008-11-24T14:08:00.001-05:00

There's an endless choice of quality businesses trading at or near liquidation prices.

We have plunged into the worst financial crisis since the 1930s. The leadership of Treasury Secretary Henry Paulson and Federal Reserve Chief Ben S. Bernanke in fighting it has been sluggish and inconsistent. Although we've just elected a new President and Congress, they will take time to develop policies to stimulate the economy and promote liquidity. What's an investor to do?

First, do not flee the market by selling your quality stocks. Yes, it's the worst bear market since 2000--02, and stocks are trading at valuations not seen in decades, but equities will come back. Second, because credit is subject to unpredictable crunches and it's impossible to guess when this bear will end, don't buy on margin. Third, don't hold shares of companies that will need cash to expand or refinance. There is a good chance they won't be able to borrow.

Fourth, keep your bond maturities very short. When governments face economic crisis, they print money. The magnitude of this crisis suggests that the printing presses will be running around the clock for some time. That means we'll see serious inflation when we emerge from the recession. Long-term bond prices could then drop even more than equities already have dropped. Stocks, by contrast, hold their own over long stretches of inflation.

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Robert Rodriguez: We began to commit capital beginning on October 8

2008-11-20T14:35:00.001-05:00

In response to collapsing share prices, we began
to commit capital beginning on October 8 and since then
we have spent approximately 22.5% of the Fund’s
September 30 liquidity or 8.6% of assets. This is the
largest amount of capital we have deployed at any point in
the last five years. Why did we begin buying on
October 8? On October 7, Treasury Secretary Paulson for
the first time commented that the U.S. Treasury would
possibly have to deploy CAPITAL in the banking system.
In our minds, this showed that the Federal Reserve and the
U.S. Treasury were finally beginning to understand that
the core issue of this crisis is CAPITAL deficiency and
not LIQUIDITY—more on this later in the credit crisis
commentary section. We began buying because the stocks
we selected appeared to be discounting a very severe
economic and stock market outlook with their depressed
valuations. Initially, our purchases will likely show losses
since we are buying into stock price weakness.
Furthermore, our value screen of the nearly 10,000
companies in the Compustat database showed an
explosion in the number of qualifying companies that
rose to 447, the highest in over twenty years. In June of
2007, this number was 33—a record low number of
qualifiers. Our conviction was enhanced by this positive
outcome that this was an appropriate time to begin
spending some of the Fund’s long-held liquidity, plus the
moths were getting pretty grumpy and tired from being
cooped up in our coin purse for these past five years.
They were yearning to fly free.

Read the entire shareholder letter

Emerging market guru Mark Mobius punts Brazil

2008-11-19T14:47:00.002-05:00

Brazil's financial markets have fallen by 50pc since its all-time high in May. The local currency, the real BRBY, has shed a third of its value since touching a nine-year high in early August and this week a Brazilian trader shot himself on the trading floor at Sao Paulo's Bovespa stock exchange.

Mark Mobius, the emerging market specialist from Templeton Asset Management reckons that Brazil offers a great opportunity for investors with nerve. We asked him why.

What makes Latin America so attractive to investors?
The region's main attraction is its huge consumer market with pent-up demand for goods and services, as well as excellent companies that are at the same time under- leveraged and inexpensive. On top of all that, its natural resources are among the largest in the world.

How resilient can the region be in the context of a global slowdown and which markets are well-armed to resist a slowdown in the global economy?
During the boom in the past five years, Latin American countries have accumulated substantial reserves. Brazil, for example has over US$200 billion in foreign reserves and the government has no foreign net debt. Overall, our main markets, Brazil, Mexico,

Chile, Peru and Panama, have shown stable political environments, responsible fiscal discipline, commitment to a floating exchange rate and honour of contracts in place. All these support the region's strength in times of uncertainty.

In addition to natural resource and agriculture producers, what are the other key drivers of growth in Latin America?

Although the region is the world's largest (and lowest cost producer) of many commodities, the development of the local domestic consumer markets is another important driver. Take Brazil for example, with 190 million people and Mexico with 100 million. Bank loan penetration is still very low in both countries (38% in Brazil and 18% in Mexico) even in comparison to some emerging markets. Thus, this not only reduces the risk of bad debt, it is also a barometer of how under penetrated the countries are in terms of goods and services. Companies have thus been following conservative lending and leveraging policies.

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Bill Miller Third Quarter Commentary

2008-11-16T20:13:00.000-05:00

Here is the link

The Year of Wall Street's Fallen Idols

2008-11-16T20:11:00.000-05:00

Millions of Americans are reeling from investment losses this year.

For many, the financial cost of the red ink is only part of the misery. They're also kicking themselves for the losses.

Maybe you feel you invested too much. Maybe you feel you should have invested in different assets.

This may prove scant consolation, but it is worth noting: The best of the best have done no better. So go easy on yourself.

This has been Wall Street's year of the fallen idols.

Marty Whitman, the legendary septuagenarian who co-manages Third Avenue Value, has seen crises come and go. There are few you could trust more in a panic. But his fund has almost halved this year. Bill Miller, the famous manager at Legg Mason Value, has fallen by nearly 60%. And that's not even the worst of it. Miller's more flexible, go-anywhere fund, Legg Mason Opportunity Trust, is down by two-thirds since the start of the year.

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Bill Ackman on Charlie Rose

2008-11-14T15:50:00.000-05:00

Don't Give Up, Buy Carefully

2008-11-14T15:44:00.002-05:00

The Wall Street Journal asked six celebrated mutual-fund managers, who have mostly beaten the Standard and Poor's 500-stock index for 10 years, what they are doing to weather the storm and prepare for an eventual rebound.

These managers -- from the growth-oriented Tom Marsico to value maven Wally Weitz -- are mostly sticking with what they know, adding to positions they already own at cheap prices.

"When you've owned a company like Liberty Media for 15 years, and you can talk to management about what's real and what's not, it's a lot easier in a crisis to buy," says Mr. Weitz, whose Weitz Value fund has gained 3.1% a year for the past decade, far outpacing the annualized loss of 0.2% on the S&P 500.

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Legg Mason: Our managers on the markets

2008-11-12T15:33:00.002-05:00

The third quarter of 2008 will be remembered as one that forever
altered the landscape of the U.S. financial system — through the
nationalization of Fannie Mae and Freddie Mac, the seizure of AIG
by the federal government, the conversion of Goldman Sachs and
Morgan Stanley into bank holding companies, and the downfalls
of Lehman Brothers, Washington Mutual and Wachovia. All of
these events were consequences of the bursting of the massive
credit bubble in the U.S. banking system and the spillover from the
significant slowdown in housing that escalated last year.

In these uncertain times, we believe that the insights of industry
veterans who have seen the ups and downs of multiple market
cycles can provide valuable perspective, as we seek to understand
the complex issues facing the economy and capital markets. In this
issue of Briefly Speaking, key portfolio managers and investment
strategists of Legg Mason’s affiliated investment managers offer their
perspective on these unprecedented events, views on the markets,
and strategies for managing assets in their specific area of expertise.

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Bruce Greenwald on Value Investing

2008-11-11T11:27:00.000-05:00

Bruce Greenwald, who holds the Robert Heilbrunn Professorship of Finance and Asset Management at Columbia Business School, is coeditor of the forthcoming sixth edition of the value investing classic Graham and Dodd's Security Analysis (McGraw Hill).

After watching stocks plummet this year, he's sizing up the opportunities seen through the lens of value greats like Warren Buffett who perceive a rare chance to start buying on the cheap. Excerpts:

What's the current environment like for a value guy?

I'll tell you the one really nice reason to be a value investor: When things like this happen, you cannot help but go nuts at the opportunity. What this looks like is the end of 1974, where good stocks are selling at three times sustainable earnings and stocks that normally wouldn't have sold at less than 20 times earnings are selling at 10 times earnings. These are exciting times. The short-term issue is that in the near term there will be a painful macroeconomic environment and we don't know how long it will last.

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Legg Mason's Mauboussin: Buy Stock Now

2008-11-05T11:01:00.002-05:00

• We are in the midst of a collateral-based financial crisis.
• The conditions are getting set for attractive long-term returns in a number of
asset classes, including equities.
• We draw reassurance from Warren Buffett’s recent comments. Buffett rarely
makes unsolicited calls on the market, and tends to be prescient when he
does.

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David Winters: Getting Super Values on Great Companies

2008-11-05T10:58:00.001-05:00

David Winters is as bullish as I've ever heard him. At 46, he has been managing money half his life, but he's never seen values like this. "People are selling excellent companies at whatever prices they can get because they're afraid or because they need the cash," he says. "The opportunities are unprecedented for a long-term investor."

Winters is a canny veteran. Schooled for two decades at the Mutual Series funds (now owned by Franklin Templeton), where he started as an analyst under legendary value investor Michael Price and rose to become chief investment officer, Winters left to launch Wintergreen fund (symbol WGRNX) in 2005. The global fund has beaten the MSCI World stock index by a comfortable margin since its inception in October 2005. Although the fund plunged 34% in 2008 through October 31, it was ahead of the index by nearly six percentage points.

Because Winters buys stocks only when they're cheap, his holdings usually have some warts. Not today. "Everything is for sale, so we can shop at Tiffany's instead of some budget store," he says. "There's been almost no place to hide this year; even the highest-quality stocks have gone down."

In analyzing stocks, Winters looks for good businesses selling at favorably cheap prices and run by good managers whose interests are aligned with those of shareholders. "We've been through an extraordinary period that is now handing us these companies on a platter," says Winters.

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Channeling Graham and Dodd: A Conversation with Seth Klarman

2008-10-30T09:34:00.000-05:00

Early in the process of defining how to update Graham and Dodd’s Security Analysis, the acknowledged “bible of value investing,” lead editor Seth Klarman and his assembled team abandoned any notion of editing the text of 1940’s second edition. “It would have taken a decade to rewrite, with absolutely no assurance we could have improved upon it anyway,” he says.

Instead, Klarman assembled a who’s who of prominent value investors – including Glenn Greenberg, David Abrams, Howard Marks and Thomas Russo – to write introductory commentary to each of the book’s sections, drawing out the timeless wisdom in the original text and combining it with additional insight and examples relevant to today’s market.

In the September 30 edition of Value Investor Insight, Klarman described this process. Key excerpts follow:

Why take on what was surely a time-consuming role with this book?

Seth Klarman: First of all, it was an honor to be asked and I don’t think one says “no” lightly to something like that. But on top of that, I feel a huge amount of loyalty to Graham and Dodd. Their thinking has influenced mine right from the beginning, so what could be more of an honor – and more of a responsibility – than to contribute to updating their work?

What tenets of Graham and Dodd have most influenced you as an investor?

SK: I think Graham and Dodd’s writing is not actually about investing, but about thinking about investing. Any book can say, “Buy stocks that fit the following criteria,” but Graham and Dodd go beyond that to fully explain why. It’s like the difference between being able to divide two numbers using a calculator and actually knowing long division. A Graham and Dodd investor understands both the numbers and the concepts behind the numbers. In a world in which most investors appear interested in figuring out how to make money every second and chase the idea du jour, there’s also something validating about the message that it’s okay to do nothing and wait for opportunities to present themselves or to pay off. That’s lonely and contrary a lot of the time, but reminding yourself that that’s what it takes is quite helpful.

Warren Buffett is right when he says you should invest as if the market is going to be closed for the next five years. That’s particularly relevant right now – who knows, that might be the next thing the government does! The fundamental principles of value investing, if they make sense to you, can allow you to survive and prosper when everyone else is rudderless. We have a proven map with which to navigate. It sounds kind of crazy, but in times of turmoil in the market, I’ve felt a sort of serenity in knowing that if I’ve checked and re-checked my work, one plus one still equals two regardless of where a stock trades right after I buy it.

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Warren Buffett: The economy works

2008-10-29T10:05:00.000-05:00

Shortly after the Dow began its tumble Wednesday, investor Warren Buffett told a packed Long Beach Arena that he has moved 100 percent of his personal portfolio from government securities to stocks.

Buffett, speaking to California first lady Maria Shriver's Women's Conference in Long Beach, said he has no idea what will happen in the coming two years but was confident that over a 10-year span the stock market would outperform cash-based investments, such as certificates of deposits and savings accounts, which can lose value when inflation is subtracted from gains.

Investors have been rushing into the relative security of cash to shield themselves from wild market fluctuations, but the world's most respected investor warned against trying to time the market by pulling out now and jumping back in when indexes begin to rise.

Buffett, whose motto is to be fearful when others are greedy and greedy when others are fearful, said the 20th century saw the Great Depression, two world wars and multiple bear markets, but the Dow still managed to finish more than 10,000 points above where it began.

"This country works," Buffett said to generous applause from an audience of women leaders in government, business, education and other sectors. "It gets gummed up from time to time, the economy, but it works."

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Former Vanguard guru John Neff is buying stocks

2008-10-29T10:00:00.001-05:00

In a small office in West Conshohocken, a legendary stock market bottom feeder has been having a feast.
John B. Neff, who racked up record gains as manager of Vanguard's Windsor Fund over three decades, is buying stocks again.

And while the actions of one person may mean little in a multitrillion-dollar market, Neff's renewed romance with stocks signals that, to him, the worst is over.

As of Friday, he has put cash that he had held on the sidelines for the last year back into the stock market. He retired from Windsor in 1995, after 31 years, so the world no longer watches him. He manages a portfolio for himself and for some small charities.

But at age 77, he has not tired of what he calls "the ultimate ball game," the stock market.

About 18 months ago, Neff started to keep more of the stock portion of his portfolio in cash. (He noted that since he left Windsor, he has kept about 30 percent of his portfolio in tax-free municipal funds to preserve wealth.)

Neff likes bargains, stocks that sell for prices of five or six times their earnings. It is like shopping only when prices are marked down 60 percent or more.

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Buffett says he's buying U.S. stocks

2008-10-29T09:58:00.000-05:00

(Reuters) - Billionaire investor Warren Buffett is buying U.S. stocks, he wrote in an opinion column in the New York Times.

"A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful," Buffett wrote in the paper.

Buffett acknowledged the economic news was bad, with the financial world in a mess, unemployment rising and business activity faltering.

"What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up," he said. "So if you wait for the robins, spring will be over."

Buffett, who made his money by building his company Berkshire Hathaway Inc (BRKa.N: Quote, Profile, Research, Stock Buzz)(BRKb.N: Quote, Profile, Research, Stock Buzz) into a $199 billion conglomerate, wrote that investors were right to be wary of highly leveraged entities or businesses in weak competitive positions.

"But fears regarding the long-term prosperity of the nation's many sound companies make no sense," he said.

Buffett said major companies would suffer earnings hiccups, but added they "will be setting new profit records five, 10 and 20 years from now."

Pzena Investment Management Third Quarter Commentary

2008-10-29T09:49:00.003-05:00

From Wall Street to Main Street, from the City to the Bourse, investors are panicked. This crisis of confidence has claimed victims that one year ago would have seemed laughable. Bear Stearns, Lehman, Merrill Lynch, Fortis, Bradford & Bingley, AIG, Wachovia, Fannie Mae, Freddie Mac, just to name a few. Unfortunately, we have been caught with some of these positions in our portfolios as we sought to exploit the fears, rather than hide from them.

Our approach of exposing the portfolio to the cheapest stocks has often protected our investors from the downside risks to the market, although that has not been the case for much of this cycle. Nevertheless, some interesting changes to market leadership are afoot. The value/momentum cycle appears to have begun to turn. While the current volatile market has been driven by emotion, the turn may actually be justified by the fundamentals for the two sectors at the heart of the cycle - commodities and financials. Historically, these turns come before the data is completely clear or consistent. But once the data is available to the market, the investment opportunity will have passed.

Momentum/Value Cycle Has Shifted
Equity investment returns have historically been dominated either by momentum or by value. Both styles are supported by long-term academic research, and coincidentally both have generated similar levels of excess long-term returns over the broad market. Momentum flourished in the most recent cycle as investors fell in love with the "Chindia" story and the fantasy of decoupling. As inevitably happens as each momentum cycles ends, the "story" collapses - in this case the sharp fall in commodity prices signaled the shift. In fact, it may surprise many that the best performing sectors for the third quarter were Consumer Staples, Health Care, Financials, and Consumer Discretionary. An underweight in the cheapest stocks (Financials and Consumer Discretionary) would have been costly for the quarter, despite all of the failures within the financial services industry.

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Note to my blog readers

2008-10-14T21:17:00.005-05:00

It has been my pleasure to create this blog for all my friends who are interested in value investing. Basically this is a compilation of all articles I read everyday to further my understanding of security analysis. I have personally benefited greatly from following great investors like Warren Buffett, Martin Whitman, etc. And I hope this blog will help others to achieve the same. Investing is fun and enjoyable. Hopefully you all enjoyed reading the collection of articles here. I will be out of town for the next two weeks and won't have access to internet. I will resume the blog after I return near the end of October. Happy investing!

Columbia Business School's Graham and Doddsville Newsletter Summer/Fall 2008

2008-10-14T08:32:00.004-05:00

Investors featured in this newsletter include Mohnish Pabrai, Joel Greenblatt, Warren Buffett, Bill Ackman, Bruce Greenwald, etc. A detailed analysis of NutriSystem Inc. by a Columbia studend is also inclued.

Read the newsletter

Those With a Sense of History May Find It’s Time to Invest

2008-10-14T08:20:00.002-05:00

The four most dangerous words for investors are: This time is different.

In 1999, technology companies with no earnings or sales were valued at billions of dollars. But this time was different, investors told themselves. The Internet could not be missed at any price.

They were wrong. In 2000 and 2001 technology stocks plunged, erasing trillions of dollars in wealth.

Now investors have again convinced themselves that this time is different, that the credit crisis will push economies worldwide into the deepest recession since the Depression. Fear runs even deeper today than greed did a decade ago.

But in their panic, investors are ignoring 60 years of history. Since the Depression, governments have become far more aggressive about intervening when credit markets seize up or economies struggle. And those interventions have generally succeeded. The recessions since World War II, while hardly easy, have been far less painful than the Depression.

Now some veteran investors, including G. Kenneth Heebner, a mutual fund manager who has one of the best long-term track records on Wall Street, say that the sell-off has gone much too far and stocks are poised to rally powerfully if the downturn is less severe than investors fear.

Martin J. Whitman, a professional investor for more than 50 years, said that as long as economies worldwide could avoid an outright depression, stocks were amazingly cheap. Mr. Whitman manages the $6 billion Third Avenue Value fund, which returned 10.2 percent annually for the 15 years that ended Sept. 30, almost two percentage points a year better than the S.& P. 500 index. The fund is down 46 percent this year.

“This is the opportunity of a lifetime,” Mr. Whitman said. “The most important securities are being given away.”

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Buffett-style investing shines

2008-10-12T09:08:00.002-05:00

VANDERMIR C.T. SAY started investing when he was 12 years old. That was 22 years ago. He recalls picking stocks the way he would play darts. Not anymore. For the last decade or so, Vandermir has become a Warren Buffett-follower, investing only in good companies at good prices and buying them for the long haul.

In the last couple of months, amid cascading losses in markets all over the world, Buffett’s value investing philosophy has attracted.

The fact that Buffett, the world’s richest man according to Forbes magazine, has emerged as Wall Street’s knight in shining armor after injecting funds into Goldman Sachs and General Electric a week ago has most likely upped the ante significantly on value-style investing.

And if the sale of Buffett’s first and only authorized biography “The Snowball: Warren Buffett and The Business Of Life” written by Alice Schroeder (editor of Berkshire Hathaway’s layman-friendly annual reports) is any indication, the interest is just heating up. Just days after it hit bookstores in Sept. 29, the book has claimed a top spot on Amazon’s best-selling book list.

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Dodge & Cox: Market Commentary and Outlook

2008-10-10T23:27:00.002-05:00

The U.S. capital markets continue to experience a period of extraordinary turmoil, marked by liquidity and credit concerns in the financial sector and a series of government interventions. This has been a difficult period for our clients and investors in the Dodge & Cox Funds. As fellow Fund shareholders, Dodge & Cox employees share in the recent disappointing results. We believe that the fear and uncertainty currently gripping the financial markets mask the long-term prospects for global growth, and we see opportunities to benefit from this disconnect.

Market turmoil is nothing new for Dodge & Cox, as we have managed investments since 1930. In the last two significant banking downturns (early 1980s and 1990-91) banks experienced difficulties due to asset quality and funding concerns, and their stock prices fell to low levels. During those periods, many banks failed and the industry
consolidated. However, banks with strong, long-term business franchises survived and ultimately flourished during the subsequent recovery. It was not a case of the regulators bailing out systemically important banks during those prior downturns, but rather providing banks with the breathing room and flexibility needed to overcome temporary challenges.

The current credit cycle, beginning in the summer of 2007 but worsening recently, has proven to be similar in some ways but different in others. The lack of confidence in the financial system worldwide has severely constrained credit and capital flows, resulting in a series of bank failures in the U.S. and Europe. Mark-to-market accounting (which did not exist to the same extent in the 1980s and 1990s) has required banks to value distressed assets at the prices established by desperate sellers. This, in turn, has led to an unprecedented need by many financial institutions to raise capital in a short period of time, and has exacerbated the crisis of confidence in the financial system.

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Jim Rogers: Stay SHORT

2008-10-10T23:18:00.001-05:00

Should Global Stock Markets Shut Down to Cool Off?

2008-10-10T11:44:00.001-05:00

Stocks could close lower today for the eight consecutive session, as a wide-ranging loss of confidence has taken hold of markets. Is it time stock markets to close for a few days and take a breather?

There are circuit breakers in place to shut down stock markets when a bout of selling looks like a panic, but they are all intraday measures and, despite large point declines, markets haven’t really come close to those levels. The circuit breakers also don’t close the markets more than a day. For the New York Stock Exchange to close for the day, the Dow Jones Industrial Average would have to fall 3350, or 30% of the average closing value of the DJIA for September.

The Dow industrials have dropped 21% through Thursday, as the market selloff hasn’t shown itself as an obvious intraday panic, but a slow steady decline in confidence. More troubling is that nothing has seemed to cheer markets. Markets have declined following major moves in the last few days, including Congress’s passage the Treasury Department’s troubled asset relief program, the Federal Reserve’s announcement that it will purchase commercial paper and even a coordinated global rate cut.

Part of the problem has been that programs like the TARP and the Fed’s acquisition of commercial paper will take time. Markets might see some relief once those programs start moving. If markets were to close until then, confidence might return to markets when they were reopened.

“The only rational cause for shutting markets is if the [group of seven leading countries] believes it can come to a coordinated set of policies that would address the situation in conjunction with the TARP getting up and running,” said Joseph Brusuelas of Merk Investments.

However, he warns that any action must be globally coordinated by the G-7. If U.S. markets were to close by themselves, market losses would just move offshore. Brusuelas suspects that if G-7 markets close, the secondary markets would follow suit. G-7 finance ministers meet today in Washington, and Bloomberg reports Italian Prime Minister Silvio Berlusconi said political leaders are discussing the idea of closing the markets while they “rewrite the rules of international finance.” However, Berlusconi later played down his comments.

Any closure has to come because governments believe they have a solution. A shut down without a coordinated policy response during that time would just put off the pain until markets were to reopen.

Closing stock markets isn’t without precedent. The NYSE was closed from March 4-14, 1933 for FDR’s “bank holiday” during the Great Depression, and it shut it doors again from Sept. 11-17, 2001 following the terrorist attacks in the U.S.

Link to the original article

Ron Muhlenkamp's review of events that impacted the markets during the past quarter

2008-10-10T11:36:00.002-05:00

I’m writing this letter just after the U.S. Senate and House passed the “bailout” bill. The media and the politicians have labeled the Treasury’s Troubled Assets Relief Program (TARP II) as a bailout of Wall Street. But, in reality, it’s a support for the banking system and is designed to keep the problems in the credit markets from overflowing into Main Street. In the past few weeks, this overflow had begun, making it difficult for some firms to get normal funding from their banks. For this reason, I believe the bill was necessary.

In this short letter, I don’t have the time to describe all the drivers that got us to this place. We will do that at our seminar on November 18, 2008. But I do want to mention a couple of the main drivers which reinforced each other and drove us to where we are now.

In 2005, the Financial Accounting Standards Board (FASB) issued FASB #157 which states that banks, insurance companies, and brokers must mark the value of the assets to market prices in their quarterly and annual reports. Regulations for each of these industries limit the amount of business they can do and the liabilities they can carry is a multiple of the assets and/or equity. Thus, FASB #157 allowed firms to expand their business as the market prices of their assets moved up, and forced them to contract their business as market prices moved down. This has become self-feeding.

Had we a similar accounting rule in effect in 1989, nearly every S&L and bank in the country would have been bankrupt. Most of you know that, in the 2005-2007 period, banks and mortgage brokers made mortgages and, therefore, home ownership available to people who could not have afforded a home by prior standards. (You may know that Congress mandated that mortgages be made available to low income people.) As some of these mortgages failed, the market value of the remaining mortgages fell. Any that were owned by financial firms, (banks, insurance companies, or stockbrokers), had to be “marked to market,” forcing the firms to raise capital or sell assets. Most had to sell assets — into a vacuum of no buyers. This caused further mark-down and the spiral began. Some managed to raise capital. Merrill Lynch got $12 billion from Korea, Kuwait, and private investors. Citigroup got $12 billion from Abu Dhabi; Washington Mutual got $7 billion from a hedge fund, TPG, Inc. Within eight months, each of these investors lost over 30% of their purchase price, discouraging other potential investors.

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Omega's Cooperman sees signs of market bottom

2008-10-08T17:44:00.003-05:00

Hedge-fund manager Leon Cooperman said Tuesday that most of the damage from the credit crisis has already been inflicted on the stock market.

Cooperman, the manager Omega Advisors Inc. who's been trading for more than 40 years, said the current financial markets are the most difficult he's ever seen. Still, he said, signs of a bottom in the equity market are beginning to form. "The bulk of the damage is done," Cooperman said during a speech at the Value Investing Congress in New York.

Roughly 13% of companies in the S&P 500 Index have shares with dividend yields that are higher than Treasury bonds. That's the highest level since at least 1994, he said. "I see this as a constructive sign," he said.

Moreover, the U.S. consumer is challenged by high debts, but corporations have the lowest debt-to-capital ratios in roughly 30 years, Cooperman noted.

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George Mairs: Resist urge to cut losses; keep investing

2008-10-08T09:12:00.001-05:00

George Mairs III was born a year before the 1929 stock market crash. In 1931, his father launched what became the venerable Mairs and Power investment management firm of St. Paul. Mairs, now 80 and semiretired but still as sharp, calm and civil as ever, is a good fellow to talk with during turbulent times in the market.

He has helped make millionaires out of many investors in his Mairs & Power Growth Fund, which has consistently outperformed market indexes over the last 50 years with a buy-and-hold strategy of mostly Midwestern companies.

"This credit crisis and market downturn is far more pervasive than anything I've ever seen," said Mairs, who joined the firm in 1952 after graduation from Macalester College and a stint in the Army. "We've moved from a nation of investors to traders, it seems. But Baron Rothschild said the time to invest is when there is 'blood on the streets.' And it's pretty bad out there right now."

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Ackman:Wachovia Should Sell Businesses Separately

2008-10-08T09:08:00.000-05:00

Activist investor Bill Ackman said Monday that Wachovia Corp. (WB) would be best off selling off its banking and brokerage businesses separately, and that he expects the bidding war for the bank to be resolved in weeks rather than months.

Speaking at the fourth annual Value Investing Congress at Lincoln Center in New York, Ackman said his hedge fund has piled into Wachovia shares because he sees it as "one of the more fascinating investment opportunities" he's seen in recent times. Ackman, whose Pershing Square Capital Management now owns more than 7% of Wachovia's stock, said he started "aggressively" buying shares of the bank at $1.84 on the afternoon of Sept. 29, after Wachovia said it was being acquired by Citigroup Inc. (C). He then sold 9.5 million shares after Wells Fargo Corp. (WFC) came in with a rival bid last Friday, and then bought again when Citi challenged the Wells Fargo transaction.

The company is best sold off in two pieces because of the tax benefits of such a transaction, said Ackman, who acknowledged Wachovia is only his second investment in a financial-services company in the past five years. The other one is a "small" position in American International Group Inc. (AIG), which he took last month. He said Pershing Square is a "top 10 or 12" shareholder in AIG, and that he started buying the insurer's shares when they were trading at about the levels they're trading at now. AIG shares recently traded at $3.78, down 8 cents.

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Market Volatility Presents Advantage for Options Investing

2008-10-08T09:01:00.000-05:00

There are all sorts of records being set on Wall Street this week. It is a sign of a panic-stricken market filled with investor anxiety and an incredible flight to safety.

Some of the records, like the amount of companies hitting all-time lows, are quite scary and offer little in the way of optimism. But other records are well worth watching. They are pointing at some pretty interesting and lucrative investing opportunities.

First, take a look at the action in the options market yesterday. The Chicago Board Options Exchange (CBOE) reported a new high in trading volume of S&P 500 (SPX) options. Nearly 2.2 million contracts traded in yesterday’s frenetic market. On the average day, just 670,000 options change hands.

More importantly, yesterday will go down as the third busiest day in the options-trading market’s history. Over 9.5 million contracts were traded.

When so many options get tossed around, it is a surefire sign of one thing, volatility. And as you guessed, the CBOE Volatility Index (VIX) saw record levels as well. The index stretched out to reach a reading of 58.24.

When markets are trading in a normal fashion, the index is somewhere in the range of 15, with a reading of 20 a rare occurrence. This week’s scores above 50 are a sure sign of trouble in the markets.

All of these newly minted records tell a pretty important story. When markets are raging back and forth, options investors have an incredible shot at profits. As long as they can keep their eyes and ears focused on the markets (I have been watching the action from 6:00 a.m. until at least 9:00 p.m. during the past few crazy weeks) and are prepared to move quickly, there is enormous potential.

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Buffett vs. Cramer: Time to Buy or Sell?

2008-10-07T08:00:00.003-05:00

From Yahoo Finance

Two of the most storied investors in modern finance are squaring off as the market gyrates.

On the one hand, legendary investor Warren Buffett has invested billions recently with investments in GE, Goldman Sachs and Constellation Energy, among others.

On the other hand, former hedge fund titan and market pundit Jim Cramer made a remarkable "sell stocks if you need the money within the next 5 years" declaration on NBC's "The Today Show" Monday morning.

The question for investors is which guru to follow? At the Value Investing Congress in New York Monday the answer was clear: Buffett. Value investors are licking their chops at opportunities to invest in quality stocks, including Buffett's Berkshire Hathaway, they believe are trading at incredibly attractive levels, as detailed in the accompanying video. (Meanwhile, Henry Blodget sees tremendous value in Apple.)

While it's fun to pair them off, the reality is Buffett might actually agree with Cramer about the next five years; it's unknown but pretty certain Buffett is thinking far beyond that time-frame. The Oracle of Omaha is the ultimate long-term investor, having famously describing his favorite holding period as "forever."

Watch the video

Greenlight capital October letter to Partners

2008-10-06T22:46:00.003-05:00

Here is the link

Pershing Square's Ackman says short sale ban hurt

2008-10-06T19:22:00.001-05:00

Hedge fund manager William Ackman said on Monday that global regulators rattled investor confidence by briefly banning investors' bearish bets on stocks, and that psychology, not fundamentals, is moving markets.

Ackman, who runs New York-based Pershing Square Capital Management, said the short-selling ban "did more to destroy investor confidence than anything."

Regulators around the world have put restrictions on hedge funds and other investors that sell stocks short -- a bet that a stock price will go down -- to help stabilize cratering financial stocks.

"Short sellers have been blamed for bringing down the market, but since the ban, the markets have been falling even further, which means 'the longs' are selling now," Ackman told reporters in a question-and-answer session after addressing the Value Investing Congress in New York.

On Monday, the Dow Jones industrials .DJI plummeted 800 points before closing down 370 points, or 3.6 percent, to 9950.50 -- settling below 10,000 for the first time since October 2004.

Many hedge fund managers have complained that the ban prevents them from properly hedging their portfolios and has caused many fund managers to suffer heavy losses.

Ackman, an activist investor who has won changes at companies like Wendy's International Inc (WEN.N: Quote, Profile, Research, Stock Buzz) and McDonald's Corp (MCD.N: Quote, Profile, Research, Stock Buzz), said stock prices are getting "extremely cheap" as the market tumbles lower amid worries about sluggish growth.

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Warren Buffett: Charlie Rose Interview

2008-10-06T18:37:00.003-05:00

John Bogle: Keep Investing

2008-10-06T09:06:00.002-05:00

How Pabrai Is Weathering the Storm

2008-10-05T14:03:00.001-05:00

When I sat down recently with famed value investor Mohnish Pabrai, I got a chance to pick his brain on everything from the short-selling ban to his recent lunch with Warren Buffett. In part one of this series, I'd like to share Pabrai's thoughts on the recent market turmoil, and how he's looking for bargain investments during these tumultuous times. Here's what he had to say.

We're living in very interesting times, but if you look back at the last 100 years and you look at all types of events that have taken place -- the Great Depression, two World Wars, the Korean War, the Vietnam War, many recessions, the oil shock and price controls [of the 1970s] -- the U.S. economy and the global economy have, over time, seen tremendous shocks to the system, and, amazingly, they just continue to chug along.

The key thing that I keep in mind is not to focus on current market shocks, but to realize that over the long haul, if you own stakes in businesses that were purchased at prudent prices, by and large, you'll do just fine.

The only change that the recent turmoil around us has caused is to make me completely ignore the financial-services space -- no long or short bets. I just leave that area alone. I throw it in the "too difficult" pile.

But here's the important part: Because of all the recent turmoil we've seen, there are some incredible opportunities outside the financial-services space. Right now, that's really the place to make some hay!

The biggest thing I've learned from Warren Buffett is, as far as possible, you want your investments to be total no-brainers. If you have to wrap your head around the situation, and think to yourself, "Well, I think housing construction might make a rebound," or, "I think GM (NYSE: GM) and Ford (NYSE: F) will start building better hybrid cars" -- when you start talking like that, you're almost defeating yourself.

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David Einhorn: Fooling Some of the People All of the Time - A Long Short Story

2008-10-05T09:14:00.007-05:00

By David Einhorn

In 2002, David Einhorn, the President of Greenlight Capital, gave a speech at a charity investment conference to benefit a children’s cancer hospital. He was asked to share his best investment idea, so he did. He described his reasons why Greenlight had sold short the shares of Allied Capital, a leader in the private finance industry. Greenlight bet that the stock would decline because the company’s business was in trouble and its accounting was corrupt.

Einhorn’s speech was so compelling that the next day, when the New York Stock Exchange opened for trading, Allied’s shares remained closed. So many investors wanted to sell or short the stock that the NYSE could not balance all the sell orders to open Allied’s trading in an orderly fashion.

What followed was a firestorm of controversy. Allied responded with a Washington–style spin-job — attacking Einhorn and disseminating half-truths and outright lies. Rather than protect investors by reviewing Einhorn’s well-documented case against Allied, the SEC — at the behest of the politically connected Allied — instead investigated Einhorn for stock manipulation. Over the ensuing six years, the SEC allowed Allied to make the problem bigger by approving more than a dozen additional stock offerings that raised over $1 billion from new investors.

Undeterred by the spin-job, lies, and investigations, Greenlight continued its research after the speech and discovered Allied’s behavior was far worse than Einhorn ever suspected — and, shockingly, it continues to this day.

Fooling Some of the People All of the Time is the gripping chronicle of this ongoing saga. Page by page, it delves deep inside Wall Street, showing how the $6 billion hedge fund Greenlight Capital conducts its investment research and detailing the maneuvers of an unscrupulous company. Along the way, you’ll witness feckless regulators, compromised politicians, and the barricades our capital markets have erected against exposing misconduct from important Wall Street customers. You will also discover the immense difficulties that prevent the government from sanctioning politically connected companies — making future Enrons inevitable. This revealing book shows the failings of Wall Street: its investment banks, analysts, journalists, and especially our government regulators.

At its most basic level, Allied Capital is the story of Wall Street at its worst. But the story is much bigger than one little-known company. Fooling Some of the People All of the Time is an important call for effective law enforcement, free speech, and fair play.

David Einhorn: The Speech Part 1

David Einhorn: The Speech Part 2

David Einhorn: The Speech Part 3

Prem Watsa: Fairfax Financial Holdings Presentation Slides

2008-10-04T15:56:00.002-05:00

Here is the link

George Soros: He Foresaw the End of an Era

2008-10-04T14:31:00.002-05:00

George Soros has been an active investor for more than half a century. In the mid-1980s, when I started writing about Wall Street, he was already a leading hedge fund manager. Not many people understood hedge funds back then, but for those in the know Soros's Quantum Fund, which he founded in 1973, was the model: year after year, it had achieved returns in excess of the broader market. After weathering the 1987 stock market crash, Quantum, since 1989 under the day-to-day management of Stanley Druckenmiller, racked up more big gains, culminating in a huge bet against the pound sterling in 1992, which reportedly netted more than a billion dollars. (Soros has never publicly confirmed the exact figure. The British newspapers put it at $1.1 billion.)

Thereafter, Soros spent an increasing amount of his time on philanthropic activities throughout the world, including many laudable efforts to promote the spread of democracy in his native Eastern Europe. (He was born in Budapest in 1930.) After 2001, he also involved himself in domestic politics. A vocal critic of the Bush administration, in the run-up to the 2004 election he donated considerable sums to MoveOn.org, the liberal Internet organization. More recently, he and his family have contributed to Barack Obama's presidential campaign.

But Soros remains first and foremost a speculator. In 2007, after the subprime crisis erupted, he returned, at the age of seventy-seven, to directing Quantum's investments, with results suggesting he hadn't lost his touch. Alpha magazine, a glossy publication that covers hedge funds, estimates that he made $2.9 billion in 2007, placing him second on its list of mega-speculators, behind only John Paulson, of Paulson & Co., who raked in an even more astonishing $3.7 billion.

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Prem Watsa: Wall Street winner's tough predictions

2008-10-03T13:22:00.003-05:00

The meltdown's big winner
Fairfax Financial Holdings Ltd., like Campbell's Soup, has defied the stock market carnage as Wall Street and the global financial system melts down. Fairfax has defied gravity because the property and casualty insurance company, led by its Chair Prem Watsa, realized a few years ago this perfect financial storm was about to hit. So it positioned its gigantic portfolio of premium income and profits to not only withstand the storm, but benefit from it. Since the August 2007 crisis, the value of Fairfax's investments has gone up by $2.3 billion to $19.55 billion. I interviewed Prem Watsa about his winning strategy in July. This week, he spoke with me to offer his predictions and observations about the extent and duration of this crisis as well as to give some advice for Canadians, Americans and other investors or business people.

Q. Will Washington's proposed US$700 billion rescue plan work? What should the average person do?
A. "$700 billion or whatever is not going to stop this. This is going to be long and deep and people want to save money. Be careful about risk. There are unintended consequences in fixing this and all are ahead of us. This will take years to sort out."
"There will be problems here in Canada too. If the US has a recession we will. For individuals, safety is number one. Buy real estate for your family but not as an investment. Don't borrow for new cars. Keep borrowing at a minimum."
"Now's the time to protect your money. Keep your life simple. Be mortgage free if you can. People must hunker down."

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Ainslie, Einhorn, Stock Hedge Funds Post Record Drops

2008-10-03T13:18:00.001-05:00

Maverick Capital Ltd., Greenlight Capital LLC and The Children's Investment Fund Management LLP fell more than 12 percent in September as stock hedge funds posted record monthly losses and braced for client defections.

Lee Ainslie's Maverick Capital declined 19.5 percent and Greenlight Capital, run by David Einhorn, was down 12.8 percent, according to investors in the New York-based funds. Children's Investment, overseen by Chris Hohn in London, fell 15 percent, based on a preliminary estimate.

Stock hedge funds fell an average of 8.6 percent in September, the biggest one-month loss since Hedge Fund Research Inc. began collecting data in 1990. While that was better than the 12 percent decline by the MSCI World Index, a benchmark for global stocks, industry analysts expect investors to increase their requests to pull money from funds.

``The poor performance of certain hedge funds will have repercussions in the allocation processes,'' said Taco Sieburgh Sjoerdsma, head of research at Liability Solutions Ltd., a London-based investment consultant. ``It may lead to substantial shifts between hedge-funds strategies and between hedge funds.''

Other managers with above-average losses for the month included Stephen Mandel, whose main Lone Cypress fund in Greenwich, Connecticut, fell 14.7 percent. New York-based Third Point LLC, run by Daniel Loeb, dropped 11 percent.

Officials for the hedge funds declined to comment or didn't return calls.

Defense Doesn't Work

Funds in all investment categories fell 6.9 percent in September, according to Hedge Fund Research's Global Hedge Fund Index. That's the worst month for the $1.9 trillion industry since August 1998, when the Russian debt default triggered the collapse of Long-Term Capital Management LP.

The losses came even as many managers sought to sidestep the tumble in equity prices by holding more cash, cutting borrowing and reducing their bets on stocks expected to rise.

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They're buying while others are selling

2008-10-03T13:13:00.001-05:00

Traditional value managers Stephen Arpin and Mark Thomson, partners at Toronto-based Beutel Goodman & Co. Ltd., are establishing new holdings or adding to key positions in sectors that have come under pressure in the market weakness -- consumer discretionary, telecommunications and financial services.

When it comes to energy, the Canadian dividend fund they co-manage has used the recent pullback in this sector to buy more of senior Canadian natural gas producer En- Cana Corp.

"We like natural gas as the North American commodity price is low relative to the rest of the world, it is also cheap on a historic base, and it is certainly cheap when compared to the price of oil," Thomson says.

Of the Canadian banks, Arpin and Thomson note that the better-positioned ones -- Toronto Dominion Bank, Bank of Nova Scotia and Royal Bank of Canada (all in the top 10 holdings in their Canadian dividend portfolio) are "extremely" well situated relative to their global peers to take advantage of the current turmoil. These three have the capital bases to continue to add loans and the financial strength to take make opportunistic acquisitions, Thomson says.

The latter is also true of leading Canadian insurers, such as Manulife Financial Corp., says Arpin. "Manulife is already a major force in major markets around the world. It can use its financial clout to buy strategic assets from distressed rivals."

Telecom services stocks have come under considerable pressure around the world, says Arpin. In Canada, they have also suffered from investor concern about the entry of new players into the Canadian wireless market and its impact on profit margins and growth of existing players.

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Bargain basement stocks worth buying

2008-10-03T13:11:00.000-05:00

In bad markets, always bet on Buffett

In the aftermath of the failed bailout, the markets are still tumultuous, and most of us financial pundits are kept busy providing either commentary about the colossal lack of judgment on behalf of Wall Street and the federal government, or giving people advice on how to weather the financial storm. We’ve already discussed some of the storm-weathering steps you can take, but this time around we’re going to go a step further and discuss how you can take advantage of the market-wide decline in stock prices.

Invest now? Are you crazy?

If you’re like most people, risk-taking is the last thing you want to think about at this time. There’s no guarantee about any stock price or, for that matter, any company. Still, this is the best time to take a risk. The low prices of stocks mean that you can get bargains on companies that have traditionally been strong performers, and once the market recovers you can recognize a profit on these stocks, even if the prices don’t return to pre-marketing collapse highs. On the other hand, if Wall Street and the Dow completely collapse, you’ll have much bigger problems than your stocks not performing. So why not invest?

If you still need some persuading, consider this--Warren Buffett has invested money in Goldman Sachs, even though Berkshire Hathaway share price dropped by over $3,000. One of Buffett’s strategies is to buy shares in otherwise strong businesses that are financially distressed, and it works as well for a Wall Street novice as it does for a power player like Buffett.

A few diamonds caked with mud

In fact, let’s start with Goldman Sachs (NYSE: GS, Stock Forum). Its share price is still $80 short of its high of $200 during the summer, but Buffett’s investment in the company has caused other investors to take note, and the stock jumped by $7 as a result. This is at least partially the result of increased consumer confidence caused by Buffett’s investment, and we’d be willing to bet that Buffett’s support is going to snowball, leading Goldman Sachs to a recovery. At this point, Buffett is regarded as such a financial guru that his picks end up prospering because of increased consumer confidence. So go with the flow on this and take a chance on Buffett. You could put your trust in someone much, much worse.

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Buffett's Ferocious Focus

2008-10-02T15:03:00.000-05:00

For more than half a century Warren Buffett has shown impeccable timing. So perhaps it should come as no surprise that the first biography he has authorized was published in late September as news of the financial crisis that he had warned about dominated the front pages and just days after he had agreed to inject $5 billion into Goldman Sachs (GS).

Much of the legendary investor's story has been told, notably in Roger Lowenstein's masterful Buffett: The Making of an American Capitalist. But in The Snowball: Warren Buffett and the Business of Life, former Morgan Stanley (MS) insurance analyst Alice Schroeder provides a much more penetrating and personal look at the Oracle of Omaha.

Schroeder's portrait is the product of five years of research that included unprecedented access. She describes an obsessive man emotionally damaged by his mother's rages who nevertheless knew what he wanted and how to get there from an early age. Here readers will again encounter the burger-eating, Cherry Coke-swilling, aphorism-spouting outsider familiar from previous accounts. But The Snowball (to succeed, find wet snow and a really long hill, advises Buffett) is more perceptive than other works, getting deeply inside the head of the man who achieved such amazing long-term investment returns that some academics believe them to be a fluke.

Buffett himself has attributed his success to "focus." Schroeder writes: "He ruled out paying attention to almost anything but business—art, literature, science, travel, architecture—so that he could focus on his passion." As a child, Schroeder relates, Warren carried around a coin-changer as his prized possession, and when his dad offered him a trip at age 10, he asked to go to the New York Stock Exchange (NYX). Not long after, Buffett read a book called One Thousand Ways to Make $1,000 and announced to a friend that he was going to be a millionaire by the time he was 35. "That was an audacious, almost silly-sounding statement for a child to make in the depressed world of 1941," Schroeder writes. "But…he was sure he could do it."

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Fidelity's Anthony Bolton calls bottom of stock market

2008-10-02T15:00:00.001-05:00

Anthony Bolton, London’s best-known stockpicker, said yesterday that he had never seen retailing and media shares looking so cheap and that he had begun to put his own money into the equity market at the height of the current financial crisis.

Mr Bolton, president for investments at Fidelity International, said that the UK stock market seemed to be at or near the bottom and he had become much more optimistic in the past two weeks. “Shares [in some sectors] are as cheap as I’ve seen them in my lifetime,” he said, citing consumer cyclical sectors such as retailing and media as particular bargains.

After pausing several years in adding to his stock market investments, he said he had put fresh personal money into Fidelity equity funds two weeks ago and on Monday – the day the US bank bailout plan was derailed. “For the first time in a couple of years, in the last few weeks I’ve started to feel optimistic,” he said.

Mr Bolton made his reputation as the stockpicker behind the Fidelity Special Situations Fund. Between its launch in 1979 and 2007, when he stood down from running it, he multiplied investors’ money 147 times. He rose to prominence when he orchestrated the ousting of Michael Green as chairman-designate of ITV, and acquired the nickname “The Quiet Assassin” – a moniker he detests.

Mr Bolton told guests at a City lunch yesterday that the rally in markets would not be dramatic. “It’s going to be a protracted and slow upturn,” he said.

The bear market had gone on too long and, at 15 months, was already “long in the tooth” compared with previous share market slides. “In the last two weeks we have looked into the abyss that you get at the bottom [of each bear market],” he said.

Sentiment was so poor, Mr Bolton suggested, that the only way was up. Companies with low leverage would do well, he predicted. Measured by price to book values and enterprise value to sales ratios, many shares were egregiously cheap.

Media shares had underperformed the stock market for seven years, and it was time to buy them, Mr Bolton argued. A broad basket of financial stocks was also attractive. “I’ve got concerns about all the banks, but a lot of those concerns are already reflected in the price,” he said.

Mr Bolton said that investors in banks had been wrongfooted by banks’ opacity and huge off balance sheet assets and liabilities, which made them hard to analyse. “I’d never heard of SIVs [before May 2007],” he said. “I didn’t know they existed.” SIVs, or structured investment vehicles, were the huge off balance sheet funds through which banks invested in complex, and sometimes toxic, structured credit assets.

Mr Bolton said there did not have to be a big trigger for a turning point, although a US bailout might help. “It can just be when people stop selling,” he said. He preferred shares in developed markets. It was too early to buy in emerging markets.

Link to the original article

Warren Buffett: I Haven't Seen As Much Economic Fear In My Adult Lifetime

2008-10-02T09:06:00.002-05:00

Here is a complete transcript of last night's Warren Buffett interview with Charlie Rose, airing on PBS. It was provided to CNBC by the Charlie Rose program.

Charlie Rose:
We are in San Diego, California this afternoon for a conversation with Warren Buffett. He is a man congressional leaders, the administration, and the Federal Reserve want to talk and talk to. He is the legendary chairman and CEO of Berkshire Hathaway. Its success has made him the world's richest man. He's admired for his investment results over a long period of time. He is trusted for his common sense and the fact that he's warned over the years, in his annual letter to stockholders, about some of the things that are contributing to the crisis facing America and the global economy. For all those reasons, we have come to see him in San Diego where he is attending the Fortune Magazine's most powerful women's summit. Later, he will be interviewed at a conference by the Fortune reporter and long time friend, Carol Loomis. We come this evening from the studios of our public television affiliate in San Diego, KPBS. I thank my friend, Warren Buffet, for taking time in a busy schedule to talk to us.

Warren Buffett:
My pleasure, Charlie.

Charlie Rose:
Let me talk of the news of today. You have announced an investment of $3 billion in General Electric, along the same terms as the the Goldman Sachs --

Warren Buffett:
Yeah, almost identical.

Charlie Rose:
Why GE?

Warren Buffett:
Well, I got a call this morning from a friend of mine at Goldman Sachs saying they might be interested in such an investment. I'm familiar with the company. I've known the management, the current management, Jack Welch before Jeff Immelt. I've known him for decades. And so I understand their businesses. We do lot of business with him, and GE has been -- I think it's the longest running stock in the Dow Jones industrial average. It will be 100 years now it will be around. I hope I'm around then, too. And it was an attractive investment. And we have had a lot of money around, over the last two years, and we're seeing things that are attractive now.

Read the full transcript

Buffett Buys $3B of GE Preferred

2008-10-02T08:28:00.001-05:00

General Electric Co (GE) just announced plans to raise $15 billion, with a little help from Warren Buffett. The company is selling $12 billion of common stock to the public and $3 billion of preferred to Berkshire Hathaway.

The old Oracle of Omaha has cut deal strikingly similar to the deal he cut with Goldman Sachs. Here he is getting perpetual preferred stock with a 10% dividend that is callable after three years at a 10% premium. He’s also snatching up warrants to purchase $3 billion of common stock at $22, which is a two dollar discount from where the stock is trading right now.

How closely is this investment in GE tied to Buffett’s faith in the bailout? GE is currently protected from short-selling under the SEC’s emergency ban, and GE may be eligible to sell assets to the Securitized Housing Investment Trust. He cited the bailout as a key to his investment in Goldman Sachs.

Fascinatingly, in an interview with Becky Quick on CNBC, Buffett said he was sold on this deal by investment bankers at Goldman Sachs. So those guys have talked Warren into parting with $8 billion of his cash in less than a week. Impressive.

CNBC describes Buffett’s investment in GE as “a very expensive advertising campaign.” To be sure, Buffett putting money into GE will make it attractive to many investors. But if you look at the great terms Buffett is demanding for his money, you have to wonder if other investors really should be buying into the common shares without the promised dividend and warrants.

Link to the original article

Marty Whitman on Graham and Dodd

2008-10-01T15:09:00.000-05:00

Bruce Berkowitz interview on WealthTrack

2008-10-01T15:04:00.000-05:00

Managers splurge on bargain stocks

2008-10-01T09:56:00.001-05:00

Fund managers have been on a shopping spree, snapping up bargains flowing from Monday's stock market meltdown.

"I just loaded up the boat," quipped hedge fund manager Derek Webb of Webb Asset Management. "When you have a panic-selloff ... you just want to get capital into the market."

During the Monday downturn, he bought Canadian names like Agrium, Potash, Aecon Group, Harvest Energy, Fording Canadian Coal, Daylight Resources, and BCE. He also added exchanged-traded funds (ETFs) tracking broad market indexes if he couldn't get enough stock.

That strategy enabled him to be fully invested and buy time to get together his shopping list of non-economically sensitive stocks. He bought them after selling some of his ETFs into yesterday's market rebound.

On Monday, the S&P 500 plunged nearly 8.8 per cent, while Canada's S&P/TSX tumbled 6.9 per cent after U.S. lawmakers failed to pass a $700-billion (U.S.) bailout package to rescue the financial industry. Yesterday, the S&P 500 bounced back 5 per cent, while the S&P/TSX composite gained 4 per cent.

Yesterday, Mr. Webb, an earnings momentum manager, bought one Canadian stock - ATS Automation Tooling Systems - and loaded up on U.S. names like natural gas pipeline transporter ONEOK Partners; health care products provider Natus Medical and expense reporting software maker Concur Technologies.

"I'd rather take names that are not exposed to the economy if we are headed for a global recession, depression or whatever," said the San Francisco-based manager of the WAM Canadian Performance Fund.

Read the full article

Warren Buffett: The Early Years

2008-09-30T20:55:00.001-05:00

The Snowball, the first authorized biography of Warren Buffett, has been one of the most eagerly anticipated business books of the year. Published on Monday, the book is particularly timely because of Buffett's role in the credit crisis now roiling Wall Street.

A team of Portfolio.com writers, continuing today with Portfolio.com managing editor Daniel Colarusso, are reviewing the book in sections this week, and will be commenting on each other's reviews (the first part is available here). Readers are invited to add their thoughts in the Comments section.

Part Three of The Snowball: Warren Buffett and the Business of Life takes readers from the early 1950s and his work with Ben Graham and his marriage to Susie through the late 1960s, when he moves to dissolve his own investing partnership. Along the way, his revered father Howard died, he and Susie had three kids of their own, and his wealth grew to $9 million.

Driven by his monastic dedication to the market and amassing wealth, he bought a battered textile maker (Berkshire Hathaway), a troubled retailer, and even dabbled in publishing.

Here are some key passages from the section and our translation and analysis.

On Buffett’s father’s support of William Howard Taft in 1952:

[Howard Buffett] broke with the party by refusing to support Eisenhower. This was an act of political suicide…He was left standing on principle—alone. Warren recognized that his father had “painted himself into a corner.” Now Howard’s struggles branded three principles even deeper into his son: that allies are essential; that commitment are so sacred by nature they should be rare; and that grandstanding rarely gets anything done.”

Uh-oh, sounds like the stage is set for revenge. Will young Warren go to New York, make his fortune, and return to Omaha to get even? Well, no. He does go to New York. He does make his fortune. But he’s too busy counting his money to exact revenge on anyone.

On Susie:

“I needed her like crazy. I was happy in my work but I wasn’t happy with myself. She literally saved my life. She resurrected me. She put me together. It was the same kind of unconditional love you would get from a parent.”

Yeesh. It's always about our mothers, isn't it? Even for Buffett. And we thought he was different.

On going to work for Ben Graham:

Warren was so excited about being hired that he arrived in New York on August 1, 1954, and showed up at his new job at Graham-Newman on August 2, a month before his official starting date. Okay, lemme get this straight. He needed Susie “like crazy” but skipped town a month early to pore over S&P stock guides?

Read the full article

Buffett Buys Stake in Chinese Battery Manufacturer

2008-09-30T07:34:00.002-05:00

The investor Warren E. Buffett announced on Monday that he had agreed to buy a 9.89 percent stake in a Chinese battery manufacturer that plans to sell electric cars in the United States by 2010.

The MidAmerican Energy Holdings Company, will pay 1.8 billion Hong Kong dollars — about $230 million — for the stake in the battery maker, the BYD Company. Mr. Buffett’s Berkshire Hathaway owns 87.4 percent of MidAmerican.

Based in Shenzhen, a mainland Chinese city adjacent to Hong Kong, BYD is one of the world’s largest makers of rechargeable batteries for cellphones and other uses. The company also has a fast-growing auto-making unit that accounts for nearly a third of its revenue and makes fuel-efficient compact and subcompact cars for the Chinese market.

The president of BYD, Wang Chuanfu, said that the alliance with Mr. Buffett was not just about raising capital for the manufacturer, which relies heavily on short-term debt.

“If BYD were to enter the North American market, Mr. Buffett’s investment would enhance the BYD brand name,” Mr. Wang said at a news conference in Hong Kong late Monday.

He added that BYD would sell cars in the United States and might even move up its plans for entering the market in 2010, by using Berkshire’s money to accelerate research.

David Sokol, the chairman of MidAmerican, said at the news conference with Mr. Wang that Berkshire Hathaway wanted to address climate change and considered electric cars as a way to do so. “This is a technology that can really be a game changer if we’re serious about reducing” emissions of carbon dioxide, the main gas associated with manmade global warming, Mr. Sokol said.

Read the full article

Don’t follow Market’s mood, explore it

2008-09-29T22:50:00.001-05:00

Today, after the $700 billion rescue plan was voted down, the market got hammered. On an investing discussion board, I stated “If you have cash, be prepared. You could find some great opportunities in this chaos.” Immediately, I got a response: “Why we still have this kind of crazy people who are not afraid of being killed?”

When market goes south, many people go with it and get depressed. But investing is about buy low and sell high. After market goes down, it’s at least a better deal than yesterday if you already want to buy. We understand this when shopping for grocery. But when come to investing, most people forget this basic idea. People tend to follow the market’s emotion. When market goes up, people are happy and want to buy more stocks. But after seeing the market goes down, people get pessimistic and depressed. Instead of buying stocks at a cheaper price, they want sell. This accelerated market’s decline and created an even better deal for those investors who have the right temperament. These investors have the discipline to stick to their belief. They followed some great companies and have an idea what those values are. Then they patiently wait for the right opportunities. In the crisis like what we have today, they know some of the prices was brought down way below where the value is because of people’s pessimism. They then acted promptly and bought those stocks at a bargain price. After that, their job is to patiently wait for the market value to come back close to where the real value is. In the long run, price will always follow value. Like Benjamin Graham said that in the short run, the market is a voting machine; but in the long run, the market is a weighing machine.

Just a week ago, in an interview on CNBC after buying a stake in Goldman Sachs, Buffet said: “And, you know, five years from now, ten years from now, we'll look back on this period and we'll see that you could have made some extraordinary buys. That doesn't mean it won't get more extraordinary a week or a month from now. I have no idea what the stock market is going to do next month or six months from now. I do know that the American economy, over a period of time, will do very well, and people who own a piece of it will do well.”

So learn from masters, don’t follow market’s mood, explore it.

Legg's Miller takes new tack on weak performance

2008-09-29T10:22:00.002-05:00

Legg Mason Inc.'s star stock picker Bill Miller said yesterday that he is making adjustments in managing his well-known Value Trust mutual fund in light of its weak performance and millions in lost assets.

Miller said he would spread out his concentrated portfolio to include broader allocations across sectors. He may buy mega-cap stocks that are trading at depressed prices, that generate cash and are at the top of their industries.

The moves appear to be deviations for Miller, whose Value Trust owns fewer stocks than most other funds. But Miller characterized the moves as tactical adjustments instead of a major change in his long-term philosophy amid unprecedented financial turmoil. And he insisted that the fund, which has been a big piece of Legg Mason's marketing prowess in recent years, will turn around.

"I'm very disappointed in our results relative to history and to our expectations and how we would have navigated this particular situation," Miller said during a brief interview yesterday at the start of Legg Mason's Thought Leader Forum for investors at Baltimore's Renaissance Harborplace Hotel. "We're responding to that by analyzing the cause and sources just as we did in the late '80s and '90s.

"We're trying to make sure we're always trying to be adaptable and flexible within the context of our core philosophy when events show us that we've been wrong," Miller said. He noted the recent financial crisis was unlike any previous one because it was global and systemic in nature.

Known as a contrarian investor, Miller makes big bets on stocks that have fallen out of favor in the market.

His flagship Value Trust had the distinction of beating the Standard & Poor's 500 index for 15 straight years before the streak ended in 2006. Since then, the fund has struggled with poor performance. The fund's assets have declined to $9.7 billion, from $20.5 billion more than a year ago.

Read the full article

Ariel Fund's Sauer sees value in asset managers, retail

2008-09-29T10:17:00.001-05:00

Shares of asset managers, and consumer, retail and some media companies offer good value opportunities in a volatile and beaten down market, a fund manager said.

Matthew Sauer, portfolio manager of the mid-cap focused Ariel Appreciation Fund, which has about $1.6 billion in assets, likes companies such as Janus Capital Group (nyse: JNS - news - people ) and Clorox as he feels that they are trading well below their fair value.

'We can't understate the sea change that's happened in financial markets over the last few weeks. It will have implications for many years to come but it has given us a chance to look around,' Sauer told Reuters from Chicago.

Within financials, the fund manager is particularly enthusiastic about asset managers.

The fund recently added to its holdings in asset management firm Janus Capital Group, and Sauer believes the stock offers an upside potential of as much as 40 percent from current levels before it is fairly valued.

Janus Capital, now Ariel Appreciation's second-largest holding, was trading at $22.28 in afternoon trade on the New York Stock Exchange.

Sauer also likes T Rowe Price as he believes it can take market share, has a strong franchise and also derives stability from its exposure to retirement funds in the United States.

'I don't think there has been any headline in the last six months that would change that for me,' Sauer said.

Read the full article

Warren Buffett lifts the lid on his secrets

2008-09-28T09:34:00.000-05:00

The world’s richest man has revealed all to his biographer.

Warren Buffett always had spectacular timing. As Wall Street burns, the billionaire investor is the hero of the hour after predicting the financial meltdown and riding to the rescue — $5 billion (£2.7 billion) in hand — of Goldman Sachs.

Tomorrow marks the release of The Snowball, the first and only, Buffett says, biography to be written with his co-operation. The book’s author is Alice Schroeder, a former analyst who spent “literally thousands” of hours with Buffett and his family.

“Invaluable” hardly describes Schroeder’s access to the world’s richest man when you consider that lunch with Buffett recently fetched $2.1m in a charity auction.

Such is Buffett’s reputation that last week, when he snapped up his stake in Goldman, the bank’s shares rose $8 as investors who had wondered if it would survive the credit crunch reacted positively.

Schroeder said: “Around the time Bear Stearns was being taken over, he talked about the domino effect to me. He said to me first Bear, then Lehman, then Merrill. He saw this coming and he talked about a crisis of a magnitude that we had not seen before.”

Where others saw chaos, Buffett saw opportunity. It has been a busy two weeks for him. The week before, one of his firms, Mid American Energy, made a $4.7 billion offer for Constellation, a rival pushed to the brink of bankruptcy by the credit crisis.

Buffett likes big brand names for his Berkshire Hathaway investment vehicle. And he likes to pay low prices for them.

The purchase of the Goldman stake was classic Buffett, waiting for a top-rated firm to fall to rock-bottom prices. It seems to be a fall he had been predicting for some time.

Read the full article

Why Warren Buffett is Betting on Banks Now

2008-09-28T09:30:00.000-05:00

Bank stocks could be the buy of a lifetime right now. The bailout is moving forward, the markets have stabilized, and Warren Buffett has put up a $5 billion bet on Goldman Sachs (NYSE:GS) this week.

Is it time to follow Buffett’s lead and go “all in” on banks now?

The answer is a simple no.

Buffett got a very sweet deal from Goldman that has reduced his risk, gave him a high degree of income, and didn’t eliminate a single cent of the potential profits from the deal. And there’s a little known way we get all that in our investments too. Let me explain.

There are a lot of reasons to like banks right now. Share values have been pummeled over the last year. If the bailout goes through, they’re about to unload their mistakes onto everyone else. The ones that are left still generate high fees, margins, and profits for the services they provide. And the ones that manage to survive will be some of the biggest winners when the U.S. economy recovers.

Banks are an extreme value play that undoubtedly caught Buffett’s eye. However, even he needed some enticing odds to make a bet this big.

As individual investors, we can’t simply follow his lead here and buy Goldman Sachs. Buffett was afforded a few special advantages that aren’t usually available to the rest of us. But as we’ll see in a moment, occasionally we can get these advantages too.

You see, Warren Buffett didn’t make a simple $5 billion investment into common shares of Goldman Sachs. Anyone can do that with a few mouse clicks or a quick phone call to his or her broker. He got a lot more for his $5 billion.

Berkshire Hathaway acquired special perpetual preferred shares of Goldman Sachs. These aren’t the shares you can buy on the NYSE. The preferred shares Goldman issued to Berkshire have all kinds of special attributes usually reserved for high-net worth individuals.

Read the full article

Buffett: Market Meltdown without Bailout

2008-09-27T09:09:00.001-05:00

Eddie Lampert: The best advice I ever got

2008-09-26T14:44:00.003-05:00

Almost every weekend when I was 7, 8, 9, 10 years old, my father and I would toss a football in the yard or play basketball in the driveway. When we played football, he'd say, "Go out ten steps. Turn to your right." The ball would reach me just before I turned, and it would hit me right in the chest. Why would my dad do this? He told me, "If I waited for you to turn, you and the defensive player would have an equal chance to get the ball. Your opportunity is gone."

This idea of anticipation is key to investing and to business generally. You can't wait for an opportunity to become obvious. You have to think, "Here's what other people and companies have done under certain circumstances. Now, under these new circumstances, how is this management likely to behave?" The plays my father designed for me helped me learn to think ahead. Lots of days I asked him, "Why can't we just invite kids over and play a game?" In order to do something well, he explained, you have to keep practicing and preparing.

Buffett: A Better Negotiator for Taxpayers?

2008-09-25T20:59:00.000-05:00

Maybe the American taxpayers should be asking Warren Buffett to be negotiating on their behalf, The New York Times’s David Leonhardt muses.

Treasury Secretary Henry Paulson has spent a good part of the last two days on Capitol Hill arguing that the government should not demand a stake in any Wall Street firms it bails out. Demanding such a stake, Mr. Paulson says, could scare away many of those firms from participating in the bailout, leaving the credit markets as hobbled as they are now.

And then Mr. Buffett swooped in on Tuesday evening and announced that his company, Berkshire Hathaway, was investing $5 billion in Goldman Sachs, money that would help the firm — which made far fewer bad investments than most of Wall Street — shore up its balance sheet. What will he receive in exchange for his investment? Something like a 7 percent stake in the firm.

Mr. Paulson, of course, has a different objective than Mr. Buffett. The Treasury secretary is trying to resuscitate the country’s financial system and keep the economy from falling into a deep recession. If he drives too hard a bargain, he won’t solve the problem. Mr. Buffett is merely trying to make some money.

Read the full article

Seth Klarman guest lecture at Harvard's "Psychology of Leadership" course 2006

2008-09-24T21:10:00.001-05:00

Important quote from Buffett's interview today with CNBC

2008-09-24T14:44:00.002-05:00

CARL (reporter): A lot of people who are watching us Warren, and even people who have just started watching us over the past week or two, look at the stock market every day and are confused. They want to use it as a metric for how we're doing, or at least the progress we're making on big issues. I'm guessing you don't think it's reflective of anything that's based in reality right now?

BUFFETT: Well, the stock market in the short -- my old boss Ben Graham said that in the short-run the stock market is a voting machine, in the long-run it's a weighing machine. As a voting machine, it responds to people's emotions. There's no literacy test for voting. You vote according to how much money you have, not according to how smart you (are.) So the stock market does some very silly things in the short-run. Over the long-run, it behaves quite rationally. And, you know, five years from now, ten years from now, we'll look back on this period and we'll see that you could have made some extraordinary buys. That doesn't mean it won't get more extraordinary a week or a month from now. I have no idea what the stock market is going to do next month or six months from now. I do know that the American economy, over a period of time, will do very well, and people who own a piece of it will do well. But they shouldn't own it on leverage. That's what people have learned in this period, that you've got to be able to play out your hand and it's a big mistake to let somebody else be in a position where they can sell you out.

CNBC INTERVIEW TRANSCRIPT & VIDEO: Warren Buffett Explains His $5B Goldman Investment

2008-09-24T14:13:00.001-05:00

Warren Buffett was interviewed live by telephone on CNBC's Squawk Box this morning about his surprise investment of at least $5 billion in Goldman Sachs.

BECKY QUICK: We know you get all kinds of deals, all kinds of people who come knocking asking you to jump in. You've said no to everything to this point. Why is this the right deal at the right time?

WARREN BUFFETT: Well, I can't tell you it's exactly the right time. I don't try to time things, but I do try to price things. And I've got a formula that says bet on brains, and bet of them when it's the right type of deal. And in this case, there's no better firm on Wall Street. We've done business with them for years, with Goldman, and the price was right, the terms were right, the people were right. I decided to write a check.

BECKY: Does the backdrop of the Federal government potentially getting involved with a massive bailout plan for Wall Street, does that have anything to do with this deal?

BUFFETT: Well, I would say this. If I didn't think the government was going to act, I would not be doing anything this week. I might be trying to undo things this week. I am, to some extent, betting on the fact that the government will do the rational thing here and act promptly. It would be a mistake to be buying anything now if the government was going to walk away from the Paulson proposal.

BECKY: Why would that be a mistake? Because the institutions would collapse, or because you could get a better price?

BUFFETT: Well, there's just no telling what would happen. Last week we were at the brink of something that would have made anything that's happened in financial history look pale. We were very, very close to a system that was totally dysfunctional and would have not only gummed up the financial markets, but gummed up the economy in a way that would take us years and years to repair. We've got enough problems to deal with anyway. I'm not saying the Paulson plan eliminates those problems. But it was absolutely, and is absolutely necessary, in my view, to really avoid going over the precipice.

Read the full transcript and watch the video

It's time to be greedy

2008-09-23T19:52:00.004-05:00

As I said before, you should not follow Mr. Market's mood, but explore it. As the market collapsed recently due to credit market crisis, many people got scared and pull market out of the market. They don't even dare to look at the market which they loved and followed everyday just a year ago. But this is the exact time that you should be greedy and look out for opportunities. And that's what Warren Buffet is doing. The news just came out today that Berkshire Hathaway paid $5 billion for a stake in Goldman Sachs. Here are some excerpts from the AP news:

Warren Buffett's Berkshire Hathaway Inc. is investing at least $5 billion in Goldman Sachs, a huge vote of confidence for one of the survivors of the credit crisis that felled two of its investment banking peers.

In addition to buying $5 billion in preferred stock, Berkshire also got warrants to buy another $5 billion in Goldman's common stock. Goldman also said late Tuesday it would raise another $2.5 billion in its own public stock offering.

"Goldman Sachs is an exceptional institution," the chairman and CEO of Berkshire Hathaway said in a news release. "It has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance."

So hopefully we can learn from Warren Buffet: be greedy when others are fearful.

Berkshire Hathaway Annual Meeting Transcript

2008-09-23T14:19:00.003-05:00

OMAHA, NEBRASKA MAY 3, 2008

Here is the link

Scott Black: Time To Grab Some Value

2008-09-23T14:11:00.002-05:00

Some traders think this might be a good day to spend on the sidelines. Not Scott Black. He says investors should get to work right away, snapping up value stocks.

"Most of the systemic risk has been taken care of by the Federal Reserve...but I would stick to what you do normally, which is to buy high-return-on-equity stocks," the president of Delphi Management told CNBC. "At this point, I don't think the underpinnings of the market are such that we're going to see major downdraft from here."

Although he believes it's safe to go into the water again, he sees some rip currents to beware: "[Investors] probably shouldn't be buying financial-service stocks," he said.

Recommendations:

So what looks good to him?

"You can go to things like oil-service companies, that have good contracts into next year," he said. "You can buy companies like Noble [NE 48.16 0.41 (+0.86%) ] and Ensco [ESV 61.54 -0.22 (-0.36%) ], at 6 P/Es, ROEs over 25 percent, and virtually debt-free balance sheets.

"You can buy an Oracle [ORCL 20.21 0.46 (+2.33%) ], which has demonstrated sustainable earning power, more cash than debt...these aren't speculations; these are good businesses, and you should be buying good businesses at cheap prices."

Watch the video

Walter Schloss Talks Investing

2008-09-21T15:46:00.000-05:00

Carl Icahn: Corporate Waste Brings this Nation Closer to the Brink

2008-09-21T09:36:00.001-05:00

Few things bother me more than the titanic government debt load this country carries from years of reckless government borrowing and spending. We really have no ability to repay this debt, other than by continually issuing new debt to pay the interest on the old debt.

The Peter G. Peterson Foundation calculates that we as a country have racked up a staggering $53 trillion in government obligations. That’s $455,000 per household and growing at the rate of $2 trillion to $3 trillion a year "on autopilot," the respected think tank says.

Just this week, we added another $85 billion to these obligations with the bailout of insurance giant AIG. Add that to the $200 billion in potential obligations to Fannie Mae and Freddie Mac, the $29 billion to back up Bear Stearns toxic credits, and $300 billion for the Federal Housing Authority and a possible $25 billion to $50 billion in low-interest loans for Detroit’s Big-3 automakers and we’re talking nearly $700 billion on top of this.

The debt and obligations we carry as a nation, combined with our miniscule savings rate and monster trade deficit, is truly frightening.

Read the full article

Bogle and Heebner Talk US Business

2008-09-21T09:22:00.001-05:00

Templeton's Mobius sees bargains in turmoil

2008-09-20T09:40:00.000-05:00

The financial storm of the last week has smacked valuations down to attractive levels, particularly in Brazil, Thailand and Turkey, said Mark Mobius, executive chairman of Templeton Asset Management.

In response to email questions on Wednesday, Mobius said markets are closer to the end of the financial crisis after a bankruptcy filing by Lehman Brothers (LEH.P: Quote, Profile, Research), massive industry consolidation and the bail-out of American International Group (AIG.N: Quote, Profile, Research).

"The resolution of the uncertainty revolving around Lehman, Merrill Lynch and AIG is positive and could constitute the beginning of the end of the market turmoil that has afflicted financial markets since mid-2007," said Mobius, who helps to oversee $28 billion in emerging market assets.

"We believe the events of this past week have resulted in markets falling to valuations that present an investment opportunity."

He said he continues to find value in Brazil, Thailand and Turkey, where he has been bullish since at least April. He also said bank stocks in emerging markets have not been hit as hard as in developed markets.

Emerging markets have been hard hit in the last two months, particularly after oil prices peaked and then fell nearly $54 a barrel, as investors slashed their exposure to risky markets.

The MSCI emerging markets stocks index .MSCIEF has dropped 27.6 percent since July, underperforming the all-country index .MIWD00000PUS, which has fallen 13.9 percent.

Read the full article

How to invest like Warren Buffett

2008-09-20T09:37:00.002-05:00

Buffet’s mentors

Warren Buffett studied stock market analysis at Columbia University, in New York, under the wing of Benjamin Graham who was, until the arrival of Buffett, perhaps the greatest thinker on portfolio investment.

Graham was a classic value investor. In other words he was looking to buy companies whose net asset value per share was greater than the share price. Buffett inherited Graham’s fascination for technical analysis and aversion to paying over the odds for any stock.

The influence of Omaha, Nebraska

Buffett has spent virtually all his working life in Omaha, a mid-west town which is dedicated to economic activity with no distractions. This has given him a real ‘feel’ for business and how businesses work. He sees them as living organisms and thinks of a shareholding not as an abstract piece of paper but as a genuine stake in a business. He has been involved in the management of various companies for more than 40 years and in 1965 he took over Berkshire Hathaway, a textile manufacturer in Massachusetts, which he turned into his own investment company. Its performance has proved a moneyspinner for shareholders and turned Buffett into the world’s richest man. Back in 1965 Berkshire Hathaway’s share price stood at under $20. Today it stands at more than $115,000. Buffett's letters to Berkshire Hathaway shareholders have become collectors' pieces.

Understanding businesses

Buffett once famously said you should never invest in a business that you don’t understand. This stance meant that he didn’t invest in dot.com stocks and as a result his performance suffered at the height of the technology bubble. But Buffett had the last laugh when the tech bubble burst and his more sedate investments stood up a lot better in the market crash than the technology-rich portfolios of many of his competitors.

Read the full article

Is my money market fund safe?

2008-09-18T20:12:00.004-05:00

With the market in turmoil, some people are worried that their money market fund maybe in danger. In order to know if the money market fund is really safe, we first need to understand what money market fund is. I find this explanation from Wikipedia:

Money market funds, also known as principal stability funds, seek to limit exposure to losses due to credit, market, and liquidity risks. Money market funds in the United States are regulated by the Securities and Exchange Commission's (SEC) Investment Company Act of 1940. Rule 2a-7 of the act restricts investments in money market funds by quality, maturity and diversity. Under this act, a money fund mainly buys the highest rated debt which matures in under 13 months. The portfolio must maintain a Weighted Average Maturity (WAM) of 90 days or less and not invest more than 5% in any one issuer, except for government and repurchase agreement securities.

Money market funds seek a stable $1.00 net asset value (NAV). The Community Bankers US Government Fund "broke the buck" in 1994, paying investors $0.96 per share. That fund had invested a large percentage of its assets into adjustable rate securities. As interest rates increased, these floating rate securities lost value. Reserve Primary Fund "broke the buck" on September 16, 2008, when its share fell to 97 cents after writing off debt issued by bankrupt Lehman Brothers Holdings Inc.[1]

Eligible money market securities include commercial paper, repurchase agreements, short-term bonds or other money funds. Money market securities must be highly liquid, and have a stable value.

The “broke the buck” situation is rare for the following reasons. First money market fund buy highest quality short term debts required by law. Second, those debts are usually over collateralized. Third, those collateral assets are usually held in custody at a third-party custodian bank. The following is a Q&A regarding Fidelity's taxable money market fund holdings provided by Fidelity.

Q. Are any of your money market funds at risk of breaking the buck?

A. We can state unequivocally that Fidelity's money market funds and accounts continue to provide security and safety for our customers' cash investments. Our funds continue to invest in money market securities of high quality, and our customers continue to have full access to their investments any time they wish. Most importantly, we have been proactive in keeping our money market funds safe and in protecting the $1.00 net asset value (NAV), which has always been our #1 objective in managing these funds.

Q. What exposure do Fidelity's taxable money market funds have to the debt of Lehman Brothers?

A. Our money market funds have no exposure to any Lehman Brothers entity.

Q. Do Fidelity's taxable money market funds have exposure to AIG?

A. Yes, the taxable money market funds have modest exposure to two issuers that are subsidiaries of AIG: ASIF Global Funding and International Lease Finance Corp.

Q. Given the market volatility surrounding AIG, is Fidelity comfortable with these holdings?

A. Yes, Fidelity is confident that these holdings will pay full principal at maturity. ASIF Global Funding is a regulated funding insurance subsidiary supporting SunAmerica and benefits from franchise strength and diversified earnings. International Lease Finance Corp. is a profitable global aircraft finance subsidiary that has enjoyed strong financial

Read the full Q&A from Fidelity

Marty Whitman's glass-half-full take on market

2008-09-18T20:12:00.003-05:00

'There are great values out there now,' says octogenarian founder of Third Avenue Management

Marty Whitman, the octogenarian dean of deep-value investing, sees great bargains to be snapped up from the current stock market meltdown.

"It's a great time," enthused the 83-year-old founder of New York-based Third Avenue Management LLC before speaking yesterday at a conference organized by AIC Ltd.

"We can't try to pick the bottom, but it seems to me that there are great values out there now, just like in 1974," the firm's co-chief investment officer said in an interview.

The stock market crash of 1973-74, which affected all the major stock markets around the world, lasted 694 days before bottoming out.

"Everything went down every day, and if you bought, you hit a lot of 10-baggers," recalled Mr. Whitman. "I hope that we do it with a lot of what we are doing now."

Mr. Whitman, who buys stocks he considers to be "safe and cheap," still oversees the firm's flagship mutual fund, Third Avenue Value, in the United States.

The former Wall Street analyst with a background in distressed investments didn't start his fund company until 1990 at 65, an age when most people retire. As of Aug. 31, his global fund has posted an average annual return of 14.4 per cent since inception.

His colleague, Ian Lapey, who is in his early 40s and is the designated successor to Mr. Whitman, runs the similarly managed AIC Global Focused Fund sold in Canada.

With the U.S. government bailing out American International Group Inc., and Lehman Brothers Holdings Inc. filing for bankruptcy protection this week, Mr. Whitman described the unfolding events as "the most severe financial crisis" that he has seen.

Read the full article

Charles Brandes: Value vs. Glamour: A Global Phenomenon

2008-09-18T09:41:00.001-05:00

In 1934’s Security Analysis, Benjamin Graham and David Dodd argued that out-of-favor stocks are sometimes underpriced in the marketplace, and that investors cognizant of this phenomenon could capture strong returns. Conversely, the duo theorized, prices for widely popular stocks often are buttressed by high expectations and could be vulnerable if these expectations prove too enthusiastic.1

The philosophy espoused by Graham and Dodd is now widely known as value investing, and the unpopular “value” stocks they advocated often are associated with companies experiencing hard times, operating in mature industries, or facing similarly adverse circumstances. Alternatively, typically fast-growing “glamour” companies frequently function in dynamic industries with a relatively high profile. This stark contrast in attributes leads to a natural question: which stocks have performed better, value or glamour?

While this is not a simple inquiry, we believe historical analysis can shed light on the relative performance of value stocks and glamour stocks – largely because their divergent traits often manifest in their respective valuation metrics. Specifically, value shares typically feature low price-to-book, price-to-earnings, or price-to-cash flow ratios, while glamour stocks generally are characterized by valuation metrics at the opposite end of the spectrum. As a result, these metrics can be used to split a sample of equities into either the value or the glamour camp – and subsequently track each group’s performance over time.

Read the full article

Maybe all this misery is just pay back

2008-09-18T09:08:00.002-05:00

by Stanley Bing
Tuesday, September 16, 2008

God forgive me for the thoughts I’m having this morning.

I’m just wondering how they feel today, all the analysts and brokers from the financial institutions who are now being punished for the profligacy, stupidity, greed and wishful thinking of their masters. How they feel as they dust off their resumes and try to put the pieces back together in a world flooded with needy drifters just like them.

Do they feel like all my friends in years past who were downsized as a direct result of the kind of advice the Street gave to a variety of senior managers facing the issue of forced, quarter-to-quarter growth?

Do they feel like my pals at our former cable division, which was divested, in an act of completely moronic short-sightedness, when people like them decided that businesses who throw off cash flow but lower earnings per share were not worth keeping?

Do they feel sort of like the folks subsequently laid off from the corporation when, without that cash flow, it could no longer make the payroll it had once been able to support?

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Leucadia National - Consistently Ahead of the Curve

2008-09-17T08:42:00.002-05:00

Everyone has heard the theory that no investor can expect to consistently beat the market over the long term; the stock market today is simply too efficient. Of course, in most cases this sentiment is correct; it is exceedingly difficult to be on the right side of the market year after year. However, there are exceptions to every rule and one exception to this investment adage is Leucadia National Corp. (LUK). To be fair, LUK does not outpace the market every year, but over the long haul its performance is undeniable. From 1979 through the end of 2007, this diversified holding company has returned a gaudy 26.2% per year versus an annualized 9.8% return on the S&P 500. Yet, there is relatively little buzz about LUK and also fairly little information available about the company—but this is certainly a story that should be told.

The key to Leucadia’s success has to be the talented men that steer the strategic vision of the company: Ian Cumming and Joseph Steinberg. These two gentlemen have successfully navigated the ups and the downs over the last few decades always with a firm grip on macroeconomic trends. For example, as they describe in their annual letter to shareholders, after observing the simultaneous rise of population and standard of living in Asia (China and India in particular), Cumming and Steinberg sensed opportunity. Realizing that infrastructure expansion in these regions would surely be necessary to foster further growth, they invested in copper and steel mining operations. As they surmised, global demand for basic materials ramped up in a big way—with prices following suit—and now their investments are paying off. This is just one demonstration of the fundamentally sound and profitable vision of these two leaders. Their management style is to find and exploit under-appreciated value in the marketplace, and in my opinion it is an approach that is part science and part art.

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Transcript of the Ruane, Cunniff & Goldfarb Investor Day 2008

2008-09-17T08:33:00.001-05:00

May 16, 2008 – St. Regis Hotel, New York City

Bob Goldfarb:

Good morning, and welcome to our Investor Day. We're going to follow the same format that we have in recent years, which means that the day is going to consist strictly of questions and answers, and we'll take questions until 12:30. We have to vacate the room by one o'clock, but we'll be around between 12:30 and one o'clock to meet you and respond to any questions that you might still have for us.

There is one restriction I'm going to ask. If there are any journalists or Internet bloggers in attendance, we ask that this meeting be off the record. We prepare a transcript of the meeting for our clients and shareholders, and we prefer that all of our shareholders and clients receive the transcript at the same time and in full.

Before we begin taking your questions, I'd like to introduce our team. On my far left is Greg Steinmetz. Next to Greg is Jon Brandt, then David Poppe, who is President of our firm and co-manager of Sequoia. Rick Cunniff is on my right. As most of you know, he's our co-founder. To his right is Greg Alexander and to Greg's right is Joe Quinones, who runs the operations side of our firm as well as that of Sequoia.

Finally, I'd like to introduce the rest of our team who are seated in the front of the room on my left and to your right. In alphabetical order, they are Girish Bhakoo, Andy Ewert, John Harris, Jake Hennemuth, Arman Kline, Trevor Magyar, Tom Mialkos, Terence Paré, and Chase Sheridan. I'd also like to introduce Jon Gross who is our Director of Client Services. With that, we're ready for your questions.

Question:

I noticed that you trimmed your stake in Wal-Mart and increased it in Target. I was wondering if you might talk about Target, its position and why you like it so much.

David Poppe:

What I would say is we bought most of the Target before we sold any Wal-Mart. Sequoia still holds Wal-Mart.

Interestingly, I think if you look over the last seven years since 2001, Wal-Mart and Target have almost identical EPS growth rates. I think going forward, both are likely to have pretty good EPS growth rates. Right now, Wal-Mart might be a little bit better positioned in that its business is more oriented to food, commodities and staples.

Read the full transcript

TRANSCRIPT & VIDEO: Warren Buffett Tells CNBC Treasury "Did Exactly the Right Thing" on Fannie/Freddie

2008-09-16T12:39:00.004-05:00

In a live interview this morning on CNBC's Squawk Box, Warren Buffett told our Becky Quick that Treasury Secretary Henry Paulson "did exactly the right thing" when the government took control of Fannie Mae and Freddie Mac over the weekend.

Here are a video clip and transcript of the entire on-air telephone coversation.

Becky Quick: Mr. Buffett, thank you for joining us this morning. I want to get your thoughts on this plan for Fannie Mae and Freddie Mac.

Warren Buffett: Well, I think the Secretary (Paulson) did exactly the right thing. I don't think there was an alternative that was anywhere close to this one in terms of calming the markets, in terms of providing an ongoing function for the two that makes any change less abrupt, the changes that are going to occur with the two companies. So I couldn't, I wouldn't have changed anything in the plan myself.

Entire transcript and Video

Vanguard Chairman John Brennan Commentary on Investing: Lost decade, found perspective

2008-09-16T12:25:00.004-05:00

A few months ago, The Wall Street Journal ran a front-page story with the headline "Stocks Tarnished by 'Lost Decade.'" The article noted that the stock market was trading at the same level that it had been nine years previous and suggested that the prospect of a decade with no (or negative) returns for equities is quite real.

This is startling, perhaps, but also true.

After the dizzying tech-fueled run-up of the late 1990s, the broad U.S. stock market peaked in 2000. Since then, we've had some steep downs, ups—and downs. The market briefly reached new highs in October 2007 but retreated from those levels in the fallout from the subprime lending crisis.

Over the next year or so, as we draw closer to the ten-year anniversary of the market's 2000 high-point, the ten-year return figures for stocks and stock funds are likely to remain modest—even if the market produces respectable returns until then. Simply put, the market's peak is casting a long shadow.

Sources: Bloomberg, Vanguard.
Note: Data through June 23, 2008.

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Walter Schloss: Benjamin Graham and Security Analysis: A Reminiscence

2008-09-15T08:59:00.001-05:00

Ben Graham was an original thinker as well as a clear thinker. He had high ethical standards and was modest and unassuming. He was one of a kind. I worked for him for nearly 10 years as a security analyst.

In re-reading the preface to the first edition of Security Analysis, I am impressed all over again with Ben’s views. I quote . . . “[W]e are concerned chiefly with concepts, methods, standards, principles, and above all with logical reasoning. We have stressed theory not for itself alone but for its value in practice. We have tried to avoid prescribing standards which are too stringent to follow or technical methods which are more trouble than they are worth.”

Security Analysis says it all. It is up to analysts and investors to put Ben’s ideas into practice.

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Get Ready for Rising Prices

2008-09-15T08:45:00.000-05:00

by David Dreman

The markets, the dollar and commodity prices have all plunged and then rebounded. Financials are still falling. Economic news both in the U.S. and abroad continues to get worse. How do you chart a course in all this? Through all the smoke, and the cacophony of distressed voices on the financial battlefield, I find several things you can sensibly do.

Before you do any of them, you need to recognize the dilemma that the Federal Reserve and the Administration find themselves in—and are powerless to resolve. As investors are painfully aware, banks, investment banking firms and Fannie Mae and Freddie Mac (which have almost become penny stocks) are still drowning in seemingly endless pools of bad mortgages. Despite ample borrowings from an indulgent Fed, banks are far less liquid than when the crisis began. As loan defaults continue, they’re going to have to write down their portfolios even more, further impairing their capital and shrinking their stock prices. They’re reaching a point where they can’t raise new funds without badly diluting current shareholders. Thus the input of new funds by the Fed hasn’t lowered rates for mortgages or raised the financial institutions’ liquidity.

Consumers are trapped by stagnant wages, depleted savings and falling house prices. They’re slipping behind on their mortgage and home loan payments, and their spending is being squeezed harder than in more than a generation. So the Fed and the Treasury have no choice but to keep interest rates low until the current liquidity problems are under control. Not to do so would result in a steep recession and the threat of a financial panic. Yet keeping rates down risks damage to the economy from the highest inflation since the 1978–81 period, when prices rose at an average of 11% a year. That’s the Fed’s dilemma.

The July Consumer Price Index was 5.6% higher than a year earlier, the Producer Price Index 9.8% higher. Import prices, thanks to a weak dollar and expensive oil, are 21.6% above a year ago, the largest one-year increase since the index began in 1982. Optimists predict that energy, raw material, commodity and import prices, the strongest forces behind rising inflation, are likely to reverse direction and drop significantly. Wishful thinking. The world is short of oil, and the appetite for it keeps growing at almost double the rate of new discoveries. There hasn’t been a year since 1984 when new finds outstripped consumption. Even if a recession slows down oil use in the U.S. and Europe, demand will still increase in China, India and the Middle East. Rapid industrialization in those regions will continue to drive up commodity prices.

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Wintergreen Fund Semi-annual Report

2008-09-14T20:39:00.002-05:00

The last six months have been filled with volatile worldwide financial markets that have kept all investors on their toes. The apparent freefall of some securities is providing huge buying opportunities for value investors, but at the same time the daily market fluctuations are somewhat bewildering to investors as we navigate turbulent market conditions. Wintergreen Fund has been affected by this volatile market: the Fund’s performance for the first six months of 2008 was (11.86%) only slightly better than the Standard & Poor’s 500 Composite Index at (11.91%). The market has not discriminated between high-quality and low-quality companies; virtually every stock has declined. Generally, markets reward solid, stable companies, but this year even the best companies have suffered. The movement from easy credit to little or no available credit has restricted normal business operations and slowed down speculation. We believe companies with the following three characteristics are great long-term destinations for investor capital, even though the short-term quotations are less than favorable: solid businesses that generate cash; businesses with pricing power; and businesses with rational management who create value for their shareholders.

A favorite story of mine as a child was “The Little Engine That Could” by Watty Piper. In this story, a long train needed help to get over a large mountain. Various railroad engines that had the capacity to move the train refused to help. They said the job was too big and difficult for them, and the mountain was too steep. The engines that were designed to haul heavy freight would not attempt to move the huge train. Eventually a small engine that didn’t appear to have the necessary get-up-and-go was asked for assistance and that small engine agreed to try to help the large train. Using all of its power and repeating ‘I think I can, I think I can’, the small engine got the freight train up to the top of the mountain. As the train went down the tracks on the far side of the mountain to deliver toys and treats to the children who had been waiting, the little engine repeated the phrase, ‘I thought I could, I thought I could’.

In this global market that looks too big for anyone or anything to bring it back to a more stable environment, I think that solid analysis of companies and careful accumulation of underpriced stocks has the potential to yield great rewards. Like the little engine that put its head down and worked at its assignment, the pursuit of fundamental research coupled with an appreciation of the consistency of human behavior should identify the securities that I believe will survive and thrive in the future. Now is the time when some of these companies are on sale. Although no one knows precisely when, it is inevitable that these wild bargain prices will at some point in time come to a close. When that happens, and with the benefit of 20-20 hindsight, many investors will wish they had accumulated a bigger stake in these bargain companies.

Read the full report (pdf)

Steve Neimeth : Penny pitchers

2007-02-14T11:43:00.000-05:00

When a bargain-hunting mutual-fund manager finds cheaply priced shares of companies that typically don't trade at a discount, there's really only one option: Buy.

That's how Steve Neimeth has been viewing some recent additions to his SunAmerica Value Fund (SSVAX) . He's focused on larger-cap stocks that show above-average earnings growth and trade at a below-average multiple to the market. If a company is restructuring its business or engineering a financial turnaround, so much the better.

"It's an interesting time for large-cap investors," Neimeth said. "Lines have blurred between growth stocks and value stocks. We're finding more opportunities to invest in broken growth companies that still have superior growth prospects but are trading at market multiples."

One company contributing to performance lately is Yahoo Inc. (YHOO) Shares of the Internet portal giant have gained about 14% so far this year after losing 35% in 2006. The buying interest, Neimeth says, is largely due to Yahoo's improved ability to target and analyze users in ways that appeal to Web advertisers and marketers. The advertising system upgrade, dubbed "Project Panama," makes Yahoo more competitive with Google Inc. (GOOG) , the fund manager notes, and with Yahoo's shares selling at a meaningful discount to its larger rival, an attractive holding for the portfolio.

Another portfolio holding, Valero Energy Corp. (VLO) , has been caught up in the volatility surrounding oil. Valero is a leading U.S. refiner, and Neimeth says the stock's price doesn't fully reflect the company's dominance in an industry with high barriers to entry and strong profit margins -- even if oil prices trend down.

Share-price weakness attracted Neimeth to Constellation Brands Inc. (STZ) , a major distributor of liquor and wine. "Investors are skeptical they can grow their brands, which are slow-growth," Neimeth said. "They're concerned about the wine business, and a potential glut of grapes that may come to market and cause lower pricing and profitability."

Read the full article.

Fairholme Shareholder Letter

2007-02-11T23:15:00.000-05:00

Because bargains are usually found among securities out of favor, stressed industries attract Fairholme Team like children to a locked cabinet. Accordingly, they have pried open the residential housing industry. While not drawn to most homebuilders, whose business models we find unattractive, we have identified two related businesses that seem overly depressed by current conditions, Mohawk Industries and USG. Both have the talented managers, free cash flows, and strong balance sheets necessary to take advantage of others’ pain. Hopefully, the current residential construction downturn has not seen its nadir. The worse it gets, the better we’ll do down the road.

With Warren Buffett at Berkshire Hathaway, Murray Edwards at Canadian Natural and Ensign, Charlie Ergen at EchoStar, Eddie Lampert at Sears, and other all-star owner managers, the Fairholme Fund has never been blessed with so much talent—and Fairholme team are searching for more. Volatility lets them buy and sell advantageously and underperformance may allow a chance to buy more of what they own.

Read the full shareholder letter.

My first post

2007-02-03T21:29:00.000-05:00

Hi, my name is Kevin. I have been investing in the stock market for several years. The investing theory I believe in is the value investing from Warren Buffet and Benjamin Graham. I'd like to meet friends with similar interest through this blog to chat about value investing, improve skills and change ideas. Hope we all prosper through value investing!

Thanks