Channeling Graham and Dodd: A Conversation with Seth Klarman

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

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

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

(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

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

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

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.

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

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

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

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

Should Global Stock Markets Shut Down to Cool Off?

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

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

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

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

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

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?

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

Here is the link

Pershing Square's Ackman says short sale ban hurt

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

John Bogle: Keep Investing

How Pabrai Is Weathering the Storm

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

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

Here is the link

George Soros: He Foresaw the End of an Era

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

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

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

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

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

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

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.

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

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.

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Buffett Buys $3B of GE Preferred

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.

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Marty Whitman on Graham and Dodd

Bruce Berkowitz interview on WealthTrack

Managers splurge on bargain stocks

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.

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