10 Mar 2010 When Bubble Burst: Companies Won, Investors Lost
Ten years ago, investors knew that technology would change the world, and they were right. But you can be 100% right about the future and end up with zero to show for it if you overpay in the first place...

09 Mar 2010 7 Stocks for the Next 7 Years
Many of Grantham’s “high quality” picks are synonymous with “dull.” There’s nothing exciting about the shampoos, deodorants, toothpastes, laundry detergents and other consumer staples that form the core business of Procter & Gamble (PG). And few firms are more lacking in sex appeal than Johnson & Johnson (JNJ), with its skin-care products, mouthwashes, prescription drugs, and lengthy lineup of medical devices and supplies...

06 Mar 2010 Quality Trumps Junk
Since last March, stocks with lousy fundamentals were the star performers. Finally that's changing...

06 Mar 2010 The Hidden Costs of Mutual Funds
In selecting mutual funds, most investors know to check the expense ratio, the standard measure of how costly a fund is to own. U.S.-stock funds pay an average of 1.31% of assets each year to the portfolio manager and for other operating expenses, according to Morningstar Inc.

But that's not the real bottom line. There are other costs, not reported in the expense ratio, related to the buying and selling of securities in the portfolio, and those expenses can make a fund two or three times as costly as advertised...

28 Feb 2010 Brokers Win, Investors Lose Key Reform
Over the next week or so, the financial-reform bill that has been oozing its way through the Senate Banking Committee may finally plop onto the Senate floor. Unfortunately, the bill is likely to lack a key provision requiring stockbrokers, insurance agents and others to act solely in the interests of their clients.

28 Feb 2010 More Often Than Not, the Insiders Get It Right
Though the professor’s analysis extends only through 2008, data collected by the Vickers Weekly Insider Report show that even though the insiders missed the bear market, they can nevertheless take credit for anticipating the market rebound that began a year ago. Leading up to the market’s low in March 2009, for example, insiders as a group behaved more bullishly than they had in more than a decade.

26 Feb 2010 The Golden Question
Don't buy a stagnant piece of metal when you could own growth...

Dataroma's opinion: Remember, gold only has "value" because everyone thinks it does. How safe is that? In actual fact gold has virtually zero utility!

21 Feb 2010 High Yields Aren't Always A Good Thing
In the parched landscape of income investing, dozens of closed-end funds yield more than 10%.

Just as wanderers in the desert shouldn't mistake a mirage for an oasis, investors shouldn't regard these funds as salvation. Often, the income you earn in the short run mightn't be worth the principal you lose in the long run...

18 Feb 2010 Domino theory
HOW far is it from Athens to America and which countries lie on the way? That may sound like an esoteric geography question, but it is being asked by investors as Greece’s debt crisis creates global jitters about the safety of sovereign debt. So far Portugal, Ireland and Spain, the other high-deficit countries on the periphery of the euro zone, are thought to be next in line. In most big rich economies, yields have been stable and well below their long-term average...

17 Feb 2010 A December US Treasury report showed Japan is once again the largest foreign holder of US Treasuries
Ultra-safe investment in Treasuries is necessary as long as the Chinese maintain a currency peg to the dollar and their exports and investments attract US dollars.

In any case, just what would the Chinese (or other foreign holders) replace Treasuries with? The world flooded into US government debt—not German bunds or UK bills—when push came to shove during the financial crisis. The safety of America’s deep capital markets remains unmatched...

14 Feb 2010 High Trading Is Bad News For Investors
It also is worth recalling what Warren Buffett wrote in February 1992, when the Dow was at 3200: "The stock market serves as a relocation center at which money is moved from the active to the patient.

07 Feb 2010 Will We Ever Again Trust Wall Street?
I believe the old truths remain valid: Buying and holding a diversified stock portfolio still makes sense. Paradoxically, as fewer people cling to their faith in traditional stock investing, the future rewards from it are likely to grow greater.

But that can take time. In 1952, two full decades after the Great Crash hit bottom, only 19% of wealthy Americans regarded stocks as the wisest investment choice, according to a Federal Reserve survey. Most investors thus sat out the great bull market of the 1950s, when stocks gained 19.4% annually.

05 Feb 2010 Alan Greenspan fights back
But, but, but, say his critics -- the bubble was so obvious! And you did nothing to stop it! To which Greenspan responds, in essence, yes. The Fed can do little to stop a bubble, or at least to stop it responsibly.

As the Financial Times' Martin Wolf, a Greenspan defender and former World Bank economist, has written, "The Fed could only have halted the U.S. bubble if it had been willing to put the economy into permanent recession." That's because strangling the boom would have required short-term rates as high as 10%, Wolf argues.

The reality of bubbles cannot be escaped, Greenspan believes. A central element of his worldview is that "bubbles are built into human nature." But why were the effects of this bubble so much more devastating than almost any other? The reason strikes at the heart of Greenspan's beliefs....

01 Feb 2010 Short-Term Bonds May Disappoint Investors This Year
The Federal Reserve has interest rates pegged essentially at zero, and while the timing of any increase is unclear, rates have nowhere to go but up. Short-term bonds generally hold up better than long-term debt in a rising-rate environment, but their prices fall nonetheless.

31 Jan 2010 In the Packaging of Loans, a Bust With Precedent
Real estate securitization was one of the great innovations in finance in the last quarter-century. In an unprecedented way, it allowed vast sums of money to go into the real estate market from people who traditionally did not take part in it.

But the people making the loans did not need to worry if they would be repaid, and in the end the entire edifice collapsed...

29 Jan 2010 My big fat sell-off
The bond market’s skittishness puts more pressure on the Greek government to come up with a credible plan for fiscal retrenchment. A pledge to follow Ireland’s example in making substantial cuts to public-sector wages may now be necessary to ensure Greece can fund itself at reasonable cost. Having raised €8 billion this week the Greeks probably have enough money to see them through until May, when a chunk of their long-term borrowing falls due. The danger now is that market sentiment spirals out of control. If that happens, only the most radical measures, or a euro-zone bail-out, will turn things around.

27 Jan 2010 Invigorated Inventories: Catalyst for Growth?
Signs that business has begun to rebuild inventories offer further confirmation of a sustainable economic recovery. No doubt, the swing from inventory liquidation to accumulation will overstate the economy’s fundamental growth for a while, but it will also set timing on more fundamental economic considerations, such as rehiring in the jobs market, probably by spring or early summer, and the anticipated move by the Federal Reserve to nudge up short-term interest rates in the second half.

25 Jan 2010 Jeremy Grantham - GMO Q4 2009 Letter
There is perhaps, though, one saving grace: the risky stocks have already been driven to extreme overpricing. Further attempts to drive the market higher (they may not be deliberate attempts, but does it matter?) will probably result in a much broader advance in which high quality stocks should hold their own or even outperform. Believe it or not, they can outperform on the upside, and these times tend to be: later in bull markets, or when they are relatively cheaper than the rest of the market, or both. (More quantitatively, high quality stocks have outperformed in more than 40% of up months and approximately 60% of the time when they were relatively very cheap, as they are now.) For the record, they also outperformed in 1929 and 1972, at the end of the first two great bull markets of the 20th century, and held level in 1999. In a continuing rally, even level pegging for quality would be a great improvement over 2009. And, if the market surprises me and goes into an early setback in 2010, then quality stocks should outperform by a lot. What could cause an early setback would be some random bunching up of unpleasant seven-lean-years data: two or three bad news items in a week or two might do the trick. This would suit me – cheaper is always better – but given the Fed’s intractability, it seems less likely than some further gains. For the longer term, the outperformance of high quality U.S. blue chips compared with the rest of U.S. stocks is, in my opinion, “nearly certain” (which phrase we at GMO traditionally define as more than a 90% probability).

24 Jan 2010 Will New Rules Tame the Wall Street Tiger?
But the bad behavior on Wall Street in the 1920s wasn't really caused by the blurring of commercial and investment banking, according to financial historian Eugene White of Rutgers University. Of the more than 7,500 banks in the U.S. in 1929, only 3% had significant securities operations. Nor did hawking investments make banks riskier for shareholders. From 1930 through 1933, nearly 2,000—or more than 26%—of federally chartered banks closed. But only about 7% of the banks that had a securities business went bust.

21 Jan 2010 Operating Leverage: 2010 Earnings Engine
But revenues—fast or slow growing—are only part of the earnings story. Costs, after all, seldom rise or fall in lockstep with sales. Especially because many costs are fixed or close to fixed, the difference is most pronounced at cyclical turns. In recessions, for instance, firms can seldom reduce costs as fast as sales fall. No matter how little they use their equipment or facilities, they still must pay for maintenance, depreciation, and previously incurred financing costs. Neither can they lay off workers, particularly at headquarters, in proportion to the drop in their sales volumes. Their payroll expense shrinks only so far. Earnings accordingly suffer disproportionately. But when the recovery begins, these ill effects work in reverse. The underutilized equipment, staff, and facilities, for which the company is already paying, at last generates revenues with little or no increase in costs, boosting profits disproportionately.

21 Jan 2010 Model behaviour
Computers may not have the human frailties (like an aversion to taking losses) that traditional fund managers display. But turning the markets over to the machines will not necessarily make them any less volatile...

16 Jan 2010 Why Many Investors Keep Fooling Themselves
If your financial planner says he can earn you 6% annually, net-net-net, tell him you'll take it, right now, upfront. In fact, tell him you'll take 5% and he can keep the difference. In exchange, you will sell him your entire portfolio at its current market value. You've just offered him the functional equivalent of what Wall Street calls a total-return swap.

Unless he's a fool or a crook, he probably will decline your offer. If he's honest, he should admit that he can't get sufficient returns to honor the swap.

16 Jan 2010 Not just another fake
The similarities between China today and Japan in the 1980s may look ominous. But China’s boom is unlikely to give way to prolonged slump...

13 Jan 2010 Are bonds the next bubble?
...many investors still have one thing in mind when it comes to bonds, something drilled into many people at an early age when they received a U.S. savings bond as their first investment: Bonds are predictable and a lot less risky than stocks.

That attitude could now come back to bite people. "Investors in bonds don't expect risk, and the longer the Federal Reserve keeps rates low, the more complacent people become," says Lawrence Glazer, managing partner of Mayflower Advisors, a money-management company.

12 Jan 2010 Even in a Recovery, Some Jobs Won't Return
The downturn that started in December 2007 delivered a body blow to U.S. workers. In two years, the economy shed 7.2 million jobs, pushing the jobless rate from 5% to 10%, according to the Labor Department. The severity of the recession is reshaping the labor market. Some lost jobs will come back. But some are gone forever, going the way of typewriter repairmen and streetcar operators...

12 Jan 2010 Endless Oil
Many analysts and industry executives have little doubt that there's plenty of oil in the ground. "Only about 32% of the oil [in reserves] is produced," says Val Brock, Shell's head of business development for enhanced oil recovery. Shell estimates 300 billion barrels and maybe more might be squeezed out of existing fields, much of it once thought beyond retrieval. Peter Jackson, IHS Cambridge Energy Research Associates' London-based senior director for oil industry activity, has reviewed data from the world's biggest fields. His conclusion: 60% of their reserves remain available...

11 Jan 2010 The Iceland saga is a harbinger of crises to come
THERE are many ways to decide whether to repay your debts but a national referendum is surely a first. That is what is going to happen in Iceland after its president refused to sign a bill paying €3.8 billion ($5.5 billion) to the British and Dutch governments over 15 years...

09 Jan 2010 Inefficient Markets Are Still Hard to Beat
Looking back at how cheap stocks got last spring, you may conclude that any idiot should have known to be buying them hand over fist. But mutual-fund investors sold out of stocks all year long; in March alone, at the very moment when stocks were cheapest, fund investors dumped $25 billion worth.

09 Jan 2010 Shrinking U.S. Labor Force Keeps Unemployment Rate From Rising
About 1.7 million Americans opted out of the workforce from July through December, representing a 1.1 percent drop that marks the biggest six-month decrease since 1961, the Labor Department report showed. The share of the population in the labor force last month fell to the lowest level in 24 years.

08 Jan 2010 A Safety Net That Tangles Investors
A custodian holds the securities purchased by a money manager, assuring that they exist and that the money realized when they are sold is properly applied. Mr. Madoff’s firm served as custodian for its investments, meaning that he was free to not really invest the money that came in from customers. There was a similar arrangement in the Bayou hedge funds run by Samuel Israel. Both Mr. Madoff and Mr. Israel are now in prison.

08 Jan 2010 How Visa, Using Card Fees, Dominates a Market
Every day, millions of Americans stand at store checkout counters and make a seemingly random decision: after swiping their debit card, they choose whether to punch in a code, or to sign their name. It is a pointless distinction to most consumers, since the price is the same either way. But behind the scenes, billions of dollars are at stake.

When you sign a debit card receipt at a large retailer, the store pays your bank an average of 75 cents for every $100 spent, more than twice as much as when you punch in a four-digit code.

07 Jan 2010 The danger of the bounce
It is hard to imagine any circumstances in which the authorities will have the foresight (or the courage) to prick a bubble. It cannot be done when the economy is weak. And when the economy is strong, as it was in the late 1990s, central banks argue that higher asset prices are justified (back then, by the productivity improvements brought by the internet). Central bankers tend to see higher asset prices as a validation of their policies and to shy away from “second guessing” the markets.

03 Jan 2010 Fruitful Decade for Many in the World
It may not feel that way right now, but the last 10 years may go down in world history as a big success. That idea may be hard to accept in the United States. After all, it was the decade of 9/11, the wars in Iraq and Afghanistan, and the financial crisis, all dramatic and painful events. But in economic terms, at least, the decade was a remarkably good one for many people around the globe.

30 Dec 2009 Twenty years on Japan is still paying its bubble-era bills

Valuations do matter

...once the Nikkei 225 hit 38,916 points 20 years ago this week, life began to leach out of the Japanese economy. In the third quarter of 2009 nominal GDP—though still vast by global standards—sank below its level in 1992, reinforcing the impression of not one but two lost decades. Deflation is back in the headlines. On December 29th the Nikkei stood at 10,638, 73% below its peak...

Urban property prices have fallen by almost two-thirds. Some ski apartments are worth just one-tenth of what the “bubble generation” paid for them.

28 Dec 2009 Yes, Stock Data Do Go Back 200 Years
Dataroma's opinion: It's all very well to debate what the minimum required holding period should be in the stock market to guarantee outperformance. Rather, what is extremely crucial is valuations at entry point. For example, buying the index in 1999 would have been a mistake regardless of the intended holding period.

We are about to end a dismal decade for stocks: The past 10 years will likely provide the first negative return for stocks since the 1930s. Many investors rightfully question whether the lessons of the past are still relevant and whether stocks are still the best long-term investment...

27 Dec 2009 Patience, Please, With That Investment Plan
History shows that market rebounds can be so quick that they are easy to miss. Not only are much of a bull market’s gains achieved in the first year, but a good chunk of those first-year gains occurs very early on.

26 Dec 2009 Does Golden Pay for the CEOs Sink Stocks?
Years ago, the great investor Benjamin Graham pointed out that directors shouldn't merely be independent, but also "businesslike." They must have an arm's-length relationship with management; they also should combine "good character and general business ability" with "substantial stock ownership." (They should have purchased most of their shares outright rather than getting them through option grants.)

26 Dec 2009 At Tiny Rates, Saving Money Costs Investors
Indeed, after fees are subtracted, inflation is accounted for and taxes are paid, many investors in C.D.’s, government bonds and savings and money market accounts are losing money.

Experts say risk-averse investors are effectively financing a second bailout of financial institutions, many of which have also raised fees and interest rates on credit cards.

24 Dec 2009 Banks Bundled Bad Debt, Bet Against It and Won
While the investigations are in the early phases, authorities appear to be looking at whether securities laws or rules of fair dealing were violated by firms that created and sold these mortgage-linked debt instruments and then bet against the clients who purchased them, people briefed on the matter say.

One focus of the inquiry is whether the firms creating the securities purposely helped to select especially risky mortgage-linked assets that would be most likely to crater, setting their clients up to lose billions of dollars if the housing market imploded...

22 Dec 2009 The Biggest Mistake Investors Make
As money manager Ron Muhlenkamp likes to say, the investor who buys into the hottest performing segments of the market is similar to planting corn in October since it had grown so well since April.

..."Buy Gold" is heard everywhere, from dinner parties to ads on sports talk radio. Just replace "gold" with "tech stocks" or "residential real estate" or "ethanol" (and the list goes on and on) as the lead character, and this is a story we have all heard before--and we know how the story ends.

19 Dec 2009 Will '12b-1' Fees Ever Stop Bugging Investors?
In practice, however, fund companies began using 12b-1 fees to pay brokers a continuing stream of smaller fees instead of the traditional "sales load," or one-time upfront charge, which in those days ran up to 8.5%. Funds got bigger, fund managers' profits got fatter and investors got more confused.

17 Dec 2009 The Great Stabilisation
The bad news is that today’s stability, however welcome, is worryingly fragile, both because global demand is still dependent on government support and because public largesse has papered over old problems while creating new sources of volatility...

11 Dec 2009 Don't Be A Chicken Little
To judge from the flows of savings into Treasurys and high-quality corporate bonds, neither yielding more than a pittance, most investors are befuddled. They can't accept that either the market decline or the economic downturn is over. Are they right to hesitate? Nope. They're dead wrong...

10 Dec 2009 American Dream 2: Default, Then Rent
With an income of about $8,300 a month and a rent of $2,200, Mr. Fernandez says he now has the wherewithal to do things he couldn't when he was stretching to pay the mortgage. He recently went to concerts by Rob Thomas and Mat Kearney. He also kept his black BMW 6 Series coupe, which has payments of about $700 a month.

"I don't know if I'll buy another house again, because it's such a huge headache," he says.

09 Dec 2009 Are Your U.S. Treasury Bonds Safe?
For investors, the greatest danger is not that America could formally default on its debts, it's that the government may informally default by unleashing inflation. It's hard to see another outcome. Anyone holding long-term Treasury bonds should demand pretty high annual interest rates to compensate them for the risk. The current yield on 30-year Treasurys is about 4.4%, and on 10-year bonds it's about 3.4%. Anyone lending their money for that length of time on those kinds of terms is taking a big risk...

06 Dec 2009 Ahead of the curve
...the historical difference between the returns on cash and government bonds is very low, but cash is a lot less volatile and thus a better hedge against the equity market. Indeed, the last time Treasury bonds yielded 3.2% (as the ten-year issue now does) was back in 1957. Fixed-income investors suffered real losses for much of the next 30 years.

04 Dec 2009 Why Changing the CEO May Not Change the Company
How much of a difference should investors expect when General Motors—or any company—brings in a new chief executive? Not much.

As Mr. Buffett likes to say, "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."

02 Dec 2009 The Old Normal
It all reminds me inherently and eerily of Sir John Templeton's line that the four most dangerous words in the English language are "This time it's different." It's different in details, maybe, but the fundamental principles of investing don't change.

01 Dec 2009 Fed Debates New Role: Bubble Fighter
Not so long ago, Federal Reserve officials were confident they knew what to do when they saw bubbles building in prices of stocks, houses or other assets: Nothing.

Now, as Fed Chairman Ben Bernanke faces a confirmation hearing Thursday on a second four-year term, he and others at the central bank are rethinking the hands-off approach they've followed over the past decade. On the heels of a burst housing-and-credit bubble, Mr. Bernanke now calls financial booms "perhaps the most difficult problem for monetary policy this decade."

28 Nov 2009 They Survived the Depression
IRVING KAHN SITS AT HIS CLUTTERED DESK, PEERING AT his computer screen through thick, dark glasses. The Dow inched up 38 points today, a small move in light of its 332-point drop earlier in the week. But Kahn has made a career of betting on beaten-down stocks, and he’s hard at work poring over annual reports and studying balance sheets looking for companies that have lots of cash, not much debt and good long-term growth prospects. General Electric has a solid business and looks pretty good at these prices, he muses. General Motors? Not so much...

24 Nov 2009 Why You Should Stick With Stocks
"Investors who stick with a very conservative strategy to avoid all bear markets may fall behind because they don't participate in bull markets – which historically have tended to be more frequent and have a longer duration than bear markets," says the T. Rowe Price study.

Stuart Ritter, a T. Rowe Price financial planner, summarizes the findings this way: "Participating in bulls over the long run beats avoiding bears."

20 Nov 2009 Is Japan back in a deflationary trap?
WHILE investors have been fretting recently about Japan’s huge debt, another of the dreaded D-words has come back to haunt them. On Friday November 20th, Japan’s Cabinet Office issued a monthly report that for the first time since 2006 acknowledged that the country was suffering from deflation.

19 Nov 2009 Why China resists foreign demands to revalue its currency
PRESIDENT Barack Obama, on his first visit to China this week, urged the government to allow its currency to rise. President Hu Jintao politely chose to ignore him. In recent weeks Jean-Claude Trichet, the president of the European Central Bank, and Dominique Strauss-Kahn, the managing director of the International Monetary Fund, have also called for a stronger yuan. But China will adjust its currency only when it sees fit, not in response to foreign pressure...

16 Nov 2009 Time and Again
Following the bear market, more mutual funds are offering “market timing” strategies. Unfortunately, successfully picking precise, or even near-precise, entry and exit points repeatedly over time has proven near impossible. Combined with more transaction costs tied to higher trade frequency, investors’ net returns over time in a market timing strategy could be lower than index returns.

15 Nov 2009 How to Ignore the Yes-Man in Your Head
A recent analysis of psychological studies with nearly 8,000 participants concluded that people are twice as likely to seek information that confirms what they already believe as they are to consider evidence that would challenge those beliefs.

14 Nov 2009 Sharp Inflation or Price Stability?
If ‘whatever it takes’ was appropriate to arrest the panic, the refrain might turn out to be equally necessary at a stage during the recovery to ensure the Federal Reserve’s institutional credibility.

The massive size of the Federal Reserve’s programs designed to stabilize the capital markets has fueled speculation that there could be an ensuing surge in inflation. While gradual price increases may be inevitable as the economic recovery gains traction, the central bank possesses the conviction and the tools to achieve its mandate of maintaining price stability.

11 Nov 2009 The dollar’s days as the world’s reserve currency are far from over
WORRIES about the dollar’s dominance of the global monetary system are not new. But debate about replacing the beleaguered dollar, whose trade-weighted value has dropped by 11.5% since its peak in March 2009, has resurfaced in the wake of a global financial and economic crisis that began in America. China and Russia, which have huge reserves that are mainly dollar denominated, have talked about shifting away from the greenback. India changed the composition of its reserves by buying 200 tonnes of gold from the IMF.

10 Nov 2009 Are Shrinking Money Funds a Bullish Sign?
The funds held about $3.16 trillion in January 2008. Over the next year, that number climbed as concern over the market hit a fever pitch. Money market cash reached $3.9 trillion by March 4, 2009, the last reading before the major averages put in their multiyear lows.

Now, it seems investors have grown less hesitant...

10 Nov 2009 The silence of the bears
According to the American Association of Individual Investors, which conducts a weekly survey of market sentiment, nearly 56% of investors polled last week said they thought the market would be bearish over the next six months. Only 22% of those surveyed were bullish on the near-term prospects for stocks.

To put that in perspective, this is the highest percentage of bearish sentiment found by the AAII since early July and the widest gap between bears and bulls since early March.

08 Nov 2009 Inside the Global Gold Frenzy
or rather, the greater-fool-investment frenzy! The herd's foolishness never ceases to amaze...

Over all, in the second quarter of 2009, consumption of gold for jewelry plunged 20 percent, while investor demand for gold increased 51 percent, according to the World Gold Council.

12 Mar 2010 FairFax - 2009 Annual Letter
Last year gave us an outstanding opportunity to add to our investment holdings of excellent companies with fine long term track records. All things being equal, we expect to hold these common stocks for the very long term. Wells Fargo, Johnson & Johnson, Kraft, US Bancorp.

While the stock markets have rebounded significantly from March 9, 2009, we continue to have a cautious view on the U.S. economy. The massive U.S. government stimulus programs (and government programs of other countries) appear to be working in the short term, but the enormous deleveraging by business and individuals continues to counter in varying degrees the positive effects of this stimulus. Our reading of history – the 1930s in the U.S. and Japan since 1990 – shows in both periods nominal GNP remained flat for 10 to 20 years with many bouts of deflation. While good companies with excellent management will continue to do well, this may be a particularly treacherous time period. Of course, being long term value oriented investors, we expect this to be a great environment for us to ply our trade – perhaps not unlike the 1975 to 1996 period.

11 Mar 2010 Torray Fund - Q4 2009 Report
When we wrote to you a year ago, stocks had taken a terrible beating and our country was in the midst of the most severe economic turmoil since the 1930s. Despite the gloomy backdrop, our January letter expressed optimism about America’s future, saying, “The damage is done and, in our opinion, largely reflected in stock prices.” Highlighting the risks of expressing such views publicly, the market promptly fell another 25% in about two months, bringing its loss since October 2007 to 57%. (By coincidence, The Wall Street Transcript interviewed Bob on March 9, the day stocks bottomed. That article, published in the March 23 issue, appears on our website, www.torray.com.)

Even though the news was worse by mid-year, shares had rallied to a small gain, and our July letter expressed “room for more optimism than at any time since the financial crisis began.” We emphasized this was a long-term view, not a forecast of where stocks were headed over the next few months or quarters. As it turned out, we would have looked a lot smarter claiming a turnaround was imminent — between March 9 and year’s end, stocks advanced 65%. While this came as a tremendous relief, it was, unfortunately, too late for countless investors that fled the market during the downturn, pouring billions of dollars into Treasury bills, money market funds, CDs, U.S. government bonds and bond funds. By the end of the year, domestic equity funds alone had experienced net withdrawals of $38 billion, while bond funds took in $375 billion — a 10-to-1 ratio. Treasury bills, yielding nothing, have been in such great demand, their prices, on several occasions, have risen above par, meaning holders were paying to ensure they got their money back. Huge sums have also been put into one, two, and five-year government bonds, despite the fact they yield only 0.3%, 0.9% and 2.4%, respectively.

Leaving taxes aside, we believe none of these rates will compensate for inflation, which has averaged 4% for more than 75 years, or the possible negative consequences of our country’s massive deficit and debt issuance. More importantly, they will never produce enough money to retire on. Had the Pilgrims, landing at Plymouth Rock in 1620, bought money market funds at today’s rates, it would have taken until now — nearly four centuries — to double their investment. Better, but still not good, a quality bond portfolio diversified across today’s yield spectrum would probably generate an income in the neighborhood of 3% a year, doubling money in 24 years. By comparison, our Fund, in spite of the last decade, has multiplied in value 5.7 times in 19 years. Over the last 70 years, bonds, net of inflation, turned $1 into $2.70, while $1 in stocks grew to $103.00. Despite this record, untold numbers of investors are positioned today as though they expect the opposite result going forward.

Meanwhile, top-quality stocks, many paying dividends exceeding current short-to-intermediate-term interest rates, are now rejected at prices more than 25% below their levels of 2007, a time when investors were loaded with them, often on margin. (They are also 24% lower than they were at the close of 1999.) When the market collapsed last year, those that sold and moved to cash and bonds not only sustained big losses, but also missed the rebound. Victims of the worst timing ended up with 65% less money than if they’d simply stayed put — admittedly a very hard thing to have done under the circumstances. They are now faced with having to nearly triple their money to get even with where they were last March. Assuming a 10% annual return going forward — the stock market’s long-term average — it will take about 12 years to do it. Even this understates the challenge. Investors have come nowhere near matching the market over the long haul, mainly because they persist in jumping in and out of stocks at the wrong time. Having observed this behavior for almost 50 years sustains our conviction that the buy-and-hold approach — declared dead by the pundits at last year’s lows — is the only one that works.

At this point, we feel the average investor is too heavily committed to bonds and cash equivalents — a no-win situation from our perspective. In the early 1980s, investors wouldn’t touch depressed 30-year U.S. governments yielding 15 1/2%. Today, they’re buying them at yields around 4.6%. If history is a guide, when the economy recovers and stocks go up, the money in bonds is certain to shift into equities at prices far higher than they were sold. This illustrates, once again, the problem people have differentiating risk from opportunity. They invariably think risk is low when prices are high, and vice-versa. This applies to stocks, houses, commercial real estate, commodities, and anything else that trades. At critical junctures, investors bet heavily they’re right, and no amount of reasoning can change their minds.

In the present case, we doubt fixed income investors are convinced they’re right; it’s just they’re afraid to do anything else. Recognizing this, we nevertheless believe investors with low stock positions should consider gradually moving back into high quality shares or funds that own them. There’s no need to hurry. The best strategy is to invest amounts one’s comfortable with on a regular basis — monthly or quarterly, for example. When prices fall, (which they did during nine of the 37 years we’ve been in business), each new investment will buy more shares and earn a higher dividend return. Ironically, while this is a big advantage for the long-term investor, the average person tends to associate falling share prices not with opportunity, but with losing money. Some losses, of course, are inevitable, but a well-diversified portfolio should provide a cushion against them.

Stocks, as we all know, can deliver unpleasant surprises. The market has been very volatile in recent weeks, making people that were already nervous even more so. Some may fear a collapse with no recovery. While there are obviously no guarantees, they should keep in mind that it’s never happened before. We remain confident about America’s future based on its record of prosperity and resilience in the face of adversity. Beyond that, we are reassured by the solid, economic fundamentals of companies in The Torray Fund. As we’ve often said, “If the business performs, the stock will take care of itself.” Everything else is guesswork, and we don’t know anyone that’s guessed right for long.

hese are tough times, the worst any of us have seen. Experts are everywhere. You can’t turn on the television or pick up a newspaper without being inundated with predictions on the market’s direction and what to do about it. They should be ignored. Investors will do far better sticking to the fundamentals, secure in the knowledge that, over time, sound, growing businesses have produced higher returns than any of the alternatives widely available to the general public. Despite the many challenges our country has faced, things have always worked out, and we believe this case will prove no different.

09 Mar 2010 Video: Big Banks Still Undervalued: David Katz

08 Mar 2010 Clipper - Q4 2009 Report
Less than a year ago, many investors were concerned about a new Great Depression. Prices of all asset classes, except Treasuries, were collapsing. Unemployment was surging and liquidity was evaporating. The combined market capitalization of our nation’s financial institutions fell 80% on average and most of the largest were taken over, forced to raise capital or filed for bankruptcy. To make matters worse, the combination of overextended consumers, undercapitalized financial institutions, excess manufacturing capacity, and an underemployed workforce made it difficult to see what engine could pull the economy out of its nosedive. From the highs reached in 2007 through the trough in March 2009, the stock market fell more than 55% and Clipper Fund almost 66%.

In response to this free fall, the U.S. government and Federal Reserve pulled out all the stops, pouring liquidity into the system through near zero interest rates, huge increases in government spending, unprecedented capital investments in financial and industrial institutions, the direct purchase or guarantees of less liquid loans and securities, a ballooning of the Federal Reserve’s balance sheet, and expanded access to its discount window. While some of these individual actions may be questioned and the long-term consequences of soaring government deficits have yet to be faced, there is no doubt that drastic action was required.

As time passed, these actions took hold and though the economic news has not gotten much better, it has stopped getting worse. Although such important indicators as home prices and unemployment are still significantly worse than they were a year ago, they seem to have stabilized, albeit at depressed levels. Because we were in the midst of a financial panic, stabilization or a decline in the rate of decline was viewed with enormous relief, setting off an explosive rally in global stocks. As strange as this might sound, the news that we are in the midst of one of the worst downturns in more than 50 years was welcomed simply because it was better than Armageddon. As a result, despite a shrinking economy, high unemployment and soaring deficits, the S&P 500® Index surged a staggering 68% and Clipper Fund jumped more than 92% from their March lows through the end of the year.2

While such huge increases in so short a time are almost unprecedented, they are as much a consequence of how far markets had fallen as they are a reflection of new optimism. As suggested at the beginning of this report, an occasionally forgotten piece of math is that a 50% decline requires a 100% increase just to break even. Thus, having fallen more than 55% before recovering 68%, the S&P 500® Index still trades almost 30% below its starting point. The math is worse for Clipper, which after falling almost 66% and rising more than 92%, is still about 35% behind its starting point.

From a longer term perspective, even after this recent rally the S&P 500® Index is still well below where it was 10 years ago. Although the market has fallen during this decade, the companies that make up the S&P 500® Index are earning more and are thus more valuable. Specifically, at the end of 1999, the S&P 500® Index traded for 1,469 and earned about $48, implying an earnings yield of about 3%. Today, the S&P 500® Index trades for 1,115 and should earn $55-$75 this year, implying an arnings yield of 5%-7% on fairly depressed earnings.3 More important, when we look at the individual companies that we hold in Clipper Fund, many now have earnings yields of 7%-10% and intrinsic values significantly above today’s prices.

Although valuations still seem reasonable, many investors are anxious that the market’s steep recovery means that it must be ahead of itself and that they would do better to wait for a correction. However, there is an old saying that “the market doesn’t know where it’s been.” In other words, the returns investors earn have nothing to do with where a specific stock or the market in general was trading a year before they invested. It is also not uncommon or a sign of overvaluation when the market bounces from depressed levels. For example, after falling more than 40% in less than two years and bottoming in October of 1974, the market soared 55% in the next nine months making 1975 one of the strongest years for the S&P 500® Index in the last 40 years. Given that the market was up more than 50% and the economy was still weak, with inflation and unemployment rising and the energy crisis looming, investors who missed 1975’s strong advance might have felt it would be prudent to wait for a better time to invest. If they waited, in one sense they were correct as many economic indicators continued to worsen, only reaching their nadir in the 1980-1981 recession with double-digit inflation, interest rates and unemployment. However, as is generally the case, the market recovered long before the economy, advancing another 24% the following year. In fact, in the five years following 1975’s 37% gain, the market almost doubled. Clearly, those who waited until investing “felt” better paid a big price. As Warren Buffett wrote in a prescient article that almost rang the bell at the end of the bear market in August 1979:

[The] argument is made that there are just too many question marks about the near future; wouldn't it be better to wait until things clear up a bit? You know the prose: Maintain buying reserves until current uncertainties are resolved, etc. Before reaching for that crutch, face up to two unpleasant facts: The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.

We do not use this example of the 1970s market recovery as a forecast. We simply do not know what the market will do in the next year or two. Rather we use it to point out that stock market returns in any one year do not help predict what returns might be the following year. If investors have learned anything over the last several years, it should be the futility of short-term market forecasts.

05 Mar 2010 Olstein Funds - Q4 2009 Commentary
As stability and/or early signs of recovery unfolded in global markets during the second half of 2009, institutional equity investors began to adopt cautious optimism by spending some of their cash, which resulted in significantly improved market performance off the low of March 9, 2009. Yet despite this rebound, many investors (especially individuals) remain nervous about the prospect of slower economic growth, and continue hoarding their money in short-term U.S. Treasuries and money market funds leading the general public and press to conclude that there is a damper on future equity market returns. Questions about the strength and pace of economic recovery are likely to dominate the first half of 2010 as investors seek objective proof that we have permanently turned the corner before committing safe short-term funds to equities driving positive market returns.

Like many investors, we have seen two schools of thought dominate most of the 2010 market outlook discussion. The more constrained school of thought, often referred to as the “new normal”, predicts a prolonged period of subdued single-digit annual returns for U.S. equity markets, rooted in a slow economic recovery constrained by historically high levels of unemployment. Conversely, there is a more optimistic school of thought that predicts a faster and more vigorous recovery driven, in large part, by pent-up demand, depleted inventories and over-extended replacement cycles. While we recognize merit in both of these scenarios, we believe a singular emphasis on either argument fails to provide the necessary focus for developing an optimal portfolio strategy in 2010.

While both of these schools of thought rely heavily on the presence or absence of bullish sentiment to drive or restrain overall market growth, we continue to focus on how individual companies have adapted their expectations and operations to unfavorable market conditions and how they have managed their assets during the downturn. This information helps us evaluate whether a company has increased the probability of delivering future earnings to investors. It is our opinion that companies that have discernible balance sheet strength, operating flexibility, a sustainable competitive advantage and management teams who weigh cost of capital versus potential returns on investment before making decisions, have a higher probability of outperforming when the economic recovery takes hold. Another important factor we look for in potential stock market leading companies is a history of developing free cash flow to create shareholder value.

While pundits and forecasters may argue about the speed and strength of economic recovery in the United States in 2010, we believe two other factors are likely to take center stage this year. First, it is our opinion that portfolios emphasizing companies having material non-U.S. revenue sources have a higher probability of growing earnings faster than pure domestic companies. Second, we believe that valuations in 2010 and future years will be based on demonstrable free cash flow, rather than unrealistic expectations of future growth prospects.

Our prior letters described that immediately following the collapse of Lehman Brothers in September 2008, we drastically reshaped the Fund’s portfolio and were able to buy at favorable prices many core positions in high quality, strongly capitalized companies (e.g. Microsoft, Coca Cola, Kimberly Clark, Intel, etc.) with wide moat business models and long histories of success and integrity. At the time we acquired these high quality companies with extremely liquid balance sheets, they were selling at unprecedented low multiples of free cash flow, and in certain cases, were selling at prices that were lower than a decade prior.

We not only believe in the defensive posture of such well-capitalized companies, but also believe that their extensive global operations should provide an additional edge to future earnings growth going forward. Our forecast is that non-U.S. economic growth may exceed U.S. GDP growth in 2010 and future years. As of December 31, 2009, twenty four companies, representing 30% of the Fund’s total equity investments, have a market capitalization greater than $25 billion. For these twenty four companies, non-U.S. revenues range from 10% to 94% of total revenues with a collective average of 52% of company revenues derived from non-U.S. operations. For companies with extensive global operations, corporate profit growth could well exceed U.S. GDP growth, especially if significant earnings come from economies that have weathered the downturn well and are likely to bounce back stronger and faster than the U.S. economy.

As previously stated, in addition to the growth potential of mega- and large-cap U.S. companies with global operations, we also believe that as the economic recovery unfolds in 2010, a company’s ability to deliver sustainable free cash flow will drive its stock price instead of speculation about its growth prospects. While P/E multiple expansion accounted for a significant portion of equity returns during the last bull market, we believe that dividends and stable free cash flow are likely to account for the bulk of stock market returns for the foreseeable future. We expect strong, well-run companies will experience more modest earnings growth than in the past. We expect stock market leaders to experience growth rates of 3% to 5% per year versus the 10% to 15% growth rates that investors sought during the previous bull markets. Although lower growth rates going forward may reduce past price earnings ratios, we believe companies that can grow yearly cash flow at 3% to 5% growth rates are going to be the market leaders. The growth companies going forward are going to sell at lower multiples than the 20+ multiples experienced in recent bull markets as a result of the lower growth rates we are predicting. However, once the market adjusts and sorts out the new leaders, price earnings ratios of these new low growth companies should expand from the current 15 times multiples to the 17-18 range. The sector bets of the 2003-2007 bull market are going to be replaced by sustainable low growth free cash flow companies with solid balance sheets. Investors who pay fully-valued prices for established companies expecting double digit growth rates could be disappointed in their future returns.

As John Bogle commented in an op-ed that recently appeared in The Wall Street Journal (January 19, 2010), over the past thirty years “the folly of short-term speculation has replaced the wisdom of long-term investing as the star of capitalism. A ‘rent-a-stock’ system has replaced the earlier ‘own-a-stock’ system. The result – the momentary illusion of the price of a stock took center stage, replacing the enduring reality of the company’s intrinsic value – the discounted value of its future cash flow.” An important tenet of our investment philosophy is the belief that companies that produce excess cash flow after capital expenditures and working capital needs are the companies that build meaningful shareholder value over time by either delivering that free cash flow to investors in the form of dividends or by intelligently re-investing free cash flow into the business to increase the value of shareholder’s equity. We believe that when the reality of the 2010 economic recovery takes hold, investors should place a greater emphasis on analyzing how a company’s operations generate sustainable free cash flow; and determining how much of that free cash flow is, or might be, available to investors.

04 Mar 2010 Sequoia Fund - 2009 Annual Report
The federal government's massive intervention in the economy staved off
what might well have been another Depression. As financial institutions were
recapitalized, investors grew more confident the banking system would not
collapse and, not incidentally, Wall Street was flooded with cheap capital. Not
surprisingly, the price of stocks soared. Still, we found aspects of the rally
curious. The stocks that performed best in 2009 often seemed to have depressed
earnings, or no earnings, and no prospects of imminent recovery. The Fund owned
its share of cyclical companies with collapsing earnings, including Martin
Marietta Materials, Mohawk, Caterpillar and Cummins. As the rally in cyclical
stocks intensified, we sold a portion or, in some cases, all of these positions.

Meanwhile, the stocks that performed worst in 2009 often had stable,
predictable earnings and strong balance sheets. Wal-Mart's earnings rose during
the year but its stock price declined. Berkshire Hathaway's balance sheet is so
strong that in the depths of the crisis some of the country's best-known
corporations turned to it for financing. Yet investors accorded it little
respect. Berkshire shares declined 31.8% in 2008 and barely rebounded in 2009,
rising 2.7%.

Berkshire has an extremely diverse stream of earnings, with roughly half
tied to economically insensitive businesses like insurance and utilities. The
market generally discounted these kinds of stable earnings last year. But
Berkshire also gets about half its earnings in normal times from a number of
cyclical businesses that should enjoy substantial earnings growth as the economy
recovers. The market bid up all manner of cyclicals last year, but not
Berkshire.

Berkshire's decision to sell equity option puts in 2008 put it at financial risk
if world equity markets suffered severe long-term price declines. This led to
anxiety during the crisis. As stock prices rose in 2009, those equity puts began
to look like winners. Again, this wasn't reflected in Berkshire's share price.
In any event, Berkshire began 2009 as 22.8% of the Fund's portfolio and its weak
performance was a major factor in the Fund's lagging result.

Looking ahead, we believe we have positioned Sequoia to perform well in an
uncertain world. If the U.S. economy turns robust, our reduced exposure to
cyclical stocks, avoidance of leveraged financial companies and large cash
balance could all hurt performance. But most of the positions in the portfolio
today generate high returns on capital even in weak economic environments. They
generate free cash flows sufficient to self-fund growth and then return excess
cash to owners in the form of dividends or repurchase. Most of our companies are
gaining market share in their industries. We continue to believe that we are
with few exceptions invested alongside high quality management teams.

02 Mar 2010 Video: Bill Nygren of Oakmark Funds on CNBC

02 Mar 2010 The Oracle's Tips for the Rest of Us
Most investors who bet on the auto industry in 1910, planes in 1930 or TV makers in 1950 ended up losing their shirts, even though the products really did change the world. "Dramatic growth" doesn't always lead to high profit margins and returns on capital. China, anyone?

01 Mar 2010 Video/Transcript: Warren Buffett on CNBC


Part 2


Part 3


Part 4


Part 5


Part 6

27 Feb 2010 Berkshire Hathaway - 2009 Annual Report
The ideal standard for measuring our yearly progress would be the change in Berkshire’s per-share intrinsic value. Alas, that value cannot be calculated with anything close to precision, so we instead use a crude proxy for it: per-share book value. Relying on this yardstick has its shortcomings, which we discuss on pages 92 and 93. Additionally, book value at most companies understates intrinsic value, and that is certainly the case at Berkshire. In aggregate, our businesses are worth considerably more than the values at which they are carried on our books. In our all-important insurance business, moreover, the difference is huge. Even so, Charlie and I believe that our book value – understated though it is – supplies the most useful tracking device for changes in intrinsic value. By this measurement, as the opening paragraph of this letter states, our book value since the start of fiscal 1965 has grown at a rate of 20.3% compounded annually.

Charlie and I avoid businesses whose futures we can’t evaluate, no matter how exciting their products may be. In the past, it required no brilliance for people to foresee the fabulous growth that awaited such industries as autos (in 1910), aircraft (in 1930) and television sets (in 1950). But the future then also included competitive dynamics that would decimate almost all of the companies entering those industries. Even the survivors tended to come away bleeding. Just because Charlie and I can clearly see dramatic growth ahead for an industry does not mean we can judge what its profit margins and returns on capital will be as a host of competitors battle for supremacy. At Berkshire we will stick with businesses whose profit picture for decades to come seems reasonably predictable. Even then, we will make plenty of mistakes.

Last year we saw, in one instance, how sound-bite reporting can go wrong. Among the 12,830 words in the annual letter was this sentence: “We are certain, for example, that the economy will be in shambles throughout 2009 – and probably well beyond – but that conclusion does not tell us whether the market will rise or fall.” Many news organizations reported – indeed, blared – the first part of the sentence while making no mention whatsoever of its ending. I regard this as terrible journalism: Misinformed readers or viewers may well have thought that Charlie and I were forecasting bad things for the stock market, though we had not only in that sentence, but also elsewhere, made it clear we weren’t predicting the market at all. Any investors who were misled by the sensationalists paid a big price: The Dow closed the day of the letter at 7,063 and finished the year at 10,428.

We told you last year that very unusual conditions then existed in the corporate and municipal bond markets and that these securities were ridiculously cheap relative to U.S. Treasuries. We backed this view with some purchases, but I should have done far more. Big opportunities come infrequently. When it’s raining gold, reach for a bucket, not a thimble.

We’ve put a lot of money to work during the chaos of the last two years. It’s been an ideal period for investors: A climate of fear is their best friend. Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance. In the end, what counts in investing is what you pay for a business – through the purchase of a small piece of it in the stock market – and what that business earns in the succeeding decade or two.

In evaluating a stock-for-stock offer, shareholders of the target company quite understandably focus on the market price of the acquirer’s shares that are to be given them. But they also expect the transaction to deliver them the intrinsic value of their own shares – the ones they are giving up. If shares of a prospective acquirer are selling below their intrinsic value, it’s impossible for that buyer to make a sensible deal in an all-stock deal. You simply can’t exchange an undervalued stock for a fully-valued one without hurting your shareholders.
Imagine, if you will, Company A and Company B, of equal size and both with businesses intrinsically worth $100 per share. Both of their stocks, however, sell for $80 per share. The CEO of A, long on confidence and short on smarts, offers 11⁄4 shares of A for each share of B, correctly telling his directors that B is worth $100 per share. He will neglect to explain, though, that what he is giving will cost his shareholders $125 in intrinsic value. If the directors are mathematically challenged as well, and a deal is therefore completed, the shareholders of B will end up owning 55.6% of A & B’s combined assets and A’s shareholders will own 44.4%. Not everyone at A, it should be noted, is a loser from this nonsensical transaction. Its CEO now runs a company twice as large as his original domain, in a world where size tends to correlate with both prestige and compensation.

If an acquirer’s stock is overvalued, it’s a different story: Using it as a currency works to the acquirer’s advantage. That’s why bubbles in various areas of the stock market have invariably led to serial issuances of stock by sly promoters. Going by the market value of their stock, they can afford to overpay because they are, in effect, using counterfeit money. Periodically, many air-for-assets acquisitions have taken place, the late 1960s having been a particularly obscene period for such chicanery. Indeed, certain large companies were built in this way. (No one involved, of course, ever publicly acknowledges the reality of what is going on, though there is plenty of private snickering.)
In our BNSF acquisition, the selling shareholders quite properly evaluated our offer at $100 per share. The cost to us, however, was somewhat higher since 40% of the $100 was delivered in our shares, which Charlie and I believed to be worth more than their market value. Fortunately, we had long owned a substantial amount of BNSF stock that we purchased in the market for cash. All told, therefore, only about 30% of our cost overall was paid with Berkshire shares.
In the end, Charlie and I decided that the disadvantage of paying 30% of the price through stock was offset by the opportunity the acquisition gave us to deploy $22 billion of cash in a business we understood and liked for the long term. It has the additional virtue of being run by Matt Rose, whom we trust and admire. We also like the prospect of investing additional billions over the years at reasonable rates of return. But the final decision was a close one. If we had needed to use more stock to make the acquisition, it would in fact have made no sense. We would have then been giving up more than we were getting.

When stock is the currency being contemplated in an acquisition and when directors are hearing from an advisor, it appears to me that there is only one way to get a rational and balanced discussion. Directors should hire a second advisor to make the case against the proposed acquisition, with its fee contingent on the deal not going through. Absent this drastic remedy, our recommendation in respect to the use of advisors remains: “Don’t ask the barber whether you need a haircut.”

27 Feb 2010 Meridian Funds Q4 2009 Commentary
Our investment strategy remains unchanged. We continue to seek out-of-favor companies exemplified by an extended period of declining earnings. Over the past year most of the earnings problems were economic-related and we were able to invest in many high quality companies at attractive valuations. These are companies, in most cases, with leading and defensible market positions, high returns on invested capital, strong balance sheets and proven management teams. In normal economic conditions such companies rarely fall out of favor. While some of these investments lagged the market during the strong rally off the March lows, we believe that this core of high quality companies positions the Fund for positive returns during the next several years. In addition, with some stability in the economy, we are beginning to see more companies that fit our strategy for traditional company-specific reasons. This is historically the strength of the Meridian Value Fund and should bode well for future performance. We hold 54 positions, representing 30 industry groups. We continue to invest in companies of all market capitalizations and our largest areas of concentration are retail, technology and healthcare products.

During the quarter we purchased shares of CVB Financial, Echelon, LKQ and Nalco. We sold our positions in Boston Scientific, Diebold, Exterran, Franklin Electric, Itron and KBR.

24 Feb 2010 Video: David Katz on CNBC
David Katz, chief investment officer of Matrix Asset Advisors, discussed his market strategy...

24 Feb 2010 Driving on the Road to Wealth
Ron Muhlenkamp of the Muhlenkamp Fund on the 'new normal,' current portfolio holdings, and performance relative to historical valuations...

24 Feb 2010 Video: Jean-Marie Eveillard on Bloomberg
Eveillard Likes Sodexo, Berkshire Hathaway and Hankyu...

24 Feb 2010 Video: Jean-Marie Eveillard on Bloomberg
First Eagle's Eveillard Discusses Toyota's Shares...

22 Feb 2010 Video: Warren Buffett Interview on Philanthropy
Billionaire investor Warren Buffett and Courtenay Wolfe, chief executive officer of Salida Capital, talk with Bloomberg's Betty Liu about philanthropy...

20 Feb 2010 A parable about how one nation came to financial ruin - Charles Munger
But even a country as cautious, sound, and generous as Basicland could come to ruin if it failed to address the dangers that can be caused by the ordinary accidents of life. These dangers were significant by 2012, when the extreme prosperity of Basicland had created a peculiar outcome: As their affluence and leisure time grew, Basicland's citizens more and more whiled away their time in the excitement of casino gambling. Most casino revenue now came from bets on security prices under a system used in the 1920s in the United States and called "the bucket shop system."...

11 Feb 2010 John W. Rogers: Back to normal
Fans of the new-normal dogma predict a decade of mediocre stock market returns. They are speculating that Americans will put 20% of their pay in piggy banks and curtail discretionary spending, which translates into slow growth for the U.S. economy. I don't believe personal behavior will shift so radically.

There's nothing new about the normal I'm seeing. Instead, I believe 2010 will be a return to normalcy that leaves us close to the average growth rate of the last quarter-century. This isn't the high-octane spending we saw just before the financial crisis, but it isn't austerity, either...

10 Feb 2010 Fair play
Century Management’s Arnold Van Den Berg has built a spectacular track record of performance over the past 40 years, by placing his bets based on the fair value of stocks, relative to bonds and historic valuation bands...

09 Feb 2010 Video: Economic "Power Lunch"
Warren Buffett and former Treasury Secretary Henry Paulson have an economic 'power lunch' chit-chat, live at the Chamber of Commerce annual meeting in Omaha.



Part 2:

09 Feb 2010 Clean Opportunities - Ron Muhlenkamp
We're about to see a dramatic increase in the use of natural gas in transportation. Recent improvements in drilling technology and techniques have significantly increased the amount of gas available at current prices, extending our reserves to nearly 100 years at current usage rates. And current prices for natural gas are roughly half those of gasoline or diesel for equivalent energy...

08 Feb 2010 Video:: Michael F Price of MFP Investors on Bloomberg
Michael Price Says MFP Is `Long' Citigroup, BofA, Harris...

06 Feb 2010 Buffett Tells Hog-Product Staff They’re on Farming Superhighway
Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., told employees of the firm’s hog-products unit he expects the operation to expand for decades.

04 Feb 2010 Video/Transcript: Bruce Berkowitz interviewed by Morningstar
The Fairholme manager explains the reasoning behind recent stock sales--including Pfizer--and the portfolio's shift from defense to offense...

04 Feb 2010 Buy and Hold Is Risky
Dataroma's opinion: Well, it depends on what stocks you buy and hold. Stocks are businesses and if you plan to buy and hold a business, it must be a durable one with a sustainable competitive advantage and sustainable margins.

03 Feb 2010 Weitz Funds - Q4 2009 Commentary
One important holding that held us back somewhat was Berkshire Hathaway, which gained only 2.7% in 2009. Berkshire had prepared beautifully for the financial crisis and was able to deploy tens of billions of dollars on very attractive terms over a period of a few months. Arguably, the recent bear market was among the most successful and productive periods of Warren Buffett’s 45 years at Berkshire. Yet, Wall Street yawned. We hate it when a stock under-performs because we over-paid for it or because management did something to destroy value. But when a company’s value grows significantly, and investors are slow to respond, we are content to buy more shares and wait patiently.

For several quarters, we have suggested that the financial crisis and “Great Recession” caused serious damage to the economy and would take a long time to repair. We believe the worst is over and that we will not experience a repeat of last year’s financial collapse, but we suspect that the 2009 “relief rally” may have raised hopes of further near-term easy profits.

The recent financial trauma has spawned many medical analogies—heart attacks, being hit by a bus, and others even more grisly. Returning to that metaphorical well one more time, we are reminded of a person who sustained multiple serious injuries in 2008, survived to great relief and celebration in 2009, but who now faces a long, hard period of rehab and physical therapy. The prognosis for a full recovery is not in doubt and the prospect of “living happily ever after” (a new bull market) is in sight, but it may take a while.

There are a number of unresolved issues which may test investors’ resolve. Hundreds of billions of dollars of bank capital has been destroyed. The government has provided substitute capital on a temporary basis, but the remaining banks must replenish their capital with earnings. Cheap deposits and wide lending spreads should make this possible, but rebuilding the capital base may take several years.

Government borrowing for economic stimulus and corporate rescues raises fears of inflation, rising interest rates, and dollar weakness. Angst over taxes and regulation unsettle investors. Unemployment and municipal budget cutbacks will be drags on the economy for some time. These obstacles are not insurmountable. We believe the patient will survive and be restored to full health — just not as quickly as many investors hope and expect.

We entered the last decade at the peak of a 17-year bull market. Stock valuations were very high. Ten years later, most businesses are larger and more valuable, but stocks as a group are actually lower than they were ten years ago because valuations have shrunk. Historically, every time we have seen this type of “lost decade” for stocks, the subsequent ten year period has produced very strong equity returns.

Likewise, in those rare ten-year periods (like 2000-2009) when bonds return more than stocks, equity returns have been very strong in the subsequent ten years. We think it is unfortunate that many investors are abandoning stocks now and chasing bonds after this rare golden period for bonds.

The Value Fund continues to tilt toward our best larger company ideas, with more than 60% of the Fund’s stock investments in companies with market caps greater than $10 billion. This Fund also owns more truly global companies with strong brands and durable businesses. In addition to newcomers Monsanto and Accenture, examples include Microsoft, United Parcel Service, Wal-Mart, Procter & Gamble and Diageo. As investors rushed to maximize near-term recovery returns, we believe the market at times placed too little value on many of these world-class companies.

02 Feb 2010 How We Think About Risk: Part 2
In seeking to protect our investors against permanent impairment of capital, we rely on five operational principles: (1) margin of safety, don’t overpay for assets, (2) diversification, let positive and negative surprises average out, (3) low leverage, avoid potentially catastrophic losses associated with high leverage, (4) balance, build a portfolio that is not overly exposed to any single macroeconomic risk and (5) protection against extreme outcomes, consider assets, like gold, that may do well if the world falls apart. For each of these principles, First Eagle Funds has processes in place that seek to limit the risks involved in investing.

Dataroma's opinion: Good write-up, but strongly disagree with point (5) - Protection against extreme outcomes. It's unlikely that gold will "do well if the world falls apart". Gold has no earnings, has hardly any utility, and only has any "value" because people think it does. Besides, what is the point of protecting 5% of your portfolio (which is the current Value Fund's Gold holding) against extreme events. "Protection against extreme outcomes" is probably a futile attempt since even if possible, in the long run it will come at a huge cost.

02 Feb 2010 Why All Earnings Are Not Equal
Some of the widest gulfs between earnings and cash flows, Mr. Olstein said, are showing up the ways companies account for capital ex- penditures. To ensure growth, companies invest in things like new facilities or additional equipment. As time goes on, plants and equipment lose value — the way a car does the moment you drive it away from the dealer — and companies are allowed to write off a portion of these values each year based on management estimates of how long they will generate revenue.

The write-offs are known as depreciation, and the more a company chooses to write off, the greater its earnings are reduced. So managers interested in plumping their profits may depreciate less than they otherwise would or should. Conversely, heavy depreciation amounts can make earnings appear more depressed than the company’s
cash flows indicate.

“It’s an investor’s job to determine the economic realism of management’s assumptions,” Mr. Olstein said. “There is nothing illegal here, but maybe their depreciation assumptions are unrealistic.” One way to assess the accuracy of management’s estimates is to compare, over time, how much a company spends on new plant and equipment and how much it deducts in depreciation each year. Some of the discrepancies that emerge can be temporary, caused by the lag time between an initial invest- ment and subsequent write-downs for depreciation.

Companies in a growth phase, for instance, will show greater capital expenditures than depreciation as they increase investments in plant and equipment.

But that should be only temporary. If such discrepancies appear on a company’s books year in and out, then investors might well question the depreciation assumptions. Investors confronted by large disparities should discount those companies’ earnings by the amount of excess capital expenditures. Such an ex- ercise reveals how much free cash flow is available to stockholders.

Conversely, if depreciation exceeds capital expenditures, Mr. Olstein says that the earnings at these companies are actually better than they appear — and that this shows up in the cash flows.

01 Feb 2010 Who’s Afraid of a Sideways Market?
In his highly acclaimed book, Full House: The Spread of Excellence from Plato to Darwin, Gould talked about the importance of distinguishing between the trends of a system from the trends in the system. “The old Platonic strategy of abstracting the full house as a single figure (an average)…and then tracing the pathway of this single figure through time, usually leads to error and confusion.” Putting it in Gould’s terms, investors who observed the stock market between 1975 and 1982 and focused on the “full house” (the market average) came to the wrong conclusion. They wrongly assumed that the direction of the market was sideways, when in fact the variation within the market was dramatic and lead to plenty of opportunities to earn high excess returns.

29 Jan 2010 Many fund investors will own a piece of Buffett
If you like your investing no-frills and low-cost, prepare for your introduction to Warren Buffett. Investors in mutual funds that track the Standard & Poor's 500 stock index will soon have a stake in the investing legend's company for the first time...

28 Jan 2010 Tweedy Browne - Q4 2009 Commentary
With global equity markets up approximately 73%(MSCI World Index) from the market bottom in early March of last year, stocks today in general appear to be fairly to fully valued. That said, from our perspective, it is more a market of stocks and not so much a stock market with some stocks more attractively priced than others. As with previous stock market collapses, the bounce off the bottom was led by lower quality stocks, those that suffered the worst declines during the downturn. While most stocks were up nicely for the year, steadier, higher quality businesses, particularly those that pay a dividend, significantly underperformed lower quality non-dividend paying issues, and today we believe offer investors much better value. For example, in 2009 the 370 stocks in the S&P 500 that paid some kind of a dividend were up 27.7% on average versus a return of 82.4% for the stocks that did not pay a dividend. The same held true for global equities with the stocks that pay a dividend in the MSCI World Index up 32.3% versus a return of 75% for the stocks in the index that did not pay a dividend. In general, the higher the dividend yield the lower the return in 2009. As we got closer to year-end, dividend stocks perked up, and were in part responsible for our Funds’ strong 4th Quarter results.

For the most part, the top 25 holdings in our Funds’ portfolios, which account for approximately 75% to 80% of the portfolios, are chock full of these steadier dividend-paying companies with more sustainable demand characteristics. On average, as of December 31, 2009, they were trading at approximately 15x current year estimated earnings and had a dividend yield on average of over 3%. This compares favorably to indexes such as the S&P 500 and the MSCI World, which were trading at over 17 times earnings. These are companies that are for the most part globally diversified, have solid balance sheets, sell products to an aspiring and growing global middle class, and pay an attractive dividend. Many of these companies such as Heineken, Unilever, Nestle, Diageo, Phillip Morris International, and Novartis, among a host of others, derive a surprising amount of their revenues and profits from the emerging markets, and from our point of view this indirect approach is a cheaper and safer way to invest in these rapidly growing Third World economies. So despite the robust returns we enjoyed in 2009, we feel that our Funds’ portfolios are still relatively well positioned, and attractively valued.

27 Jan 2010 Longleaf Partners - Annual Report
Lessons of 2009
After the market meltdown of 2008, the most frequently asked question we received was, “What have you learned?” In previous shareholder communications we have elaborated on the things we learned including painful lessons from mistakes that cost us a few permanent losses.

In addition to that oft asked question, the most discussed topic has been macroeconomic forecasting’s importance. The macro environment dominated everything in 2008. For those doing solid bottoms-up corporate analysis, the credit crisis overwhelmed individual company analytical conclusions. “Micro” work seemed practically irrelevant, generating suggestions that macro issues should become a greater focus for Southeastern to better protect our investment partners. An understanding of how the macro will affect those names that we own or are considering always has been important. In a vacuum we would not follow Mexican macroeconomic statistics. But as a shareowner of Cemex, we must have some grasp of the Mexican economy’s drivers to properly assess intrinsic value and understand appraisal risks.

Interestingly we have not been asked about the “lessons of 2009.” The first answer to that unasked question is that bottoms-up fundamental company analysis matters quite a bit. If it were probable that every year could be like 2008, every investor should try to monitor the global banking system and engage in macroeconomic prognos- ticating. However, if it were highly probable that the worldwide economy, banking system, and equity markets would not look like 2008 in most years, then we should not abandon lessons from Graham, Buffett, and our 35 years to become macro driven “generals-fighting-the-last-war.” Simply stated, 2009 reminded us that 2008 was anomalous.

A macro oriented investor could have logically decided on January 1, 2009 (or in March when stocks were meaningfully lower) that with the horrible global economy, the teetering banking systems across multiple countries, and the extremely weak stock markets, it was a good time to sit on the sidelines until some economic clarity emerged. By contrast, an intrinsic value investor who focused on the free cash flow that certain well-run, competitively advantaged companies generated – even in a severe recession – would have purchased those cash flow streams at incredibly low multiples, i.e. high cash flow yields. Those who chose the macro route and parked in cash missed what was the best purchase point for equities in our lifetime and earned virtually nothing on their liquidity.

This leads to the second lesson of 2009: comfort comes at a very high cost. Buffett made this point in an August 6, 1979 Forbes article entitled, “You Pay A Very High Price In the Stock Market For A Cheery Consensus.” Selling stocks in 2007 would have been uncomfortable; in retrospect we all should have done more of that. Buying or even holding stocks in early 2009 was very uncomfortable; investors should have done that. Many investors feel most comfortable when the consensus confirms their view. Making the same investment choices as a large number of other intelligent people mathematically almost insures doing the wrong thing at the wrong time because security prices reflect the collective action of the consensus group.

So where are we now? We believe that we are between the valuation extremes of the mid-2007 highs and the early 2009 lows. With global markets having risen rapidly since March, bargains are less plentiful, and free cash flow yields are less attractive. However, valuations are still compelling when compared to the past. Our price-to-value ratios remain at or below the long-term average. Also, the “comfort gauge” still appears favorable given the excessive quantity of cash people are holding in lieu of equities. This cash on the sidelines constitutes significant future buying power that will someday make its way back to attractive, growing corporate free cash flow yields that almost always find their long-term recognition either in the stock market when overall psychology shifts or from corporate M&A. Today many macro mavens are comfortable owning the taxable, fixed coupons of 10-year Treasuries at yields of 3.7%. We much prefer the after-tax, growing free cash flow coupons of dominant businesses at yields of 9-10%.

26 Jan 2010 Investor Buffett holds $1 bln stake in Munich Re
Warren Buffett has built a $1 billion stake in Munich Re, adding to his array of insurance holdings and boosting shares in the world's biggest reinsurer. Munich Re said on Tuesday Buffett's shareholding rose just above the mandatory reporting threshold on Jan. 18 and amounted to 3.045 percent of the voting rights on that date.

25 Jan 2010 Bill Miller - 2010 Market Commentary
What about the stock market? It’s clear that economically things are getting better, not worse. In addition to GDP numbers, credit spreads have returned to some semblance of “normal,” and the bond market has seen record refinancings. Yet stocks still sell below where they sold AFTER Lehman failed, when the world was falling apart. Even in the week after Lehman collapsed, the S&P 500 traded as high as 1255, over 10% higher than the market is today.

In the parlance of Jesse Livermore, the path of least resistance for the stock market is higher, yet investor resistance to stocks as evidenced by what people are actually doing with their money remains resolutely in favor of bonds, with money continuing to be redeemed from U.S.-oriented equity mutual funds, while flows into bond funds are running at record levels. This affinity for bonds over stocks is understandable when looking at the last 10 years, but perverse, we believe, when looking at the likely course of the next 10. Bonds crushed stocks the past 10 years, with riskless Treasuries returning over 6% per year, while stocks lost money on average each year of the past 10. Ten years ago stocks were expensive; now they are not.

In the next decade, the story is likely to be quite different. As the economy gradually (or quickly) recovers, the Fed will remove the extraordinary monetary accommodation it provided during the crisis, and shrink its balance sheet. A neutral fed funds rate would be in the 2.5% range or thereabouts, perhaps higher. Long term, the ten-year Treasury ought to yield about the nominal growth rate of GDP, so somewhere in the 4.5% to 5.5% range, leading to substantial losses in Treasuries and probably investment grade corporates as well. High-yield bonds ought to do better, but they had their big move last year, rising over 50% and providing the best returns relative to equities ever. All this, though, assumes benign inflation of 2% to 3%. If the inflation bears are right, bonds will be a disaster.

Stocks are quite a different story. After spending 10 years in the wilderness, high quality U.S. large capitalization stocks are cheap compared to bonds. Names such as Merck trade at 12x this year’s earnings and yield more than 10-year Treasuries. IBM has record earnings, trades at 12x this year’s expected results, buys back shares every year, and has grown its dividend 25% per year the past five years. Stocks have historically provided inflation protection that bonds cannot. Like Poe’s purloined letter, these values are hidden in plain sight.

22 Jan 2010 First Eagle Funds Conference Call Transcript
A Graham stock is one that is a statistically cheap stock where the value doesn't necessarily grow and maybe even shrinks over time. A Buffett stock is sort of the opposite of that. It's a business with some sort of franchise where the intrinsic value tends to grow over time. In that case, we require different discounts, depending on what kind of a business it is. If it's a Graham-type stock, we tend to be out at intrinsic value and we tend to require a larger discount to intrinsic value. If it's a Buffett-type stock, we tend to acknowledge that the growth in intrinsic value is worth something in itself and will require less of a discount to intrinsic value; and, we're not necessarily selling our entire position at intrinsic value with a Buffett-type stock. The vast majority of companies are somewhere in between. It takes quite a bit of judgment to determine where on the spectrum these companies lie. Over time, it's always easy to find a Graham stock, because it's statistical analysis. The Buffett-type of company where there's a lot of judgment involved takes time and requires a lot of analytical effort and we have great analysts to do that work. And, for the most part, over not just the last year but over five to ten years, the portfolio has shifted more towards Buffett-type companies from Graham-type companies. It's a trend that probably will continue into the future.

One big observation we would make, is that as valuations have recovered from very distressed levels earlier in the year to levels that we would see as being more consistent with a more normal valuation backdrop -- we feel that we are in an environment that is characterized as neither bargains nor bubble -- the focus of the team has to be as resolute as possible on the search for bottom-up opportunities at the security-by-security level. If the market is not mispriced as a whole, you have to look for mispricing at the individual security level, which is, indeed, what we've focused on doing historically.

20 Jan 2010 Video: One-On-One with Buffett, Pt. 2

20 Jan 2010 Video: One-On-One with Buffett
Berkshire Hathaway is holding a special shareholders meeting today, with Warren Buffett, Berkshire Hathaway chairman & CEO and CNBC's Becky Quick...

20 Jan 2010 Video: Bill Ackman - Kraft-ing a Sweet Deal
Discussing Pershing Square's stake in Kraft, with William Ackman, Pershing Square Capital Management...



Kraft-ing a Sweet Deal, Pt. 2

19 Jan 2010 Video: David Winters on CNBC
How to invest in 2010, with the Power Lunch team and David Winters, Wintergreen Fund portfolio manager & CEO...

19 Jan 2010 Oak Value Fund - Q4 2009 Commentary
“The stock market is filled with individuals who know the price of everything, but the value of nothing.”
The wisdom of this quote from one of history’s most influential growth investors is evident in the events and experiences of the past year. With the proliferation of market information, it has become common to accept “price” as a proxy for “value.” Our experience continues to confirm that it just does not work that way. In our work we are neither interested in the value nor the price of “everything.” We focus our efforts on understanding a collection of growing, advantaged businesses and having an informed opinion of what we believe they are worth. For this group of companies, we are very interested in price, but only in relation to our estimate of their value. Determining price requires a buyer and a seller. Assessing value requires knowledge, insight and judgment. Price is a reaction to the present. Value is a function of the future – growth, predictability and quality. As another great investor once said, “price is what you pay, value is what you get.”