02 Jul 2009 House prices and the wealth effect
Willem Buiter of the London School of Economics has argued in the past that when house prices fluctuate, there are both winners and losers, but no net wealth effect. Charles Calomiris, Stanley Longhofer and William Miles are also sceptics. In a new National Bureau of Economic Research paper, the three economists argue that earlier analyses overstate the wealth effect because they do not account for the fact that people who expect to earn more in the future may bid up house prices. They may also spend more, but this extra consumption would not be caused by changes in housing wealth...

01 Jul 2009 Legg Mason's Bill Miller On The Prowl Again
Today, Mr. Miller says fair value on the Standard & Poor's 500, currently trading around 920, is "in the 1,100 range. There's value in most places in the market right now." Stocks he singled out as "very cheap" include Bank of America (BAC) and the insurance company AFLAC. Mr. Miller insists the financials are actually "overcapitalized" today.

Like a number of other "value" investors he says he is also spotting opportunity in the unloved "high quality" names that have lagged behind the spring rally - companies like McDonald's, Wal-Mart, Procter & Gamble, Johnson & Johnson, and Exxon. "These are the kinds of names that I think will do better over the next few years," Mr. Miller said...

30 Jun 2009 A Relative Perspective on Deficits and Debt
One area of pointless fear comes from a misunderstanding of deficits and debt. Because of the recession and the Obama stimulus plan, the United States faces huge deficits this year and in coming years. The 2009 flow of red ink is estimated at 13.2 percent of gross domestic product (GDP), twice the relative size of Ronald Reagan’s largest deficits and unprecedented since the Second World War. It also is a huge relative strain compared with other countries. As the first column in Table 1 makes clear, only the United Kingdom has gone deeper into deficit. But it would be a mistake to assert from these figures, as some have, that the United States is one of the most debt-ridden countries on earth. Debt is an accumulation of past deficits and, as the second column in the table shows, the United States has a ways to go before its relative debt burden rivals those of many other countries. At about 61 percent of GDP, America’s public debt is barely over one-third Japan’s relative burden, is considerably less than Italy’s and Belgium’s, and is slightly less than Canada’s, France’s, and Germany’s relative burden. Interestingly on this basis, the United Kingdom looks better than many, raising questions about the recent ratings downgrading and why they did not extend to other countries.

A similar picture emerges when looking at the data from a more intuitively manageable perspective of per capita measures...

29 Jun 2009 Video: Financial Analyst Dick Bove talking to Steve Forbes
Topics discussed:

- The financial crisis and it's causes

- The economy

- The current state of the Banking industry

29 Jun 2009 John Dorfman: Stock Market’s Rally Likely to Last Into 2010
The market (as measured by the S&P 500) sells for 14.5 times earnings, two times book value (corporate net worth) and 0.94 times revenue. The dividend yield is 3 percent. What’s remarkable about those numbers is how strikingly normal they are. It’s worth noting that these multiples are not multiples of peak earnings (or book value or revenue) but of depressed earnings. So there’s room for further improvement.

(Dataroma's opinion: The article makes many good points especially regarding current valuations, but it also suggests attempting to "time" the market which in our view cannot be done successfully in the long run.)

27 Jun 2009 Savings Rates Rising Toward Mediocrity
The Bureau of Economic Analysis announced that personal savings rates rose again in May. Americans saved 6.9 percent of their after-tax income last month, the highest rate in 15 years. Is that impressive? Not particularly, at least in historical terms. In fact, it’s about equal to the average savings rate of the last 50 years...

24 Jun 2009 The efficient markets theory is as dead as Python's parrot
The obsession with benchmarking also gives rise to one of the biggest sources of bias in our industry - career risk. For a benchmarked investor, risk is measured as tracking error. This gives rise to homo ovinus - a species concerned purely with where they stand relative to the rest of the crowd. This species is the living embodiment of Keynes' edict that "it is better for reputation to fail conventionally than to succeed unconventionally".

Surely, it is high time to consign EMH and its legacy to the dustbin. Shall we manage it? I'm a pessimist. As JK Galbraith said, financial markets are characterised by "extreme brevity of financial memory . . . there can be few fields of human endeavour in which history counts for so little as in the world of finance".

23 Jun 2009 Pendulum Swings for Mr. Yacktman
... Experts called Mr. Yacktman's value-management style outdated during the peak of the bull market and tech-stock boom.

Mr. Yacktman said he is now "Dumpster diving," putting cash to work and scavenging for fallen stocks that could have high rates of return. He recently swooped in on Pfizer as well as a couple of battered retail names, Abercrombie & Fitch and William-Sonoma.

23 Jun 2009 Warren Buffett's Portfolio, Now Within Reach
He bought Johnson & Johnson at about $62 a share: It's now about $55, or 12 times likely earnings, yielding 3.5%. He had also invested about $4.3 billion in food company Kraft, at around $33 a share. It's now around $25, 13 times likely earnings and boosting a hefty 4.7% yield. He had also invested $2.3 billion in US Bancorp at an average price of about $31. Today's it's $17.

He finds names that are out of favor, or where people just don't see the longer term profit potential that others don't. He has a longer term horizon than the majority. If you have patience, and others don't, you can wait things out...

21 Jun 2009 Finding Stock Gems Among the Rally's Laggards
But there are other laggards that appear to be overlooked gems -- companies that some analysts say are worth paying some attention to, especially because it has become harder to find bargains. And if the market's rally peters out, some of these companies likely will be safer havens.

Many of the shares that have lagged have been so-called defensive stocks, those that tend to be safer but promise slower profit growth, such as Johnson & Johnson and Procter & Gamble. Some of these companies were bid up last year by investors who viewed them as a haven amid the market's tumble.

Lately, as investors have become more convinced that an economic recovery is around the bend, they've shifted to companies more likely to bring bigger profits in such a recovery, such as retailers, technology and industrial companies and commodity-related shares, discarding some of the safer stocks.

21 Jun 2009 Why Inflation Isn’t the Danger
But if the inflation outlook is so benign, why have Treasury borrowing rates skyrocketed in the last few months? Is it because markets fear that the Fed will lose control of inflation? I think not. Rising Treasury rates are mainly a return to normalcy.

In January, the markets were expecting about zero inflation over the coming five years, and only about 0.6 percent average inflation over the next decade. The difference between then and now is that markets were in a panicky state in January, braced for financial Armageddon; they have since calmed down.

19 Jun 2009 Voting and Weighing
There’s a reason why iconic professional investor Benjamin Graham said the stock market behaves like a voting machine in the short run and a weighing machine in the long run. There’s also a reason why “this time it’s different” are the four most dangerous words in investing.

15 Jun 2009 Setting the Record Straight on What Shareholder Value Really Means
The core of the problem seems to be what managing for shareholder value means. Welch, Martin and others imply that the theory is about maximizing the stock price. Companies that manage for shareholder value, the thinking goes, do whatever it takes to engineer a lofty market price, including delivering the highest possible earnings per share. That is a profound misunderstanding of what creating shareholder value is about.

Managers create shareholder value when they invest to maximize the present value of long-term free cash flows. Investments include capital spending, research and development, mergers and acquisitions (M&A), and share repurchases. These investments also include managing human capital, the task of putting the right people in the right jobs.

Shareholder value also considers cash flows the lifeblood of business, not reported earnings. The goal is to maximize the free cash flow over the life of the business. Since discounting assures that future cash flows are worth less than those today, there is a healthy balance between the short term and long term.

The term “value” is also crucial to the concept of creating shareholder value. The premise is that if a company builds value, the stock price will eventually follow. The objective is to build value and then let the price reflect that value. Executives adhering to shareholder value principles manage for value, not price...

15 Jun 2009 Ban CDS as "instruments of destruction" - George Soros
Soros said the asymmetry of risk and reward embedded in CDS exerted so much downward pressure on the bonds underlying the contracts that companies and financial institutions could be brought to their knees.

Going short on bonds by purchasing a CDS contract carried limited risk but almost unlimited profit potential. By contrast, selling CDSs offered limited profit and practically unlimited risk, Soros said.

"It's like buying life insurance on someone else's life and owning a license to kill"

08 Jun 2009 How psychological biases can make a mess of our financial decisions. Especially these days
If you’ve watched your 401(k) lose 40% of its value, seen the U.S. banking industry crumble or simply read the headlines, it could be a challenge not to respond out of angst. After all, it’s only human to react emotionally to the news - especially when your money is on the line.

But when emotions become the overriding reason for making investment decisions, you could end up losing more money in the long run.

07 Jun 2009 Inflation, Not Default, Is Risk for Treasury Bonds
Since the credit crisis began, the Federal Reserve has more than doubled the supply of its own money, and government deficits are running into the trillions of dollars. Many believe this will inevitably lead to rapid inflation.

But such a conclusion is premature. The Fed has increased the supply of money in response to the tremendous increase in the demand for such money caused by the liquidity crisis. And government borrowing is just offsetting the sharp increase in consumer saving caused by the declining value of assets and tighter credit.

I believe that the government's current economic response is right. But the government must be on guard. Once confidence returns, the Fed must pull back the money it loaned and the government must bring deficits under control.

06 Jun 2009 Gold: Headed For A Bubble?
To say this metal is volatile is an understatement. Since the start of 2008, the price of gold has swung between $1000 and around $700 (it's currently at $965). This is a safe haven? When the stock market does this, it's on the front page.

Rarely does anyone discuss the biggest problem with gold -- no one actually knows what this metal is really worth. After all, it generates no income. All the gains come from capital appreciation. And that, of course, is a gamble...

06 Jun 2009 Wall Street's Clearance Sale Leaves Few Bargains
So where can a value-conscious investor turn?

Mr. Grantham regards "high-quality blue chips" as the only bastion of value in today's market. He cites companies like Coca-Cola, Johnson & Johnson, Procter & Gamble, Wal-Mart Stores and Microsoft as offering "high, stable returns with very little debt."

Dividends average better than 3% for this group; if "everything merely returns to normal" over the next few years, Mr. Grantham expects these blue chips to be able to return 11% to 12% annually after inflation.

02 Jun 2009 Advanced Performance Chasing
In fund investing circles, performance chasing has been de rigueur for years. In the late 1990s, investors seeking to capitalize on the hottest trends hopped from one asset class to another in pursuit of the best returns. They bought growth funds when they were hot and moved to value when that became fashionable. Nowadays, with funds further segmented by rating agencies, performance chasing has gotten more advanced. Investors chase within asset classes - or style boxes - looking for the hottest manager in large cap, mid cap, or blend, for example. These performance chasers buy based on how a fund delivers relative to its peers in the short term...

...data suggest investors typically are drawn to funds that lead the pack over shorter periods of time - usually one, three, or five years - because they consider them “consistent’’ performers. But our analysis shows that consistent performance, as defined by most investors, is an illusion. Consequently, investors frequently end up buying high and selling low - a recipe for disappointment.

02 Jun 2009 Don't Bow to Dow
In price-weighted indexes like the Dow, the higher the price per share of a stock, the more impact its performance has on overall index returns - even though a lower-priced stock can be worth more. This can greatly skew performance. Both 3M and General Electric are currently included in the Dow. Both are household names and have been around for over 100 years, but GE is a much larger company by revenue, employees, and market cap (3M has a market cap of $41.2 billion, and GE $146.8 billion). But at $59.3 a share, 3M’s stock performance influences the Dow more than four times GE’s stock, which trades at $13.9 a share. Is 3M more indicative of US stock market and economic health than GE? Four times more indicative?

28 May 2009 The Next Move for Berkowitz, Marsico, and Weitz
Berkowitz relishes the low valuations that have resulted from 2008's downturn, and he said with a wink that he hopes this great environment won't go away too quickly. He dug into financial-services companies as their stock prices plummeted, scooping up such firms as American Express AXP at less than $10 per share. It took an iron stomach and a long-term purview to do so...

...Marsico also pointed out that there is now about $4 trillion sitting in money market funds right now earning nothing. As the economy stabilizes and people swing from fear to greed, he anticipates a big re-engagement with the stock market...

Reflecting on 2008, Weitz distinguishes the period from the lows of the early 1970s. In the early '70s, he woke up every day expecting the market to be down, in late 2008 he woke up every day wondering which pillar of the financial world had disappeared. Yes, this made for incredibly attractive stock prices, and Weitz says, "it would have been fun if it hadn't been so terrifying."...

18 May 2009 Many Bought Shares High, Sold Low
Since bottoming out, the Dow has surged 26%. That means investors who sold at the bottom have missed out on one of the most powerful rallies in decades. "Their timing was almost perfectly bad," said Dennis Houlihan, a Fort Wayne, Ind., financial adviser who tried unsuccessfully to steer three of his clients away from selling in early March. Mr. Houlihan said he hasn't heard from any clients who dumped stocks. "There's a tail between the legs. You don't want to rub their nose in it," he said...

13 May 2009 How to Value Stocks? Ignore Economic News
... most of the value of shares really depends on the cash they will generate many years, even decades, ahead. The next few years are only a minuscule part of the equation. "Since stocks do not have an expiration date and dividends grow over time," Mr. Inker argues, "the duration of stocks is extremely long. If we assume that half of the return from stocks in a given year comes from the dividends and half from the growth in dividends, most of the value of stocks comes from cash flows in the distant future."

How distant? Using Mr. Inker's hypothesis, it turns out that about 75% of the value of shares is actually based on dividends that will be paid more than eleven years from now. Half the value is based on dividends to be paid after 25 years, and a quarter on those to be paid after about 50 years...

12 May 2009 Have We Freed the “Silent Thief”?
While most investors worry these days about recession and perhaps even depression, inflation constitutes the primary longer-term threat. The problem lies in how the authorities have tried to battle today’s problems by pumping the financial system full of liquidity and by relying on even-larger doses of fiscal stimulus. Though it is hard to see how policymakers could have done anything differently in the circumstance, history also shows that such activities, if they go on for too long, will lead to inflation.

12 May 2009 Should You Bother With Government Bonds?
...But 40 years ago treasury bonds were yielding over 6.3 percent, about twice their yield today. It is mathematically impossible for government bonds to come close to matching those 12 percent returns in future decades. Stocks, on the contrary, can easily repeat their returns over the past four decades, since those returns were near their historical average...

... it is quite likely that bonds will not only underperform stocks in the future but will also give investors negative real returns...

12 May 2009 Too Fast, Too Furious?
...to help fund a stock buyback and investments, Microsoft announced its first bond offering in the firm’s 34-year history—in part to capitalize on these attractive stock valuations. The AAA-rated Tech behemoth will sell a total of $3.75 billion in 5-, 10-, and 30-year bonds, despite the fact it already has $25 billion in cash and short-term investments. Microsoft’s 10-year bonds are expected to pay 1.05% over comparable Treasuries, or about 4.2% at current rates. That’s an after-tax cost of less than 3%. The forward P/E on Microsoft stocks is 11.3 for an E/P of 8.8%. So the firm can borrow money cheaply and immediately boost its bottom line by buying back its own shares...

11 May 2009 Contrarian Patience Pays Off -- Finally
Warren Buffett famously said he tries to be fearful when others are greedy and greedy when others are fearful. For some money managers, that isn't just clever advice -- it is an entire investing strategy.

The idea of embracing out-of-favor stocks, sometimes called contrarian investing, isn't new. But the approach requires a strong stomach in the best markets, let alone during historic downturns...

09 May 2009 U.S. Gas Fields Go From Bust to Boom
Huge new fields also have been found in Texas, Arkansas and Pennsylvania. One industry-backed study estimates the U.S. has more than 2,200 trillion cubic feet of gas waiting to be pumped, enough to satisfy nearly 100 years of current U.S. natural-gas demand.

05 May 2009 There’s Hope in Those Dividends
Companies that have managed to increase their payouts in this tough economic climate may be a good target for a time-tested conservative investment strategy: buying shares of solid dividend-payers.

Since the end of 1979, investing in dividend-paying stocks in the S.& P 500 would have earned you 11.6 percent a year, on average, on a total return basis, versus 10.5 percent for the overall index. And the ability to sustain dividends is often regarded as a sign of a solid company, even in the current environment.

02 May 2009 Buffett Dismisses Stress Tests, Praises Wells Fargo
“I think I know their future, frankly, better than somebody that comes in to take a look,” Buffett today said of the bank stocks that Omaha, Nebraska-based Berkshire owns. Regulators “may be using more of a checklist-type approach.”

“If you look at Coca-Cola today, for example, and just looked at a balance sheet, it wouldn’t tell you anything at all about Coca-Cola,” the billionaire investor said today in a Bloomberg Television interview before Berkshire’s annual meeting. “It’s what the product is.”

“All banks aren’t alike by a long shot, and in our view Wells Fargo, among the large banks, has some advantages the others do not,” ... Buffett told shareholders today that he’d love to buy the entire bank or U.S. Bancorp and is unable to do so because Berkshire wouldn’t get permission from regulators..

01 May 2009 Berkshire’s Munger Favors ‘100% Ban’ on Credit Swaps
“If I were the governor of the world, I would eliminate it entirely -- 100 percent,” Munger said in a Bloomberg Television interview today. “That’s the best solution. It isn’t as though the economic world didn’t function quite well without it, and it isn’t as though what has happened has been so wonderfully desirable that we should logically want more of it.”

26 Apr 2009 25 Years to Bounce Back? Try 4½
So when did the overall stock market really make it back to its pre-crash peak? Just four years and five months after its mid-1932 low, according to data provided to Sunday Business by Ibbotson Associates...

15 Apr 2009 Back to the Future Investing
Who would have thought that a Depression-era investing style could be in vogue in 2009? But a growing group of investors are digging out their old textbooks and taking refresher courses in valuing companies based on margin of safety, current asset value and a slew of other concepts perfected 75 years ago. The market’s crash, while devastating to many people’s net worth, has created the types of bargains that drew many pros to investing in the first place—good businesses that can survive the crisis but are trading as if they’re dead. The recent rally hasn’t changed that...

14 Apr 2009 Stock Pros Who 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...

13 Apr 2009 Video: Marty Whitman interviewed by Steve Forbes
Great value investor Marty Whitman talks to Steve Forbes about the current state of the market. Topics discussed are:

- Importance of balance sheet and credit worthiness in stock picking
- Distressed bonds
- Mark to market accounting
- Why shorts are so much more powerful today

09 Apr 2009 How Cheap Is the Market?
The true valuation of the market is no where near as dismal as the aggregate earnings reported by Standard & Poor's suggest. When portfolios of stocks are weighted by market values, the market is cheap by historical standards. No one can say for sure whether March 9 will mark the bottom of this dismal bear market (I personally think it will), but I am sure that investors who hold a diversified portfolio of stocks today will be rewarded by above-average returns.

06 Apr 2009 John Dorfman: Obama Seems Smart Stock Picker-in-Chief
In the president’s words, “profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective on it.”

He added that the market “bobs up and down day to day. And if you spend all your time worrying about that, you’re probably going to get the long-term strategy wrong.”...

05 Apr 2009 What the Past Teaches Us About Today
Veterans of the 1973-1974 bear market talk about the similarities and differences with the current downturn -- and what that means for the future.

"Three or four years down the road, this will have proved to be an extraordinary time to invest," says Mr. Browne. He and Mr. Spears, 60, are among five managing directors and part-owners of Tweedy, Browne...

Dodge & Cox believes that the long-term outlook is bright, and that innovations and deeper integration of countries like China into the global economy will lead growth...

04 Apr 2009 Don’t bet on gold for doomsday
A brief video highlighting the myth of gold as an 'investment' or a 'safe haven'…

02 Apr 2009 The Granddaddy State
Challenging President Obama’s proposed budget, they warn about saddling the next generation with too much debt. Senator Judd Gregg, Republican of New Hampshire, argues that the president’s plan will “devastate future economic opportunities for our children and grandchildren.” Senator John McCain denounces “generational theft.”

This language implies that the current generation borrows and future generations pay. But borrowing creates assets as well as liabilities—and future generations will inherit both. It’s the relationship between assets and liabilities that matters most.

24 Jun 2009 Video: Warren Buffett on CNBC
Billionaire investor Warren Buffett discusses America's "economic war" with CNBC's Becky Quick

17 Jun 2009 Views on the Economic Crisis - Jean-Marie Eveillard
...in 2006 residential real estate prices began to decline. Not because the U.S. was in a recession, not because interest rates were too high, but it was simply a matter that the last individual with no income, no job and no assets was provided a mortgage with no money down. And, as residential real estate prices began to decline, the credit cycle turned and the deleveraging in the financial sector and in the consumer sector began.

Now, the authorities were kind of slow in noticing that we were at the beginning of a major financial crisis. Indeed, Mr. Bernanke, the Chairman of the Fed, in late 2005 or 2006, publicly said that residential real estate in the U.S. was not in a bubble at all, and residential real estate prices had gone up because of the inherent strength of the American economy. When somebody at a high level says something truly stupid, you have to wonder whether he's just being stupid or whether he's lying through his teeth. He knows that there is a bubble, but he doesn't want to say so for political reasons or to not dent the confidence of the public. So, most of the time, those people in high places, it’s not that they are stupid, but they are acting in bad faith.

And indeed, Larry Summers in 2005 at the summer meeting, which the Fed organizes in Jackson Hole, Wyoming, a lesser known economist presented a paper that said there was trouble brewing and that a financial crisis might be around the corner. Larry Summers immediately ridiculed the poor fellow. So, neither Mr. Bernanke nor Mr. Summers saw the crisis coming.

What does that mean for the stock market in the U.S. and the rest of the world? People who were selling stocks in the U.S. in February either were panicking or believed that the deleveraging taking place would ultimately cause genuine deflation, because deflation is a killer for stocks.

I always thought that the odds of deflation being the ultimate outcome were extremely low. In 2002 Mr. Bernanke wrote a paper on avoiding deflation, which he thought was a danger in 2002, even though it was not. He was repeating what Milton Friedman said before, that in a pure paper money system you can always bypass the banks. Friedman used the metaphor of the helicopter whereby raining $100 bills on the population. There is no doubt that the $100 bills would be used to spend on a variety of things.

Monetary policy could result in what they call “pushing on a string”. Even if additional liquidity is provided to the banks, the banks refuse to lend because they’re shaking in their boots; or if the banks are willing to lend, the consumers and corporations, also shaking in their boots, and are unwilling to borrow. So, you end up pushing on the string and deflation proceeds in spite of the Fed providing extra liquidity.

It's true that in a pure paper money system with no constraints you can always arrest deflation; create inflation by increasing nominal spending. As I said before, inflation is bad but deflation is worse, so the authorities will always choose inflation.

I do not believe that deflation would be a problem with the stimulus in place, and if necessary, there will be more stimulus put in place. The current stimulus is enough so that the economy will stabilize and start recovering. Some people say stocks are not as cheap as they were in 1974 and 1982, which is admittedly true, but at the same time, there is much less competition today from cash and treasury bonds than there was then. If I owned treasury notes or bond, I wouldn't sleep too well at night. To some extent they are an accident waiting to happen.

11 Jun 2009 The Signposts of Change: Economics, Rules, Markets
Transcript of the video link below...

11 Jun 2009 The Signposts of Change: Economics, Rules, Markets
Excellent Video/slides presentation by Ron Muhlenkamp of Muhlenkamp & Company Investment Management discussing the current economic downturn and the markets (Requires Windows Media Player).

09 Jun 2009 Video: John Rogers of Ariel Investments on CNBC
Value guru John Rogers of Ariel sees the current investing climate as the best buying opportunity of a lifetime...

08 Jun 2009 Video: Charles Bobrinskoy, vice chairman of Ariel Investments on Bloomberg
Likes Aflac, JPMorgan and Disney

31 May 2009 Robert Rodriguez of FPA Capital speaking at Morningstar Investment conference
During the 1998-2000 performance derby races, a head long rush into speculation took place when growth stock “investment” managers chased Monopoly money-like stocks called “dot com” and other types of technology stocks. The fear of being left behind by not owning them was quite evident and I was utterly shocked and dismayed by their capricious actions. Where was their discipline? What were they thinking and did they ever consider how they might destroy their client’s capital? At the time, I referred to dot com company valuations as, “not only discounting the future but also the hereafter...

While technology stock and growth stock investing hysteria were running wild, we did not participate in this madness. Instead, we sold most of our technology stocks. Our “reward” for this discipline was to watch FPA Capital Fund’s assets decline from over $700 million to just above $300 million, through net redemptions, while not losing any money for this period...

We are again running contrary to the consensus, shifting course in our equity investment strategy in a way many would consider to be high risk. We deployed more capital than at any other period in the last 25 years...

I believe superior long-term performance is a function of a manager’s willingness to accept periods of short-term underperformance. This requires the fortitude and willingness to allow one’s business to shrink while deploying an unpopular strategy...

28 May 2009 Olstein Funds market update
It is our belief that current opportunities in equity markets offer a favorable time to begin pursuing these longer-term investment goals. Investors who have recently been burned, or have exited the market, usually express a desire to wait until “markets look better” before re-investing or increasing their commitment to equities. In essence, however, this sentiment reveals a hidden belief that one can “time” the market. We strongly believe the most attempts to time the market regarding “buy” and “sell” decisions interfere with the longterm goals and objectives of equity investing. Attempts to time the stock market require two decisions: when to sell and when to get back in. Unfortunately, most investors get one or both of these decisions wrong and such wrong decisions can lead to compounded errors that result in a pattern of buying closer to market tops and selling near bottoms - a strategy which usually produces disappointing long-term returns. Historically, the majority of market gains have occurred in short-term spurts rather than being evenly spread throughout the year, thus necessitating a consistent percentage allocation to equities in lieu of intervals “in” or “out” of the market. There have been many studies published over the past 40 years demonstrating that the failure to be in the market in just a few of the best days each year can wipe out the long-term objectives of equity investing. These studies indicate why the odds are so poor in attempting to time markets over long periods of time in order to profit there from. During my 43 year career, I have seen many attempts by all kinds of gurus (who have established credibility in the short run by making prescient market calls) to time the markets over extended periods of time based on proprietary formulas which were predicted to produce above average profits for its followers. In my experience, all attempts to time markets with any degree of consistency over long periods of time in order to produce profits, eventually failed. Rather then succumb to the desires of the mass of investors to time markets; we believe it is our mission to find securities to buy that we believe have the ability to either outperform the market or at the very least capture the positive market returns that have been generated over long periods of time. It is significant to note that these positive stock market returns have been generated despite the intermittent bear markets and corrections that occur from time to time.

28 May 2009 Video: Bruce Berkowitz on Bloomberg
Bruce Berkowitz of Fairholme likes Pfizer, Sears and Boeing...

28 May 2009 Video: David Winters on CNBC
Opportunities across the globe, with David Winters, Wintergreen Advisers CEO...

28 May 2009 Video: Bill Nygren on CNBC
Discussing investment opportunities and financial regulation, with Bill Nygren, The Oakmark Fund portfolio manager...

28 May 2009 Video: Wallace Weitz on CNBC
Winning market strategies, with Wallace Weitz...

28 May 2009 Video: Bruce Berkowitz on CNBC
How to make money by counting cash, with Bruce Berkowitz, Fairholme Capital Management president...

27 May 2009 Investing in Hell with Chris Davis
The Selected and Clipper manager reflects on the notion that you make most of your money in a bear market, you just don't realize it at the time...

23 May 2009 Audio/Slides: Longleaf Partners annual presentation
Excellent series of audio commentaries and slides by Mason Hawkins of Longleaf Partners discussing value investing, the current market conditions, and specific stocks in the funds…

21 May 2009 Video: David Winters of Wintergreen Advisers
David Winters Interviewed on Bloomberg. He sees value in NSRGY, SCHP, GS, GD...

20 May 2009 Tweedy Browne annual letter
...unprecedented flight to a “safe harbor” on the part of investors, with government bonds or money market funds being the preferred parking spot whether you were American, French, German or Singaporean. (Money market funds currently hold approximately $3.8 trillion dollars – a trillion dollar increase from 2007.) Investors quickly discovered the problem was not just a US problem as large quantities of these “toxic” debt securities were found on the balance sheets of financial institutions all over the world, particularly in Western Europe. In a matter of months, financial markets and economies experienced what Warren Buffett has termed “cardiac arrest,”...

There is no doubt that many economies face enormous challenges. There is not going to be a simple or quick fix to solving the economic problems, nor are economists likely going to be able to pinpoint which decisions started the economy on a recovery path once it begins. Today, the old adage in the media that “airplanes landing don’t make news; airplanes crashing make news” has never been truer. We are overwhelmed by negative news, which no doubt affects people’s behavior and makes a bad situation worse. Comparisons are routinely drawn between the 1930s on the one hand and Japan’s “lost decade” on the other. There is no dearth of “informed” opinion on these matters, only a dearth of consensus of opinion. Some observers even debate the future of capitalism. Without in any way suggesting we are trivializing the problems, we don’t subscribe to a 1930s or Japanese comparison.
The current environment is neither one. Nor do we subscribe to the end of capitalism. To paraphrase Winston Churchill, capitalism is the worst economic system except for all the others that have been tried. While no doubt there will be regulatory steps aimed at dampening some of the current excesses, there will be plenty of room to tempt the “animal spirits.” When all of the uncertainty associated with these problems is combined with unprecedented volatility in markets around the globe, the psychological stress can reach a breaking point. Without a framework to ground you in objectivity, the stock market will inform your investment decisions, which carries the risk that the volatility of your thinking will reflect that of the market. As Jeremy Grantham recently observed, this could also lead an investor to become paralyzed and unwilling to make any decisions...

Recent examples of companies whose stocks we have been accumulating in our Funds’ portfolios and which illustrate our thinking are Norfolk Southern Corporation (United States), Krones AG (Germany), Henry Schein Inc. (United States) and Guoco Group Ltd. (Hong Kong).

A stock that we own in the Tweedy, Browne Value Fund and have recently been buying for our Worldwide High Dividend Yield Value Fund is Norfolk Southern Corporation (“NSC”), which is one of the seven remaining Class I US freight railroads. (We have also made investments of late in both Burlington Northern Santa Fe Corporation and Union Pacific.) Norfolk Southern transports raw materials, intermediate products, and finished goods across a rail network covering primarily the Eastern and Southeastern part of the United States. It stands out not only because it is one of the statistically cheapest of the railroad stocks, but it also has a very attractive dividend yield.

Our interest in the rails is driven primarily by the pricing power they now have as a result of a significant reduction in rail capacity over the last 20 years. Since the rails were deregulated in 1980 they have consolidated, shed employees, and taken significant track out of the rail system which, when combined with slow but steady increments in traffic volume, has resulted in a tripling of track utilization. The pricing power of the railroads really emerged when volume growth resumed coming out of the 2001 recession. By then, the dust had settled on rail consolidation and integration issues had stabilized. The industry was left with only six Class 1 railroads (down from about 23 in 1980 and 76 in 1965) and it became apparent that the industry was capacity constrained. Today, the primary focus of the railroads is on improving returns on invested capital. They have shown that they are completely unwilling to sacrifice price for volume or invest in their networks unless they can earn economic returns on their investment. In addition to tight capacity, NSC’s ability to raise prices is aided by high levels of shipper captivity. Between 50% and 70% of NSC’s shippers have no alternative means of shipping their freight. Lastly, we like the fact that there are high barriers to entry and virtually no risk of technological obsolescence. These factors, when taken together, have allowed the rail industry to raise prices and thus increase returns on capital.

We think the railroads will be able to raise prices in the 5% to 6% price range for the next several years. With rail cost inflation averaging about 3%, we believe Norfolk Southern will experience increasing margins, returns on invested capital, and free cash flow. As volumes pick up, and the railroads continue to take market share from trucks, we think that Norfolk Southern should be able to grow operating income in the low double digits for the next several years. For these reasons, we think Norfolk Southern is intrinsically worth at least 10x EBIT, and feel comfortable buying it in the stock market at 6x to 7x EBIT...

12 May 2009 Video: Legg Mason's Hagstrom Recommends Microsoft, Nokia, Cisco
Robert Hagstrom, a senior vice president at Legg Mason Funds Management Inc. and author of "The Warren Buffett Way," talks with Bloomberg's Pimm Fox about investment strategy...

11 May 2009 Pzena Investments - Q1 commentary
The past nine months in the financial markets have strained the patience of even the most seasoned investor. Uncertainties surrounding the length and depth of the recession and the impact of government fiscal and monetary actions have led some investors to move to the sidelines, waiting for a clear signal as to when the bottom is behind us and it's safe to get back into the market. While it is highly tempting to try and time the market or to try and integrate economic forecasts into thinking about the markets, the record on doing so is highly suspect. For example, in the last 16 trading days of the quarter (from the market's bottom), the S&P 500 was up over 16%, despite being in the midst of mostly unsettling economic data.

Absent an unusual talent for market timing, sticking to a time-tested investment strategy has proven to be the most effective means of generating excess returns over the long haul, even despite the inevitable setbacks that are part of such a strategy...

07 May 2009 Legg Mason's Bill Miller Sees Opportunity In Financials
The Standard & Poor's 500 Index will probably be 20% to 30% higher by the end of the year, perhaps more, and U.S. financials will likely offer the greatest return over the next two years...

Looking at the overall equity market, "everything is on sale," Miller said...

Among financials, Miller currently likes Wells Fargo (WFC), Capital One Financial Corp. (COF), American Express Co. (AXP) and in the broader insurance area, Aflac Inc. (AFL) and Prudential Financial Inc. (PRU)...

06 May 2009 Century Management Advisers - Q1 2009 Commentary
While sharp market downturns cause fear, panic and economic dislocation, they are oftentimes a necessary precursor to an upturn as they force individuals, corporations, and even the government to get their balance sheets and financial statements in order. We believe this is taking place today as corporate and consumer debts are being paid down, excess costs and expenses are being reduced and eliminated, and savings rates are increasing. It is out of all this pain and discomfort that we believe the seeds of recovery are being planted, and eventually substantial profits will be borne. The world is not ending, the majority of people will remain employed, most people will make their mortgage payments, and our country, with all of its global reaching products, services, and innovation, will continue to be an economic leader and force throughout the world. Successful investing over the long-run has always required patience and long-term perspective; this has never been truer than today.

In the 2008 Berkshire Hathaway annual letter to shareholders, Warren Buffet said he's "certain the economy will be in shambles throughout 2009 -- and, for that matter, probably well beyond -- but that conclusion does not tell us whether the stock market will rise or fall." Buffett continued, "Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America's best days lie ahead." We could not agree more.

In this market, the most important thing shareholders need to do is look out two or three years instead of succumbing to the temptation to look out two or three months.

05 May 2009 Heartland Funds - Market Commentary
Market cycles typically coincide with overall investor outlook and confidence...

... That said, we can’t help but notice the remarkable continued build up of cash ... We believe that this mountain of liquidity could be a continued stimulus for stock appreciation as investors regain confidence in stocks.

02 May 2009 Bill Miller, Q1 2009 Market Commentary
Let’s start with what banks do. Banks are, broadly speaking, in the business of collecting liquid short-term assets in the form of deposits and turning them into illiquid long-term assets in the form of loans. Not only do they take our liquid assets and make them illiquid (they do retain enough liquidity to meet anticipated demands from depositors for cash), they create many more loans than they have capital to support if too many of the loans go bad. This leverage is about 10 to 1. Since the assets are 10x the capital supporting them, it doesn’t take more than third-grade arithmetic to conclude that if the value of the assets they hold fall more than 10 percent on average, they are “insolvent” (the quotation marks are there because the whole argument of those who support some kind of nationalization turns on confusing the different predicate logics of the single term “insolvent”). Last year the S&P 500 fell 38%, which is a reasonable proxy for how much asset values declined on a mark-to-market basis. Ergo, the system is insolvent and either needs to be nationalized or it needs, say, a trillion dollars of new capital (which was an estimate from a bank analyst last week).

When I was in grad school well over 30 years ago, I had a professor who would occasionally mark “ISSW?” next to what I had thought was a particularly clever argument. It stood for: “If so, so what?” and might also be appropriately appended to the argument about insolvency. Sometimes those who make that argument say the banking system is “technically insolvent,” which begins to shed some light on the “so what” part. The notion of insolvency, as typically understood, means you don’t have the wherewithal to meet your obligations as they come due. But that is certainly not the case with the banking system as a whole, or with any major bank. Banks, in fact, are flush with cash, have deposits flowing in, and have $800 billion of EXCESS reserves on deposit at the Fed. Most of the big banks that have reported results recently are profitable (Wells Fargo had record profits), and most improved their capital ratios. Not surprisingly, the same analysts who expected the banks to report losses in the first quarter dismiss the earnings as due to nonrecurring items, unusual market conditions (very wide spreads) and accounting gains. Of course, when those same conditions led to large losses being reported last year, those losses were considered all too real.

Consider the issue of mark-to-market accounting, which has been the subject of so much controversy. Supporters say it serves the goal of transparency and helps illuminate the true financial condition of the enterprise. Opponents say it does no such thing, just the opposite, in fact, confusing market prices with underlying values, and injecting needless volatility and confusion into bank financial statements.

The irony is that we have been here before: the same arguments were made in the 1930s when for most of the decade banks marked assets to market. As asset values fell, depositors fled, banks collapsed, and the depression wore on. In July 1938, the Federal Reserve bulletin announced that mark-to-market accounting was being suspended, and that bank assets should be valued on long-term safety and soundness, and not daily price fluctuations. That was also the time the uptick rule was instituted to slow down short selling. Coincidence or not, those two policy measures coincided with the end of the vicious bear market of 1937 and 1938. It is eerie how the relaxation of mark-to-market accounting rules a few weeks ago and the announcement that some form of uptick rule would be reinstituted also coincided with the bottom of this bear market. Policies and rules matter.

A couple of other points on mark-to-market: Showing market values, or estimated market values, for assets is a good thing. But requiring bank capital ratios to be adjusted accordingly is not. Leaving aside the current controversy, consider that whenever we have another asset bubble and irrational exuberance returns, banks will have to mark up their assets, no matter how absurdly overpriced they are. It is also telling that the bears appear to want only those assets that can be marked down marked to market. None are calling for buildings built years or decades ago whose value is far in excess of carrying value to be marked up. And none has ever been heard to call for the deposit bases of major banks to be marked to market, which would generate billions of excess capital for those banks if the deposit franchises were carried at market...

01 May 2009 Weitz funds Q1 2009 commentary
Bear market rallies can be explosive and the recent move may well be another false start. We continue to believe, though, that stocks will turn up long before the economic news turns positive and that it is impractical to try to wait to invest until all the market “uncertainties” are cleared up.

Our initial response to the developing credit crisis and recession was, paraphrasing Kipling, to “keep our heads while those about us were losing theirs.” Taking patient, contrary positions in the face of “temporary” bad news has served us well for the past 25+ years, but the scale of this bear market has made that approach expensive. As our friend Tom Gayner pointed out in the recent Markel annual letter, “pure unadulterated panic would have been the best investment approach to take in 2008.”

We look for understandable businesses with strong balance sheets and defensible competitive positions that generate excess cash and are run by managements we trust to allocate capital well.

Our largest “financial” holding now is Berkshire Hathaway which has a large insurance business but is very broadly diversified. Our other significant financial position is Redwood Trust. Redwood invests in troubled mortgage securities—a target-rich area in today’s world, to say the least. Redwood does not use borrowed money to buy these securities, so while their investments are subject to credit risk, Redwood is not subject to margin calls and cannot be forced to sell into a weak market.

We are wary of the short-term economic outlook, but we believe that there are a number of quality businesses whose stocks are selling well below their conservatively calculated business values and that we will eventually be rewarded for buying these stocks at bargain prices.

23 Apr 2009 Video: Bill Nygren of Oakmark Funds
Bill Nygren interviewed on CNBC, shares some of his stock picks:

American Express (AXP)
Encana (ECA)
Apple (AAPL)
State Street Corp. (STT)
Liberty Media Capital (LCAPA)

21 Apr 2009 Video: David Dreman on CNBC
Now is the opportunity for value to be seen once in a lifetime, says David Dreman, Dreman Value Management chairman/chief investment officer.

20 Apr 2009 Warren Buffett on Wells Fargo
'Banking is a very good business unless you do dumb things,' says Wells Fargo's largest shareholder...

...What I pay attention to is earning power. Coca-Cola has no tangible common equity. But they've got huge earning power. And Wells ... you can't take away Wells' customer base. It grows quarter by quarter. And what you make money off of is customers. And you make money on customers by having a helluva spread on assets and not doing anything really dumb. And that's what they do.

...The difference between getting your money at 1-1/2 % and 2-1/2% on a trillion-dollar asset base is $10 billion a year. It's hard to overemphasize that...

17 Apr 2009 Longleaf Partners Funds First Quarter 2009 Commentary
When we discuss the characteristics of the businesses we own, something we can talk about with a degree of certainty, many lose interest. Market commentators’ remarks often imply that the old-fashioned approach of buying and holding individual undervalued securities as a protection against future events is not only antiquated but worthless in this environment. Because macro events indeed dominated all returns in all asset classes in 2008, people illogically are extrapolating that macro events will exclusively dictate all future performance.\

Security analysis not only remains relevant, but is more important today than at any point in Southeastern’s history. Current conventional wisdom, which holds the opposite view, is pricing in an Armageddon macro scenario and driving equity prices to levels that offer huge opportunity to a good business analyst and long-term investor.

Because most have abandoned security analysis and long-term investing, and many have sworn off equities for fear of short-term macro uncertainties, our opportunity to own severely discounted dominant companies has never been better...

16 Apr 2009 Ron Muhlenkamp's review of events that impacted the markets during Q1 2009
We believe that, long term, stock and bond prices reflect economic values. But for shorter periods of time, prices are set by market supply and demand, much like any other auction...

We believe that deleveraging by hedge funds and redemptions at both hedge funds and open-end mutual funds were at the center of the forced selling...

While forced selling was taking place, there was no forced buying. There may have been as much as $1 trillion of forced selling in ’08, but there was not enough buying to offset it. For those who did buy in ‘08, further price declines made it painful, so buying was quickly discouraged. Further, any buying by banks and insurance companies was discouraged by “mark-to-market” accounting...

We find it interesting that, as of mid-March ’09, we’re seeing forced buying. The various programs coming out of the federal government are beginning to spend money by buying mortgage-backed securities and Treasury bonds. The latest initiative, TALF, states that it will buy securitized non-mortgage-backed type debt, including credit card debt and auto loans.

In summary, I think that the combination of forced selling ending, and forced buying beginning, along with the alleviation of mark-to-market accounting changed the game in terms of short-term supply and demand...

15 Apr 2009 Fairfax's Prem Watsa Says Credit-Default Swap Gains Are ‘History’
Fairfax will continue to invest in equities such as Wells Fargo & Co., Johnson & Johnson and Kraft Foods Inc. Watsa said he also likes U.S. Bancorp...

“Stock prices are reflecting a lot of the pessimism that people see,” Watsa told reporters after the meeting. “We are liking stocks because a lot of it is discounted already.”

15 Apr 2009 A Portfolio of Great Companies at Cheap Prices
Of course, Hawkins, a crusty legend in the mutual fund industry, couldn't care less about short-term results. Operating from Memphis, Tenn., he's run Longleaf since its inception in April 1987 (Staley Cates became a co-manager in 1994), adhering strictly to a bottom-up, value-oriented discipline with an eye toward the long term.

One of Hawkins's favorite measures is to compare a stock's free-cash-flow yields to the yield of Treasuries. ...he says, "stocks have never been cheaper" during his 35-year investment career.

Hawkins notes that many of the holdings in his concentrated portfolio, such as Dell (DELL), Disney (DIS), eBay (EBAY) and DirecTV (DTV), are paying free-cash-flow "coupons" well into the teens. And, unlike the fixed-interest payments of Treasury bonds, these "coupons" will grow over time...

09 Apr 2009 Oakmark Funds commentary
“How many times does the end of the world as we know it need to arrive before we realize that it’s not the end of the world as we know it?”

Investors are always faced with the choice of investing for safety or of assuming risk in exchange for the higher returns that typically come from owning businesses. Over the past eighty years, owners of stocks have been well rewarded for taking that risk. The annualized return from owning the S&P 500 has averaged 9% since 1928, compared to only 4% from owning short-term government bonds. And that return advantage has come despite three periods during which stocks drastically underperformed risk-free assets.

As investors try to decide what to do now, I think it is useful to contrast two options. Let’s assume investors are making their decisions for a five-year time horizon. Were the time horizon any shorter, we would say stocks shouldn’t even be considered because short-term results can be too random. One option for an investor is to say “no” to any risk, and invest in a five-year government bond. Many investors, stinging from recent losses, are making that very choice. The annual yield for that bond today is 1.8%. So, at the end of five years, that investor could be certain to have a 9% return (not considering either taxes or inflation). The other choice is to buy equities, anticipating a higher return in exchange for accepting uncertainty. Can history give us any guide as to what that return might be? One approach would be to assume that returns would simply match the historical average of 9% per year, or 54% compounded over a five-year period. That answer, however, ignores the effect of the starting price. I think the following is more useful.

First, the dividend yield of the S&P 500 is now about 3%, so over five years the equity investor should receive a 15% return plus or minus price change. We can estimate the S&P price five years from now by estimating both its earnings level and its P/E ratio. Over the past 80 years the median P/E ratio for the S&P 500 has been 15 times. I could argue that today’s very low rates on government bonds suggest future P/Es should be higher, but let’s not bother with that complexity. Earnings are trickier to forecast. Operating earnings for the S&P 500 peaked at $88 in 2006 but the consensus forecasts a trough at about $62 this year. Extrapolating either peak or trough earnings is not likely to be productive. Instead, let’s look back over the past thirty years. A regression analysis of the past thirty years shows that trend earnings for 2009 are about $84, or 5% below the peak achieved three years earlier. Further, that same regression analysis calculates that earnings growth has averaged between 6 and 7% per year. Extrapolating based on those numbers puts trend line earnings for 2014 at about $115. Multiplying $115 in earnings by a P/E of 15 produces a 2014 expected price for the S&P 500 of 1725, 116% higher than today’s price of 798. Were that to happen, the annualized return for the next five years would be about 20%, a little more than twice the historical average, and more than ten times the bond return.

What about the downside? By 2014, the S&P could fall to about 750 and still match the return on a five-year bond because the current dividend yield exceeds the bond’s interest rate!

06 Apr 2009 I think almost our entire portfolio is selling at a back-up-the-truck price!
Outstanding Investor Digest - Q&A with Fairholme’s Bruce Berkowitz.

...one of the definitions of a bear market is that there are more great ideas than money out there. And that’s what we’re facing today. There are just so many ways, in my opinion, to make significant money over the next decade or two...

27 Mar 2009 The $2-Billion Man
Prem Watsa is the richest, savviest guy you’ve never heard of. He predicted the crash of ’87, the Japanese collapse of 1990 and last year’s meltdown, which he parlayed into a huge payoff. Now he’s gobbling up shares at rock-bottom prices. What he knows and why you should pay attention...

25 Mar 2009 The Weighing Machine by John Rogers
Patience is a virtue in value investing and, like Graham, I tend to pay attention to the scale more than the ballot box.

There are lots of "toxic" assets on balance sheets today. In all likelihood they will be worth plenty in the future, but right now they aren't. Mark-to-market accounting means a company's value rests upon last-trade prices rather than the value that it stands to create over the coming years. I believe, like Steve Forbes and Warren Buffett, that this system needs fixing.

Recommends: Dell, Hess, Janus Capital.

16 Mar 2009 Video: Warren Buffett on Bloomberg
Full Bloomberg interview of Warren Buffett

10 Mar 2009 Fairfax Financial Holdings - Annual Report excerpts
In November of 2008, after the stock markets had dropped 50% from their highs, we decided to remove the equity hedges on our portfolio investments. Also, as the yield on long (30-year) U.S. Treasuries began to drop below 3%, we sold almost all our U.S. Treasuries.

In previous annual reports, we have discussed the holding of some common stock positions for the very long term. Last year we identified Johnson & Johnson as one name and said that Mr. Market may give us more opportunities in the future. As shown in the table below, at the end of 2008 we had taken advantage of the major decline in stock prices to purchase additional positions in outstanding companies with excellent long term track records which we contemplate holding for the long term:

- Johnson & Johnson

- Kraft Foods

- Wells Fargo Bank

09 Mar 2009 The Torray Fund - Annual Report
...a market environment characterized by low volumes and high volatility which has attracted speculators but scared off long-term investors. Sources at the New York Stock Exchange have told us there are an estimated several million day-traders gambling with their 401(k) plans - some, unfortunately, unemployed. These trading accounts can be leveraged four-to-one ($100,000 of equity supports a $400,000 portfolio) provided the positions are liquidated by the end of each day. You may have noticed the market’s recent gyrations and heavy volume between 3:40 and its 4:00 close. It is during this period that many large blocks of stock and most of the outstanding day-trading margin debt are cleared, a phenomenon that occasionally has caused volume to as much as double in 20 minutes. (The orders are entered into the Exchange’s electronic system, nicknamed “the dark hole,” where they are matched by computers.) This activity has triggered wild swings in the Dow Jones and S&P 500 indices, heightening investors’ anxiety...

Also worth noting is the Federal Reserve’s measure of assets available for immediate spending - i.e. cash or equivalents - jumped 86% to $8.9 trillion in the first 11 months of last year. That is enough to buy 75% of all domestic stocks. By contrast, at the market’s peak in early 2000, the same Fed measure totaled $5 trillion, or 20% of the market’s total value, suggesting that investors are more fearful of losses at today’s low prices than they were when the market was twice as high. If history is a guide, when the current financial distress passes and the economy recovers, investors will quickly change their minds and pile back into stocks, causing them to rally sharply. This classic “buy high - sell low - buy high” syndrome has afflicted investors since the earliest days of exchanges.

06 Mar 2009 Heartland Advisors - Annual Report
Uncertainty, irrationality and volatility will most likely continue in 2009, yet during economic turmoil it becomes even more important to seek out individual businesses with sound balance sheets and competent leadership.

As investors sought refuge from volatility in 2008, assets moved to cash and reached record levels. We believe this will eventually fuel the next rally. Combined with remarkably low valuations, we remain optimistic.

No matter the crash of 1987, the tech wreck or the unfolding crisis today, Heartland’s message remains unchanged. We believe times like these present exceptional opportunities for the disciplined, long-term value investor.

...we believe investors have overreacted by driving down stock valuations to levels not witnessed in decades, offering the opportunity to buy blue chip companies at value prices.

06 Mar 2009 Clipper Fund - Annual Report
While capital market downturns are nothing new, the dislocation and panic that swept through the markets in 2008 were unique in scale, severity and pace.

Turning to the economy, as is often the case, the capital markets have been leading indicators. What began as a financial crisis tied to falling real estate prices is swiftly becoming a broad-based economic crisis. Consumer and corporate spending are in a free fall. Auto sales for example fell a staggering 35% in the fourth quarter alone. Unemployment is increasing sharply as are virtually all other negative indicators. As these metrics deteriorate, however, it is worth remembering that the front side of a recession is always the scariest.

As always, the only value of mistakes lies in the lessons learned. Looking back at the crisis of 2008, the lessons can be reduced to a single word: liquidity. In a nutshell, we learned that while the answer to the question, How much long-term debt is appropriate for a given company? varies by industry and business, the answer to, How much short-term debt is appropriate for a given company? should almost always be zero. In 2008, even companies with plenty of earnings and equity relative to their debt found themselves shut out of the credit markets.

Because a bear market presents the opportunity to benefit from earnings growth, dividend yield and multiple expansion, I had always been a bit jealous of the opportunities that my father and grandfather were given in the terrible bear markets of the last 60 years. Now that our generation has finally been given the same opportunity, I recognize the wisdom of the saying, “Be careful what you wish for.” In a time of fear and panic, investments will never seem as straightforward as the example given above. More important, even if investors can recognize such opportunities with their heads, their stomachs often have other ideas. As legendary manager Peter Lynch observed, “The key organ (for investment success) is your stomach. Everyone has the brainpower, but not everyone has the stomach for it.”

In today’s bear market, investors are racing for the exits. Cash is pouring into “riskless” securities like short-term U.S. Treasuries with virtually no yield. Although such a choice feels good, it is, given the near certainty of inflation, likely to prove very costly. Meanwhile, investments in high grade common stocks, which feel like a terrible choice, are likely to prove very profitable and are almost certain to outperform cash over the next decade.