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.

08 Nov 2009 The dilemmas facing policymakers
It is also possible that, at some stage, fiscal easing could become counterproductive. If the markets start to believe a country’s deficit is out of control they will force its bond yields sharply higher, in effect tightening monetary policy. That is why economists talk of the need for governments to have a credible medium-term plan to cut their deficits.

07 Nov 2009 The Dark Side of the Productivity Surge
The third-quarter productivity numbers show that business is squeezing more work out of employees in hard times.

The problem is how the productivity growth was achieved. It wasn't because of clever efficiency measures or the purchase of wonderful tools that help people get their jobs done faster. Such improvements take years, not mere months. Rather, it was because companies cut jobs and work hours drastically.

06 Nov 2009 Jeremy Grantham - GMO Quarterly Letter
Yet Another Plug for U.S. Quality Stocks: Our main argument is quantitative. Quality stocks (high, stable return and low debt) simply look cheap and have gotten painfully cheaper as the Fed beats investors into buying junk and other risky assets, a hair-of-the-dog strategy if ever there was one. In our seven-year forecast the quality segment has a full seven-percentage-point lead per year over the whole S&P 500, or 9% over the balance ex-quality. This is now at genuine outlier levels.

In addition, there are qualitative arguments. We like owning high-quality blue chips if we are indeed going into a more difficult seven years than any we have faced since the 1970s. The problems of reducing debt and the potential share dilution that can go with it as it did in Japan for a decade, particularly play to the strength of the largely debt-free high-quality companies. And for nervous investors there is yet another reason for favoring quality stocks: their more than 50% foreign earnings component, which is higher than the balance of the S&P500 with its heavy financial component. In the long run, quality stocks have proven to be the one free lunch: you simply have not had to pay for the privilege of owning the great safe companies, as plain logic and established theory would both suggest.

03 Nov 2009 Berkshire Buys Burlington in Buffett’s Biggest Deal
Buffett said in 2007 that railroads may prosper at the expense of trucks. “As oil prices go up, higher diesel fuel raises costs for rails, but it raises costs for its competitors, truckers, roughly by a factor of four,” Buffett told shareholders in 2007 at his company’s annual meeting. “There could be a lot more business there than there was in the past.”

31 Oct 2009 Running Scared
A YEAR after the bursting of the housing, credit and commodities bubbles, Erik Davidson of Wells Fargo Private Bank is worried. He said he thought a new bubble had emerged, this time in something seemingly benign: cash.

With the dollar’s decline, “people are coming up to me at parties and saying, ‘I don’t do stocks anymore; I’m into currencies,’ ” Mr. Davidson said. “Speculating in currencies is riskier than stocks.”

29 Oct 2009 Why are banks so averse to raising equity?
The usual laws of corporate finance do not seem to apply to banks. Almost all big industrial companies—and decent analysts of them—are subject to a tight mesh of proven rules, backed up by decades of financial theory. Everyone agrees, for example, that accounting values are often flaky and that cashflow matters most when valuing a firm or trying to work out if it might go bust. The profitability of any activity, too, must be assessed before the magnifying effects of leverage are taken into account. In bank-land, however, anything goes. Accounting, not cash, is king. And most common yardsticks for measuring performance are all in some way distorted by leverage, not least return on equity (ROE)...

26 Oct 2009 Don't Get Crushed by the Stampede
...recent data regarding mutual fund flows from the Investment Company Institute (ICI) suggest investors might be galloping into bonds and foreign stocks at scary and unsustainable clip.

What’s so dangerous about investment stampedes is that, regardless if it's oil or ethanol, they tend to persist, which is exactly why it’s so easy to get sucked in. Given their current popularity, investors need to consider if these now-popular themes have already had their day in the sun. Fund flows suggest they have.

25 Oct 2009 Do Mutual Funds Cheat on Returns?
Investors have long known about “incubator” funds and how they distort returns through a phenomenon known as survivorship bias. A mutual fund family wishing to launch a new fund may quietly nurture several at a time. The funds that beat market averages are eventually marketed while ones that do poorly get closed. Like dead men, abandoned incubator funds tell no tales.

24 Oct 2009 7 Deadly Sins of Investing
In the case of stocks, a study by three finance professors found that "glamour" stocks, those with the most robust sales growth and highest ratio of price to cash flow during the previous five years, were miserable performers during the subsequent five years, compared with stocks at the opposite extreme. So to buy stocks with the highest past rates of growth and hold them indefinitely may be perilous to your wealth. You’d be better off buying and holding stocks whose past earnings growth was least impressive. The psychological phenomenon here is called "representativeness," or the tendency for us to believe even short-term trends will continue into the future...

19 Oct 2009 Warren Buffett's 'Buy American' - One Year Later
One year later, the benchmark S&P 500 is 14.9 percent higher than it was the night before Buffett's "Buy American" op-ed was published on Friday, October 17, 2008.

19 Oct 2009 The “Value Trap”
When earnings trough at the end of recessions and stocks rise in anticipation of a recovery, backward-looking price-to-earnings (P/E) multiples sometimes rise to alarming heights. But since the earnings invariably grow robustly in the recovery, the market can continue its rise even as multiples fall, which they always do in the recovery phase...

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.”

19 Jan 2010 Buffett Wants to Raise Posco Holdings, Company Says
Warren Buffett wants to increase his stake in Posco, Asia’s most profitable steelmaker said after its Chief Executive Officer Chung Joon Yang met the billionaire chairman of Berkshire Hathaway Inc...

15 Jan 2010 Bill Nygren Q4 2009 Commentary
We have frequently said that short-term performance numbers are more influenced by luck than by skill, and we have advised that investors shouldn’t read too much into numbers that are less than a decade in duration. We won’t alter that advice now that we have a good one-year number, but we also don’t want to allow the end of a decade to pass without commenting on our long-term results. Despite many mistakes for which we are still kicking ourselves, for the decade of the ‘00s the Oakmark Select Fund achieved a total return of 96% while the S&P500 lost 9%. That performance is the result of the talent and hard work of our entire investment team.

15 Jan 2010 Pershing Square buys 2 pct stake in Kraft
(Reuters) - According to Kraft, Bill Ackman's firm acquires stake...

14 Jan 2010 Video: Bruce Berkowitz on Bloomberg
Bruce Berkowitz, head of the $11.2 billion Fairholme Fund, talks with Bloomberg's Margaret Brennan about his investment...

12 Jan 2010 Video: John Rogers of Ariel Investments on CNBC
John Rogers, CEO of Ariel Investments, shares his outlook on the markets.

12 Jan 2010 Video: Bill Miller on CNBC
Legg Mason Capital Management CEO Bill Miller, who beat the S&P 500 15 years straight, shares his investment strategy.

11 Jan 2010 Tilson Funds - Commentary
Berkshire Hathaway
Under Warren Buffett’s direction, Berkshire's performance has been nothing short of remarkable over the past two years. His disciplined capital retention looked overly conservative for many years, but when the crisis hit there were few buyers and waves of panicked sellers, so he was able to deploy tens of billions of dollars in some terrific businesses, on highly favorable terms. He paid a full price for his most recent (and largest ever) investment, Burlington Northern Santa Fe, but it made sense for Berkshire – and only for Berkshire – because of the company’s low cost of capital, in the form of float from Berkshire’s vast insurance operations ($62 billion worth as of the end of Q3). Berkshire reported strong operating earnings and an unprecedented 10.1% increase in book value during the third quarter, which reinforce our belief that Berkshire’s stock, at around $100,000 per A share, is at least 25% undervalued.

Pfizer
Pfizer, which recently completed its merger with Wyeth, is weighed down by various concerns including the expiration of the patent on its largest drug, Lipitor, and the impact of Obamacare. Investors fear that health-care reform will hurt the entire industry, a key reason that the sector trades at just 12 times earnings, or 36% below the P/E of the S&P 500 (historically, such high-quality businesses have commanded higher P/Es than the index). We think that the pessimism is overdone.

Historically, however, investors in pharmaceutical companies have over-reacted to possible government actions (it was a fabulous time to buy the sector during the days of Hillarycare) and the end of patent protection on best-selling drugs, underweighting the value of the drug pipeline. Thus, we think the well-known negative scenarios are already priced into the stock, creating a situation ripe for positive surprises.

With the stock around $18, it trades at approximately 8x expected 2010 earnings of $2.26 per share. That’s far too low for a company of its caliber. While waiting for the market to recognize the value we see, investors should earn a dividend yield of approximately 3.5%.

American Express
We’re pleased to report that our analysis was exactly right, as the stock has approximately quadrupled since then. The company is recovering nicely from the perfect storm that hit it – a combination of external factors and the company’s own missteps – and analysts project that earnings in 2010 will rebound to $2.35/share, meaning the stock, at around $39, is trading at less than 17x earnings. This is a modest valuation for such a high-quality business, so we continue to hold the stock, though we’ve trimmed the position substantially.

09 Jan 2010 The Efficient Market Hypothesis, Behavioral Finance, and High ROE Businesses
EMH states that security prices reflect all publicly available information. It does not state, however, that this information must be cor- rect. In fact, because security prices are based in large part on unknown and often volatile future infor- mation (expectations), EMH is probably more consistent with the statement that the market is always wrong! Future reality is likely to always deviate from expectations to some degree.

This caveat is probably the best way to explain periods of heightened market volatility without violating the framework of EMH. It could be argued that in those periods the market was efficiently pricing in future expectations. It just turns out that those expectations were proven to be spectacularly wrong.

Unfortunately for EMH, that defense can only go so far. EMH relies on rational investors. More specifically, it needs marginal investors (those that are driving price movements) to objectively and accurately react to new information.

The modern study of Behavioral Finance got its start in the late 1970s based on the academic work of Amos Tversky and Daniel Kahneman. Their work focused on loss aversion – or what they called prospect theory. They found that individuals experience a greater amount of negative emotion associated with prospective losses than they do positive emotion associated with prospective gains. In other words, losses caused more emotional pain than gains caused positive feelings.

Another bias associated with loss aversion is called the disposition effect, which describes the tendency among investors to hang on to losing securities for too long for fear of realizing a loss, while selling winners far too soon due to eagerness to realize gains.

Another tenet of behavioral finance is recency bias. Recency bias explains the tendency among inves- tors to overweight recent experiences and extrapolate recent trends when making investment decisions. An example of such recency bias is a 1997 study by Yale professor Robert Shiller. He found that at the peak of the Japanese stock market, 14% of Japanese investors expected a crash, but that after the crash a significantly higher 32% of these same investors expected a crash. This bias would seem to be a prime candidate when thinking about root causes for market bubbles.

07 Jan 2010 Video: Bruce Berkowitz on CNBC
The Fairholme Fund's Bruce Berkowitz, Morningstar's domestic fund manager of the year, shares his investment secrets with CNBC...

05 Jan 2010 Berkshire's response to Kraft's bid for Cadbury
Omaha, NE (BRK.A; BRK.B)—Berkshire Hathaway has voted "no" on Kraft's proposal to authorize the issuance of up to 370 million shares to facilitate the acquisition of Cadbury. Berkshire, taking into account both its own holdings and those of its pension funds, believes that the 138,272,500 Kraft shares it owns – 9.4% of the total outstanding – make it the company's largest shareholder.

The share-issuance proposal, if enacted, will give Kraft a blank check allowing it to change its offer to Cadbury – in any way it wishes – from the transaction presented to shareholders in the proxy statement. And we worry very much that, indeed, there will be an additional change from the revision announced this morning.

To state the matter simply, a shareholder voting "yes" today is authorizing a huge transaction without knowing its cost or the means of payment.

What we know with certainty, however, is that Kraft stock, at its current price of $27, is a very expensive "currency" to be used in an acquisition. In 2007, in fact, Kraft spent $3.6 billion to repurchase shares at about $33 per share, presumably because the directors and management thought the shares to be worth more.

Does the board now believe those purchases were a mistake and that Kraft's true value is only the current price of $27 per share – and that it is therefore fine to structure a major acquisition based upon that price? Would the directors use stock as merger currency if the price were, say, $20 per share? Surely the true business value of what is given is as important as the true business value of what is received when an acquisition is being evaluated. We hope all shareholders will use this yardstick in deciding how to vote.

Our understanding is that Kraft must announce its final offer for Cadbury by January 19th. If we conclude at that point that the offer does not destroy value for Kraft shareholders, we will change our vote to "yes."

At this time, however, we believe no shareholder should vote "yes" when he can't possibly know what he is voting for.

02 Jan 2010 Warren Buffett's Berkshire Blasts Benchmark S&P Over Decade
Shares of Warren Buffett's Berkshire Hathaway far outperformed the benchmark S&P 500 stock index over the decade of the 2000s, with a gain of 76.8 percent.

The S&P dropped 24.1 percent, excluding dividends, over the same ten-year period ending today (Thursday.)

31 Dec 2009 Long and Strong
'People ask why I'm a long-term investor. I'm not against making money in the short term. I just don't know how to do it.''

Whatever is causing the undervaluation--typically market neglect, temporary operating troubles and/or the fact that the industry is out of favor--can persist for an inconveniently long time. So patience is a necessary virtue for those who still believe that value investing works.

30 Dec 2009 Video: Best Bets for the New Year
David Katz, chief investment officer of Matrix Asset Advisors, shares his best bets for 2010...

29 Dec 2009 Miller Makes Comeback After Three Years With Bet on Economy
“I was too optimistic at the beginning of the crisis,” said Miller. As the financial crisis deepened in 2008, “it was a very harrowing period,” Miller said.

“It is too early to pat ourselves on the back,” Miller said. “We’re just one year off of a very bad period, so we can’t get complacent.”

28 Dec 2009 Video: Year-End Outlook
Bill and Will Nasgovitz of Heartland Funds provide a brief 2010 outlook.

27 Dec 2009 Video: David Winters on Consuelo Mack
Noted value investor David Winters, who Smart Money magazine identified as one of the "world's greatest investors," joins Consuelo in one of her "Great Investor" interviews to share where he is finding value in the market now.

27 Dec 2009 First Eagle Funds - Intrinsic Value and Margin of Safety
With our efforts focused on minimizing permanent impairment of capital, we also do not promise to make you the most amount of money in any short period of time. You have seen that in our results. Look at the late '90s where we lagged and we were punished for it, but as Jean-Marie said famously back then, in that lagging period we did not change what we did or how we approached investing. In fact, he said, “I'd rather lose half my shareholders than half of my shareholders' money.” We did lose half our shareholders; we did not lose half our shareholders' money.

Looking at the subject of long term investing, people are a little upset that buy and hold hasn't worked for the last ten years. If you bought in 1999, your annualized return is at approximately minus 2% for ten years. But the buy and hold approach over the long term is wholly dependent on the price that you pay for something. If you bought Cisco at 100 times earnings in 1999, over the long term, you will lose money. If you bought 3M at eight times earnings, with a 4% dividend yield over ten years, there's a high degree of likelihood that you'll make money over the long term. But it all depends on what you pay. Buy and hold is not dead.

And finally, to those very simple concepts that Graham introduced to us and Buffett developed and Jean-Marie applied on an international stage, we've layered our own sort of attentiveness to loss avoidance. Buffett said it best when he said that the two most important rules to investing are, “Rule number one, don't lose money. Rule number two, see rule number one.” When he said “lose money,” he didn’t mean you buy a stock at $20 and it goes to $15. He means if you buy a stock at $20 and you later find out it's only worth $15, that's what is to be avoided at all costs.

22 Dec 2009 Ackman Says General Growth Shares Are Undervalued
General Growth Properties Inc., the shopping mall owner under bankruptcy protection, is undervalued and the shares may be worth as much as four and a half times yesterday’s price, William Ackman’s Pershing Square Capital Management LP said. General Growth rose 20 percent...

17 Dec 2009 Ariel Investments - Portfolio Company Spotlights
Companies discussed: Covidien plc, Newell Rubbermaid and Viacom.

16 Dec 2009 A Top Value Investor Dies - A Career Spent Finding Value
To thrive as a value investor, Christopher H. Browne once said, you have to "risk being called a dummy from time to time."

"Investment management is for us a 'grunt work' business," Mr. Browne wrote in a 2001 letter to shareholders. "Were you to visit our offices, you would be reminded more of the reading room in a college library than some frenetic trading room at a major brokerage firm."

14 Dec 2009 Christopher H. Browne of Tweedy Browne Company dies
We would like to extend our heartfelt condolences to his family, friends and colleagues at Tweedy Browne.

-- Dataroma team