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BRIEFING BOOK

Data Information Knowledge WISDOM

THE BULLS AND THE BEARS

Location: Forbes, New York, New York

About The Bulls ................................................................................. About The Bears ………………………………………………………….

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The Bulls And Bears in Forbes

"Veteran Fund Managers Dust Off And Reload,” 01/21/09....... "Cash For Sale," 07/03/08………………………........................ “Five Hot Stocks For The Long Run," 12/05/08……………….. "Keep Cool With Credit Card Firms," 05/05/09......................... "Welcome To Bubble World," 09/04/09 ………………………... "Wisdom From The Value Crowd," 01/21/09 …………………..

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The Bulls And Bears Interview ………………………………………

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ABOUT THE BULLS Intelligent Investing with Steve Forbes

Bruce Berkowitz is the founder, managing member, chief investment officer, chief compliance officer and chief operating officer of Fairholme Capital Management. Berkowitz is President and a Director of Fairholme Funds, Inc., an open-end management investment company. He also serves as a Director of White Mountains Insurance Group, Ltd. and AmeriCredit Corp.

In determining what investments to make, Berkowitz counts the cash that companies bring in, as that is what firms have available to them to spend. See Bruce Berkowitz's full interview with Steve Forbes. Jean-Marie Eveillard is the senior advisor and a member of the board of trustees at First Eagle Funds. Eveillard is also a senior vice president of Arnhold and S. Bleichroeder Advisers, LLC. Eveillard was named Morningstar's International Manager of the Year in 2001, and in 2003 received a Lifetime Achievement Award from Morningstar for building one of the most successful long-term records in the investment business. Eveillard buys the stocks of companies that are financially safe, which means there is very little or no debt. See Jean-Marie Eveillard's full interview with Steve Forbes.

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Tom Gardner is the chief executive officer and co-founder of The Motley Fool, an investment and personal-finance advisory service that advocates for investors. He and his brother, David, whom he co-founded the firm with, have also co-authored several best-selling books, including The Motley Fool Investment Guide, You Have More Than You Think: The Motley Fool Guide to Investing What You Have, and Rule Breakers, Rule Makers. Gardner looks for strong management teams that aren't constantly turned over. He spends more time evaluating the strength of a business than the value of its stock. See Tom Gardner's full interview with Steve Forbes.

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ABOUT THE BEARS Intelligent Investing with Steve Forbes

John Jacquemin is president and founder of Mooring Financial Corporation, a private investment firm that specializes in the management of alternative assets for high net worth individuals and institutional investors. Jacquemin received the Ernst & Young Greater Washington Entrepreneur of the Year Award in 2006.

Jacquemin doesn't think the March rally was "the real thing". He warns investors to be leery of the commercial real estate sector and investments related to consumer spending. See John Jacquemin's full interview with Steve Forbes.

Gary Shilling is the president of A. Gary Shilling & Co., Inc. Shilling was in charge of U.S. and Canadian economic analysis and forecasting at Standard Oil Co., which is now Exxon Mobil Corp. He later set up the economics department at Merrill Lynch, Pierce, Fenner & Smith and served as the firm's first chief economist. Shilling looks for bubbles growing in the markets. He advises investors to sit on the sidelines sometimes, as it's better to be absent in a declining market because markets fall faster than they rise. See Gary Shilling's full interview with Steve Forbes.

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Whitney Tilson is the founder and managing partner of T2 Partners LLC and the Tilson Mutual Funds. T2 Partners managed three private investment partnerships, T2 Accredited Fund, Tilson Offshore fund and T2 Qualified Fund. Tilson recently co-authored More Mortgage Meltdown: 6 Ways to Profit in These Bad Times with Glenn Tongue, managing partner of T2 Partners. Tilson advises investors to "not be a hero" and not feel forced to invest in anything. Instead of trying to find the next big thing, invest in cheap companies such as Berkshire Hathaway. See Whitney Tilson's full interview with Steve Forbes.

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THE BULLS AND BEARS IN FORBES Intelligent Investing with Steve Forbes

Mutual Funds

Veteran Fund Managers Dust Off And Reload Joshua Lipton, 01.21.09, 06:00 PM EST

Even the best fund managers lost money last year, but they stay focused on strategies that put them on top.

Mutual fund investors who invested in just about any long-only equity fund suffered big-time in 2008.

Unless they were smart or lucky enough to put money to work in bond funds, they suffered tough,

insomnia-inducing setbacks last year. The average fund lost more than 30%, says researcher

Morningstar, with even some of the most seasoned, battle-tested managers getting deeply in the red.

Consider the nightmarish case of Mason Hawkins and Staley Cates, the two longtime managers of

Longleaf Partners [LLPFX]. The well-regarded duo boast a very strong long-term record, and the fund

held up well during the first half of the year, better than most of its rivals. But then deep losses in energy

and international companies like Chesapeake Energy, Pioneer Natural Resources and Cemex hit the

fund hard. The result? A total return in 2008 of -50.6%. Over the last 10 years, through Jan. 9, the fund

has kicked back an annualized return of 1.10%, topping the S&P 500 by 2.48 percentage points.

Despite what an awful year it was, experienced mutual fund managers know that better times do lie

ahead. The historic stock decline means there are many opportunities now for those managers with

cash, courage and long time horizons. With that in mind, Forbes.com recently spoke to some of the

most skilled, successful managers in the country to gage their view of the markets and where they're

putting money to work, right now.

Bruce Berkowitz of the value-oriented, no-load Fairholme [FAIRX] fund looked invincible when

Forbes.com checked in with the Miami, Florida-based money manager in August. He could do no

wrong, it seemed. The 50-year-old Berkowitz started Fairholme fund in December 1999, and he had

consistently dominated the competition.

Recent declines in holdings like Boeing and Sears have stung Berkowitz's performance. For the year,

FAIRX posted a total return in 2008 of -29.7%.

Berkowitz says this is the toughest market in which he's ever invested. "Until November, we were

great," he says. "Then we fell off the cliff. We had significant cash, and we put that cash to work. We

bought cheap, and cheap became cheaper."

Still, a recent tough spell doesn't tell the whole story of FAIRX. The long-term record Berkowitz boasts

is still an impressive one, a five-year annualized return of 5.76%, beating the S&P 500 by 8.39

percentage points, and he clinches the No. 1 spot among his Morningstar peers for that time period.

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Berkowitz is now seizing opportunities in defense and health care. "I like them for this simple reason:

What is more important than the safety and health of your family?" he asks. Also, he says he likes

Hertz, given how much cash the company generates. "If any car rental company survives, it will be

them. They have a great name." Finally, he's looking to capitalize on the Obama administration's

intention to rebuild the country's infrastructure. Berkowitz is investing in United Rentals, which is the

largest equipment rental company in the U.S.

Overall, Berkowitz is getting greedy while others are fearful. "If now is not the time to invest, then when

is? There are great companies more than surviving. They have wonderful balance sheets. Once we

come out of this recession, they will thrive. This is the time that you plant the seeds of great

performance. The most money is made when you invest in what appears to be the most difficult of

times because companies are priced for the difficulty. In some cases, they are priced to fail."

Across the country from Berkowitz, in San Francisco, works John Osterweis, longtime manager of the

Osterweis Fund [OSTFX]. The veteran stock picker enjoys spending free time riding his horses in

Northern California, but when's not saddled up with those powerful Arabians, he's searching for out-of-

favor stocks that generate strong free cash flow (cash from operations minus capital spending) that

have a catalyst to trigger growth.

Why follow the cash? "It is a more accurate measure of profits and it's a leading indicator of where

profits will go," says Osterweis . "It gives companies much more flexibility. They can invest more

aggressively to expand, use the cash flow to de-leverage, take on leverage to make an acquisition or to

fund capital expenditures, buy back stock, or raise dividends."

Osterweis' no-load fund, which has $341 million in assets, did take it on the chin last year, posting a

total return of -29.2%, but its long-term record is still stellar. Through Jan. 9, the fund generated a 10-

year total annualized return of 7.27%, which leads the S&P 500 by 8.65 percentage points.

Osterweis says he's now staying generally cautious and conservative with a 40% cash stake, avoiding

cyclical names as well as the banks and brokers while preferring consumer staples, health care and

tech names that have stable, steady businesses. Current top picks include Crown Holdings, a

producer of steel and aluminum cans; Questar, a natural gas-focused energy company; and Johnson

& Johnson, a leader in the pharmaceutical, medical device and consumer products industries.

Before he gets more aggressive, Osterweis says he needs to see more healing in the credit markets.

"I want to get some sense that we are moving through the credit cycle and that banks are going to be in

a position to start lending again," he says. "We have all this stimulus coming into the banks, but then

the banks just turn right around and write off more bad loans, which means the stimulus really doesn't

stimulate anything. It just keeps the banks afloat. So I need a sense that we're at some kind of inflection

point. We are not there yet."

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In addition to Berkowitz and Osterweis, a smart growth guy with a great record is Robert Zagunis of

Jensen [JENSX]. The five-star fund, through Jan. 9, generated a 10-year annualized return 2.78%,

which beats the S&P 500 by 4.16 percentage points. The no-load fund has an annual expense ratio of

0.85%. The initial minimum investment is $2,500.

Zagunis implements a simple strategy here, summed up with the firm's motto: "Enduring wealth comes

from owning great companies for a long time." The managers look for stocks of companies with high

rates of return, solid balance sheets and experienced management. Zagunis and his crew of stock

pickers require companies to have had at least a 15% return on equity every year for 10 years in a row

before they will even consider them.

"It implies several things," says Zagunis. "One, the ability for the companies to be profitable and return a

significant amount above and beyond the cost of capital, the cost of equity. If you combine the return on

invested capital and return on equity and you are consistently high then that is the classic investment.

You are getting more money back from what you put in. When you start doing that year in and year out,

and the compounding takes effect, you really do build business value, which then drives the long-term

stock price."

Top holdings for the fund include Wells Fargo and PepsiCo. Zagunis is also a fan of Abbott

Laboratories. "They are dealing with pharma, nutritional products and diagnostic products, which are

areas that we are strategically comfortable with," he says.

For those investors looking for overseas exposure, Thornburg International Value [TGVAX] is a

compelling option. William Fries has been captaining this fund since its 1998 launch, and it has

generated consistently strong performance. Through Jan. 9, over the past decade, TGVAX has turned

in a total annualized return of 8.83%, beating its MSCI EAFE benchmark by 8.03 percentage points.

The investment strategy here is a simple one: Buy promising companies at a discount, says Fries. He

divides his concentrated portfolio of about 60 stocks between basic value stocks, consistent earners

and emerging franchises. He's currently finding bargains in areas like telecommunications, health care

and insurance.

A top holding in TGVAX is Israel-based generic drug maker Teva Pharmaceutical Industries, which

co-manager and longtime team member Wendy Trevisani like for its visible, reliable earnings growth,

strong balance sheet, high return on equity, and solid top and bottom line growth.

"Teva has the pockets, R&D and scale to take advantage of all these drugs coming off patent," says

Trevisani. "Also, they have a branded portfolio so their margins are a bit higher than the pure generic

players."

As they scout the world for opportunities, the Thornburg team particularly likes China and Latin

America. They're less enthusiastic about India.

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"We haven't held anything in India for quite some time," says Fries. "For one, it's a different market to

trade in. You have to almost find somebody that is already an owner of an Indian stock to buy it without

paying a premium. If you are an incremental buyer then you end up buying it a premium price. After the

recent Satyam experience, premiums won't hold too well here for some time." Recently, Satyam

Computer Services Co-founder and Chairman B. Ramalinga Raju said he had faked revenues and

earnings for years.

There are investment pros who argue U.S. equities are the place to be right now, given that American

central bankers and policymakers have been more creative, timely and aggressive, they argue, in

dealing with economic challenges than their colleagues across around the globe. Fries acknowledges

the merits of this thesis, but he cautions investors against such generalizations.

"People right now have a time horizon that is about two inches in front of their noses," he says. "But

investors should have longer term time horizons. Think about places like China and the potential

developments in Eastern Europe and Latin American countries like Brazil. Do that and you can put

together a portfolio now of promising companies at a discount."

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Investment Guide Cash For Sale Jon Bruner 07.03.08, 5:00 PM ET Forbes Magazine dated July 21, 2008

Japanese corporations are sitting on a pile of undervalued cash and securities. Get your piece of it.

There's money to be bought in Japan. After years of painful deflation and stock market stagnation, managers of many Japanese companies have amassed large stockpiles of cash and liquid securities--treasure chests that are, in many cases, undervalued by the stock market.

"The Japanese market tends to be more inefficient than the American and European markets," says Jean-Marie Eveillard, who manages several First Eagle funds. "There is, in Asia, a trading mentality. But if you're a value investor you can take advantage of this inefficiency."

Eveillard's First Eagle Global Fund, which has enjoyed a five-year annualized return of 18% (compared with 15% at MSCIs World Index), has been steadily increasing its positions in Japanese stocks to 21% of the fund, behind only U.S. stocks at 24%.

Among Eveillard's Japanese picks: property and casualty insurers, which, he says, "are disguised investment companies because they are vastly overcapitalized." These insurers keep their money in large portfolios of Japanese stocks, and Eveillard estimates that these companies trade at 30%-to-40% discounts to their adjusted book value--on top of the overall discounts in the undervalued Japanese stock market. "In a sense you get a double discount," Eveillard says. "We look at these securities as the equivalent of buying the Tokyo Stock Exchange at a discount."

Eveillard particularly likes Aioi Insurance and Nissay Dowa General Insurance. Their modestly profitable insurance businesses are scarcely a draw, and in fact they trade, respectively, at 31 and 40 times trailing earnings. But their stock portfolios are enticing.

Eveillard also sees cash-laden opportunities in the Japanese industrial sector. He cites heavy-industry exporters like SMC, which manufactures pneumatic equipment; Fanuc, a producer of automation systems; and Keyence, which makes sensing and measuring equipment. These three outfits are in cyclical industries, but all of them have conservative balance sheets--SMC has nearly five times as much cash as debt, and Fanuc and Keyence are debt free. Eveillard figures that they would still be undervalued even if profits fell 25% to 30%.

The rich cash position of Japanese companies is not quite as seductive to William Fries, whose Thornburg International Value Fund has returned 23% on average over the last five years. Fries notes that Japan's population is flat and aging--a combination that's hardly a recipe for organic growth. The other big problem, says Fries: managers' reluctance to maximize shareholder value.

"Corporate governance is not necessarily focused on minority shareholders. It's just a different culture," Fries comments. For that reason, he says, "we wouldn't invest in a Japanese company just because it has lots of cash."

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Nevertheless, Fries agrees that Japan's persistently low valuations are attractive enough that he has recently pressed his staff to spend extra time scouring the country's markets. He says that Japanese managers tend to be extremely conservative with their accounting--particularly with depreciation and amortization of goodwill--and this makes some companies appear to be expensive on a price-to-earnings basis. He suggests looking at a company's enterprise multiple. That is the ratio of enterprise value (market value plus debt less cash) to operating earnings (Ebitda).

Fries likes Toyota Motor, which is strong in exporting, manufacturing overseas and developing fuel-efficient cars; Nintendo, which rolled out its phenomenally successful Wii gaming system in 2006; and Komatsu, whose construction and mining equipment has been in high demand during the worldwide infrastructure expansion.

Eveillard is more optimistic about the Japanese economy, as he foresees possible resolutions to the country's demographic and management issues. "We are value investors, and everything has a price. If the valuations are low enough, we don't expect perfection."

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Guru Screen

Five Hot Stocks For The Long Run

John Reese, Validea.com, 12.05.08, 01:20 PM EST

Just because a stock has momentum behind it doesn't mean the fundamentals are lousy. These five are hot and cheap.

As we wade through the worst economic crisis we've seen in decades, it seems as if nothing has been working for the stock market over the past couple months.

Energy stocks have plunged as the price of oil has fallen; financial stocks have been pounded as the credit crisis continues to unwind; basic materials and commodities stocks have plummeted as the global economic slowdown has worsened and speculative trades unwind; and even alcohol and tobacco stocks are down substantially, as not even vice stocks, which traditionally do well when the economy falters, have not been immune to the carnage. In fact, you cannot find one industry with a positive return for the past three months--not one.

With such widespread pain, a lot of investors are asking, Has anything been gaining ground lately?

The answer is, of course, yes. There are thousands of stocks in the stock market, and at any given time you can find some winners, even if that time is during a terrible economic crisis and bear market. Given how dark the market clouds have been lately, it is quite tempting to try to latch on to any of those recent winners, scooping up any bit of positive vibes--and returns--that you can get.

As any long-term investor knows, blindly following hot stocks can get you in trouble, and in this environment, it can spell disaster for your portfolio. Simply going with stocks that have been hot during an incredibly anomalous climate is no strategy for success.

The bottom line is that buying "hot" stocks is fine if they haven't gotten too pricey and still have strong fundamentals to support their valuations. What stocks fit that bill today? With a bit of digging and the use of my guru strategy computer models, each of which is based on the approach of a different Wall Street great, like O'Shaughnessy, I've found several. Let's take a look at some stocks making the cut.

Emergent BioSolutions (nyse: EBS - news - people ): While the S&P 500 has fallen close to 30% over the past three months, this Maryland-based biotech has soared more than 70%, in part because of news that its third-quarter earnings jumped more than 250% on the strong sales of its anthrax vaccine. The company, which has a $707 million market cap, also has botulinum, typhoid, tuberculosis and chlamydia vaccines, and a hepatitis B immunotherapy treatment, in its pipeline.

While EBS's stock has been climbing, the guru strategy I base on the writings of mutual fund legend Peter Lynch thinks it's still a good buy. Because of its 30% long-term growth rate (based on the average of the three- and four-year earnings per share figures) this strategy considers EBS a "fast grower," Lynch's favorite type of investment.

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To find fast growers selling on the cheap, Lynch famously used the price-to-earnings-growth ratio, looking for stocks with PEGs below 1.0. By dividing EBS's 15.12 P/E ratio by its growth rate, we get a PEG of 0.51, which easily makes the grade and nearly makes it into this model's best-case category (below 0.5).

One final area Lynch examined was the inventory/sales ratio. He astutely saw it as a red flag when a company's inventory is piling up faster than its sales were rising. This year, EBS's inventory/sales ratio is 9.24, down significantly from 16.19% the previous year. That's a great sign and probably has a lot to do with the success of its anthrax vaccine.

PetMed Express (nasdaq: PETS - news - people ): While consumers have been cutting back on spending, they apparently haven't done so when it comes to their pets. PetMed Express, America's largest pet pharmacy, has increased earnings and sales in each quarter of this year, and has consistently been delivering positive earnings surprises over the past year.

The Florida-based firm, which delivers pet medications and other health products for dogs, cats, and horses through its Web site and 800 number, has seen its stock jump about 10% in the past three months and has been particularly hot over the past month and a half, gaining about 25% while the S&P has been in the red.

PetMed, which has a $381 million market cap, is another favorite of my Lynch-based model. Its strong growth rate (36% based on the average of the three-, four- and five-year EPS figures) and reasonable P/E (17.8) make for a PEG ratio of just 0.49, which falls into the best-case category on the Lynch model's most important test. That's a sign that this fast grower is still a good buy.

Another big reason my Lynch-based approach is high on PetMed: The firm has no long-term debt.

W.R. Berkley (nyse: WRB - news - people ): This Connecticut-based insurer took some initial hits in early October, but it appears to have been more a victim of collateral damage than real problems. Since Oct. 9, its stock has surged more than 50%. The $4.6 billion market cap firm is involved in a number of niche-type areas, including regional markets and specialty units that focus on complex and sophisticated risks like excess and umbrella liability and aviation insurance.

Earlier I mentioned how O'Shaughnessy focused on relative strength as part of his growth stock approach, and Berkley gets high marks from my O'Shaughnessy-based model. The company's strong performance has earned it a relative strength of 89 over the past year (meaning it has outperformed 89% of all other stocks), plus its price-to-sales ratio is just 0.91. That comes in under my O'Shaughnessy-based model's 1.5 upper limit, an indication that, while it's hot right now, WRB is still a bargain.

Another reason my O'Shaughnessy model likes Berkley: earnings growth in each year of the past five-year period, with EPS rising from $1.72 to $3.78 in that time. O'Shaughnessy was more concerned with the persistence of growth than magnitude, and Berkley has indeed shown that persistence.

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Berkley also gets approval from my Lynch-based model. This method likes the stock's 12.45 P/E ratio and 24% long-term growth rate (based on the average of the three-, four- and five-year EPS figures). Those numbers make for a stellar PEG ratio of 0.52.

In addition, Lynch used a couple special criteria for financials: the equity/assets ratio, which measures financial strength, and the return on assets rate, which measures profitability. With an E/A ratio of 19% and an ROA of 2.58%, Berkley easily beats this model's targets of 5% and 1%, respectively.

Apollo Group (nasdaq: APOL - news - people ): After plunging in the early part of 2008, this private education group, which owns the University of Phoenix online college, has seen its stock gain close to 20% in the past three months, and 40% since it announced that fiscal fourth-quarter earnings more than doubled, thanks to record enrollment and the reversal of a $170 million lawsuit it had been hit with. Now Apollo is back close to its 52-week high.

Apollo may be hot right now, but the stock also gets approval from my Warren Buffett-based model, which looks back further into a company's past than just about any other strategy I use.

For example, this method looks for companies that have consistently increased EPS over a 10-year period. In the past decade, Apollo's earnings have increased in every year but one (2003), and over the entire period EPS has grown from $0.33 to $2.87. That's the kind of steady, predictable earnings growth Buffett usually likes to see.

Buffett is known to look for firms that have a "durable competitive advantage" over their peers, and one way he has done that is by looking at a company's return on equity. The model I base on his approach targets companies with 10-year average ROEs of at least 15%; at 21.5%, Apollo easily meets that standard. More recently, its ROEs have been even stronger, averaging more than 60% over the past three years.

One more reason the conservative Buffett method likes Apollo: The firm has no long-term debt.

Life Partners Holdings (nasdaq: LPHI - news - people ): Life Partners was a pioneer in secondary life insurance, offering "life settlements" to terminally ill or elderly clients. (Life settlements involve the sale of a life insurance policy from the ill or elderly person to someone else at a negotiated price that is less than face value.) It's a rapidly growing market. According to the firm, the total face value of life settlement transactions in 2006 was $5 billion; over the previous eight years, the combined total was about $13 billion.

While the stock market has been floundering, Life Partners' stock has been climbing. The $433 million market cap stock has gained more than 25% in the past three months.

Life Partners gets approval from the guru strategy I base on the writings of brothers Tom and David Gardner, the creators of the Motley Fool web site. Like the Lynch method, this small-cap growth approach looks for a low PEG ratio (below 0.5). With a PEG of just 0.27, Life Partners passes the test.

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The Gardners' method also targets stocks with profit margins that have been consistently high, and my model looks for firms with margins of at least 7% in each of the past three years. Over the past three years, Life Partners' margins have grown from 13.44% to 27.47% to 50.95%, blowing away that target.

Another interesting area the Gardners looked at involved income tax rates. If the ratio of income tax paid to pretax income is less than 20%, that could mean earnings have been inflated because of low tax rates that might not continue. Over the past two years, however, Life Partners' ratios of income tax to pretax income have been 28.66% (last year) and 34.65% (this year), passing this test.

Stay focused on value, and on the long term. All of the stocks mentioned here have been producing strong returns amid one of the worst market climates we've seen in a long time. While their momentum alone may net some more short-term gains as investors chase performance, you never know when that kind of momentum is going to run out.

The true appeal of these stocks is that their strong balance sheets and low valuation measures have them positioned for solid growth over the long run. Those are the kind of businesses you should focus on, regardless of what their stocks have been doing in recent weeks.

John P. Reese is founder and CEO of Validea.com and Validea Capital Management. He is also co-author of The Market Gurus: Stock Investing Strategies You Can Use From Wall Street's Best.

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Intelligent Investing Panel Keep Cool With Credit Card Firms David Serchuk, 05.05.09, 06:00 AM EDT One of the savviest investors is closing his short positions on credit card firms. And a new consumer protection bill won't change that. The Credit Card Holders' Bill of Rights is on the move, backed by President Obama. The legislation passed 357-70 and is geared up for its vote in the Senate. Among other key features, the bill would require card firms to give cardholders 45 days notice of any rate increases, prevent card firms from retroactively increasing interest rates and prevent card issuers from misleading terms. Supporters of the bill, such as Rep. Carolyn Mahoney, D-N.Y., say the bill would give power back to cardholders who, in recent years, have been unable to block what she said were unfair interest rate hikes and fees. The credit card firms counter that such legislation will restrict their ability to extend credit to consumers, and that such changes could cost the banking industry over $10 billion annually. According to the White House, credit card debt totaled $963 billion in January, with credit card debt rising 25% over the past decade. While the exact impact such a bill would have on financial markets is unknown, at least one major credit card firm watcher has started to close short positions on most of his major holdings in the sector. This is especially germane as this investor, John Jacquemin, has been in the money as he rode credit card firms south. Back in December 2008, we pointed out that Jacquemin, the head of private investment firm Mooring Capital, had been short credit card firms for close to two years, and that he signaled out Capital One, American Express ( AXP - news - people ) and Discover as firms to sell. Since then Capital One has fallen an additional 38% and Discover is down 17.5%. American Express has gone the other way, up 25.3%. The Standard & Poor's 500 is up 3.6% in that time. Still, despite the off call on Amex, try not to shed too many tears for Jacquemin, as over the past two years his Intrepid Opportunities Fund is up 222%, thanks to timely bets against financials. So what is this wizard of corporate debt doing? He says he's closing most of his short positions on credit card firms. He feels the pending bill should have relatively little impact on how he views these names, meaning that he also doesn't think that the bill's passage will compel him to stay short. Through April, Jacquemin has closed about 80% of the short positions he'd held in credit card firms, positions he opened in 2007 and increased through 2008.

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And indeed, most of these firms have been on fire since the markets reached their recent bottoms on March 9. Capital One, for example, is up 144.4% since March 9, Amex is up 165.9% and Discover Financial is up 81.4%. So, even though the press is full of reports of record credit card defaults, one of the savvier investors out there isn't opening up new short positions. It doesn't mean that they can't fall further, but Jacquemin isn't placing bets on them. The Forbes Investor Team is also on the fence about what real impact they feel the new bill could have either on credit card firms, investors or financial markets should it become law. Ginger Snyder, senior vice president at Raymond James, feels that although it's unlikely any law could change investors' mindsets, she still is a fan of the fact that the new legislation could simplify the language used by credit card firms. Randy Carver, an investment adviser with Raymond James, says that blaming credit card firms for bad consumer habits is akin to suing fast food firms because you're overweight. And he believes, as the card companies believe, that more restrictions on credit card firms will lead to tighter and worse terms for consumers. "If you put more restrictions on the credit card companies, credit will tighten for those who can and will pay their debts, which is a bad thing," he says. Stephen Roseman, the head of hedge fund Thesis Capital, notes that although we've grown used to it there is no right to easy, cheap credit and that card companies should hae the right to price their goods as they see fit based on their risk, aka us. "So while people complain about usurious fees they need only look in the mirror to understand why they are paying excessive fees," he says. Our Credit-based Life Forbes: It looks like there is an excellent chance credit card firms will see their business mandates changed by President Obama, with likely bans on retroactive rate increases, more protection for students and young consumers, more notice before rate increases go into effects and no double-cycle billing. The credit card companies say these moves could lead lenders to restrict credit in an already tight environment, and would make it harder for consumers who need credit to get it; and they say it would hurt small businesses the most that are dependent on credit. Advocates of the "Credit Card Holders' Bill of Rights" say credit card firms have exploited their users, that consumers are being doubly pinched by card companies and that card issuers shouldn't be able to change interest rates at will.

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Economically,both sides say their views are more sound. The firms say that if changes are implemented they will lose up to $10 billion. The users say that with average American credit card debts at $10,000 or so these debts are killing citizens. Also, more and more people are defaulting on credit cards anyway. So where do you stand on this issue,and what do you think should happen to this bill and to credit card interest rates and practices? What sort of damage would get done to the economy if the bill is passed? If it doesn't pass,do credit card firms remain an excellent short play, as they have been for months? If the bill passes would you buy credit card issuers long? Would passage of this bill help America rebuild? Ginger Snyder: Credit cards have always been a convenient way for consumers to "borrow" money, but using them responsibly has proven to be difficult for some consumers. The Credit Card Holders' Bill of Rights is an attempt to offer some relief to those consumers who have been caught up in the "spending more than you have" syndrome by regulating the credit card companies. I don't think that's going to solve the problem for those consumers who feel the need for instant gratification by "borrowing" the money they want. However, I'm a big believer in keeping things simple, so one good thing from this bill would be the elimination of the confusing terms and fine print. Randy Carver: I think that there needs to be a full and easily understood disclosure of the terms and conditions for credit cards, but companies should be able to set any structure that they wish. The underlying issue with people not paying is not the credit card companies but people being irresponsible and then blaming someone else. People need to stop spending money they do not have. Suing the credit card companies because someone can't pay back their debt is like suing a fast food company because you are fat. People need to take some personal responsibility. If you put more restrictions on the credit card companies, credit will tighten for those who can and will pay their debts, which is a bad thing. Stephen Roseman: For starters, there is no pre-ordained right to cheap, easy credit. Credit is a privilege for those who have earned the right to have access to it. The credit card companies have every right to price their "cost of goods" based on the nature of the credit risk that they incur. So, while people complain about usurious fees (which is at times a fair complaint), they need only look in the mirror to understand why they are paying excessive fees. Those who are better credit risks and manage their liabilities better don't pay excessive fees. To be clear, this isn't an indictment of consumers and their use of credit but a reflection of what their responsibilities are.

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If you think about another example from the financial services world, life insurance, you wouldn't expect a middle-aged, morbidly obese smoker with pre-existing conditions to pay the same annual premiums as a post-college runner in top athletic condition. The same is, and should be, true of the credit world. As for whether or not card issuers remain compelling shorts, there are company-specific issues like funding, the makeup of their portfolios, delinquency rates, average credit scores, etc., to consider. Forbes: OK, to expand the question "what impact do you think reforming these laws, as Obama seems to want to do, would have on our economy? And on investors?" Snyder: Reforming these laws will not have an effect on the people who pay off their credit card bills each month, of course, but will on those who have been using them to keep their heads above water because of either their overspending or circumstances beyond their control. Credit cards are a huge temptation that play into the greed of the consumer and I don't think we should make it easier for people. What we need to do is educate consumers so they won't repeat their mistakes and perhaps for those who are carrying a lot of debt this will serve as an impetus for them to consider setting a budget for themselves. Roseman: I agree with Ginger, in principal, about the need for education but as a practical matter I think it's very difficult to "educate" people not to be lustful, or gluttonous, or covetous, etc. We have a multi-generational consumptive orientation in this country that is not so easily undone. Unlike smoking, or drinking and driving, the deleterious effects of binge-shopping are not so scary as to "scare people straight." Carver: As with other things, I think that if bad behavior (in this case overspending) is not punished or in fact is rewarded then people will not stop the behavior. I agree that we need to help educate people and ultimately think that having consequences for overspending will do that better than other potential solutions.

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Intelligent Investing Welcome To Bubble World David Serchuk, 09.04.09, 06:00 AM EDT A glut of worldwide savings could actually lead to a series of financial bubbles. To deal with this, keep a cool head and think twice about risk. If you think our economy has functioned less as a collection of regulated markets than a series of bubbles, guess what, some experienced players in the investment world agree with you. Not only that, they predict this trend could accelerate. One possible vector for this highly destabilizing trend seems innocuous enough: savings. Yes, even as we are told that a penny saved is a penny earned, when these pennies start to pile into the trillions they will look for places to go, says Brett Hammond, chief investment strategist at TIAA-CREF. What makes this even more counter-intuitive, at least initially, is that if this is true it would create our next bubble for reasons that are the polar opposite of the one we just experienced, i.e., the bubble in real estate. Whereas that bubble was caused by too much easy credit and endless refinancing, among other things, this one will be caused by real money sitting in real bank accounts, just waiting to escape. Hammond says there is a global glut of savings, as exemplified by the average Chinese household saving 40% of their income. Even in the U.S., land of the spendthrift, the savings rate has nudged up to 6%. "When you get that kind of phenomenon--which you've had over the last 15-20 years--which is the rise of this global pool of savings looking for places to invest," he says. "This is just a pool of money that wants to go somewhere. So it's been finding places to go and creating bubbles. And I think the danger is that it's going to go on doing that so that we're in bubble world, we're not necessarily in inflation world in the next 10 years." Hammond believes this current market rally is really our third stock bubble in the past decade: one ended in 2000, one ended in 2007/2008 and the current one is still going. He also says real estate acted as a bubble--of course inflating the stock market. Going forward, future bubble candidates include emerging markets or stocks, bonds and real assets. Bubbles are so dangerous because the stocks they inflate can take long periods of time to come back. A cursory glance at some of the brightest names from the tech wreck shows how true this can be. As an example, look at the 10 year track record of Microsoft ( MSFT - news - people ), Cisco ( CSCO - news - people ), Oracle ( ORCL - news - people ) and Yahoo! ( YHOO - news - people ). Of those four tech behemoths, only Oracle is above water in the past decade, up 107%. Meanwhile the worst of the lot, Yahoo!, is down 63%.

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Excepting Oracle, the Standard & Poor's 500, down 26%, outperformed all. It also outperformed the Nasdaq index, down 30.2%. This isn't to say you shouldn't invest in tech, and that they all are losers, because they're not. Rather, that bubbles rarely re-inflate anytime soon. For another example, let us examine the performance of housing stocks. Leaving out the obvious disasters that are Fannie Mae ( FNM - news - people ) and Freddie Mac ( FRE - news - people ), how did some more reputable names do? This time we're going back five years, to more accurately capture their true bubble-ness, because most people riding bubbles, by definition, get in late rather than early. Using benchmark firms like D.R. Horton ( DHI - news - people ), Pulte Homes ( PHM - news - people ), Toll Brothers ( TOL - news - people ) and Lennar ( LEN - news - people ), we see much the same story as we did in the tech sector. Over the past five years, only Toll Brothers beat the index, down 3.3%, versus 9.9% for the S&P. The others lag well behind, with Lennar bringing up the rear, down 68.8%. Again, this isn't to say that housing stocks will always be bad bets, rather that trying to ride bubbles is an unpredictable business. If our economy is headed that way, as Hammond predicts, it could lead to a lot of damage all around. Another proponent of the idea that we're going to embark on a savings spree is Gary Shilling, the head of A. Gary Shilling & Co., and a Forbes columnist. Shilling believes that following a 25-year-long spending marathon Americans are going to go into savings mode for a decade. This isn't voluntary, it's because tapped-out consumers don't have any equity left to borrow against. The upshot is that the financial sector will go back to acting more like banks and less like casinos, much to their chagrin, and endowments and pensions will fail to support higher asset prices. This latter point is germane because endowments at places like Harvard University helped drive the last decade's push into relatively fringy investments like hedge funds, private equity, real estate, timber and venture capital, Hammond notes. Sometimes the largest endowments had 50% of their assets in such ventures, chasing not diversification but performance. When they fell, they fell hard. As reported by Forbes, as of June 2008 Harvard had 12% of its assets in private equity, 19% in hedge funds, 12% in foreign stocks, 10% in emerging markets and 8% in real estate. Fixed income, that haven of safety, only made up 16% of the pie. As a result, pensions and endowments are having to reconsider their risk. Hilary Kramer, chief investment officer of A&G Capital Research, says that even now many hedge funds have illiquid investments that are still being carried at cost. "And so the hope is that by the time they have been valued that they will be worth more than they are today," she says.

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"But as we all know, any time you have to use the word 'hope' in your investment scenarios, it never works out that way." As a result of these institutional problems, she see general losses in the markets in 2009 and 2010. The reason why general indexes have risen so much, she believes, is because hedge funds have gotten in, gone long and did it with leverage, with individual investors chasing returns. Recent outflow charts back this up, as institutions took $1.4 billion from money markets and put them into equity markets and fixed income in the week that ended Aug. 21. Individuals then took out $12 billion and followed suit. Marc Lowlicht, the head of the wealth management division at Further Lane Asset Management, believes that one thing that investors--at all levels--keep misunderstanding is the concept of risk. Instead, people merely look at return, which is a skewed way to view anything. Specifically, now that markets have risen so much from their lows, investors need to try and quantify their upside versus downside risk. With markets up so much so fast, the remaining upside, for now, might be quite limited. By contrast, everyone bailed out of the markets when the Dow Jones industrial average hit 7,200. But by that point, the downside risk was actually quite limited. Think twice. Bubble Land Forbes: Pension funds, as I understand it, rebalance I believe every few months, like three months or something like that. And when they do, their impact on markets is really quite significant because they themselves are so large. And that's where you would know about this firsthand. When is the next major rebalancing, and what effect should this rebalancing really have on stock and bond markets? Brett Hammond: Well, it's interesting, there is a regular rebalancing program for most defined benefit plans. As you might imagine, there isn't one associated with defined contribution plans. Obviously, the largest chunk of which is 401(k), and then TIAA-CREF has 403(b)s, and we're the largest player in that market. And the reason I mentioned the difference between D-B and D-C is that the defined contribution market is getting so big that you really have to take it into account, and it does not have that same impact. Because individuals are doing the rebalancing not the institutions. Forbes: And they don't necessarily rebalance all that often. Hammond: The average defined contribution pension holder rebalances zero times in his or her lifetime. Marc Lowlicht: And that's from lack of advice usually. Hammond: Yeah. Now, going back to the point, it's not that D-B money is trivial, it's not, but that D-C and IRA money's has far surpassed it. Now, what I don't want to do is sort of

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say the sky is falling, and the main reason is that like us, most institutional investors are very careful about what they do to avoid moving the market because they don't want to have to pay the kinds of transaction costs. So, when you talk about every three months, it isn't necessarily at the end of every quarter that you find the rebalancing. The policy portfolios that guide these things are trued up, and I think you'll find a much more staggered fashion. In other words, it isn't all on the same day. Now, it sounds like a really interesting problem, but when you kind of unpack it, I think it's less of an issue. However, I think the real question that one wants to ask is, "What are the defined benefit pensions and endowments going to do about what their asset allocation is in the future?" They're all asking the question, "Should we be doing what we've been doing for the last 15 years that works spectacularly until November of 2007, and has worked very badly since." And so, should we stick to what has now become the tried and true, which is in essence having a very large chunk of alternatives at the core, or should we go back to more traditional stocks and bonds and then pull back on the equity allocation all together? And I think that boards right now in pensions and in endowments are very much asking themselves these questions. And the answers to those questions, I think, are going to have a rather large impact on the, sort of, relative attractiveness of asset classes simply because they're going to define a lot of the flows in a strategic sense, though not necessarily in a rebalancing sense. Forbes: Can you describe for our readers what some of these alternative investments were? Hammond: Well, sure. If you look back starting in the beginning of the 1990s, you get the leading endowments: Harvard, Yale, Stanford, etc. moving into hedge funds, private equity, real estate, timber, venture cap, investments that are considered to be illiquid and often, in essence, require somebody to sit on the money for a long time to realize returns. There also often instruments that don't necessarily trade--aside from being illiquid--they also don't necessarily trade so frequently enough that you can get a mark. And so, the thought was that it was actually an advantage for an investor that had long liabilities. So, that's basically the idea. And in the largest endowments, over $1 billion, had until very recently allocated as much as 50% on average to what you might call these alternatives, a huge number. Forbes: Yeah, and in retrospect, spectacularly risky. So, the discussions now, are they talking about making these peripheral investments, these alternative investments, or are we back to stocks and bonds basically? Hammond: Yeah, the debate right now is why did we invest in these things in the first place, and was it for risk control, diversification purposes, or was it for return? And I think that there might have been a little muddying, in some places, you know, I'm not suggesting

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any one institution, but it might have been a little bit of confusion on their parts of exactly why they were doing it. And the reason why that becomes important is that, in retrospect, it certainly wasn't for risk control because the correlations of betas on these alternatives went right toward one over the last year and a half. Hilary Kramer: In terms of alternative investing and the large endowments and public pension funds, we can't forget that much of the investment was driven by pay-for-play scandal, which is just in the early stages of being uncovered. You know, Attorney General Cuomo in New York has looked into the New York Common Fund. But we're going to see a number of other pay-for-play scandals that will continue to emerge. And even state pension funds, public pension funds that didn't partake are going to be very, very skittish and careful about dealing with alternative investments because there's been so much tainting that's taken place with that. And I also want to add to your question, David, about you know, was this about diversification or performance? It was performance. This was about performance. I believe that you have pension fund CIOs and endowment CIOs that wanted to duplicate the Yale endowment model of making a lot of money by investing in private equity, venture capital, hedge funds and direct investments in real estate. You know how many pension funds I know of have actually built office buildings? Of course, they got in it really late. And they're just finishing their buildings. So, part of the problem in the pension world is that we haven't even begun to see the true losses to these pension funds because of the private equity. When the year ended, especially with endowments (endowments ended on June 30, 2009), they marked their private equity and venture capital books at cost. And many, if not most, hedge funds these days have illiquid investments, those are still being carried at cost. And so, the hope is that by the time they have to be valued, the investments, that they will be worth more than they are today. But as we all know, any time you have to use the word hope in your investment scenario, it never works out that way. So, I think we're going to see losses in the 2009 year as well, or the 2010 year that will end June 30 next year. Ten months from now, it's going to continue to be an ugly scenario. Then, the problem is whether there’s going to be, you know, liquidation. How can you have new asset allocation take place if there's been this loss? The money's gone to money heaven, it's gone. So, how can we have new allocating and new allocations going on, which leads me to believe that much of the equity market rise from the lows, I mean, we're talking 50% on some of the general indexes, has to do with hedge funds getting in there and going long, and leveraging up, and it's individual investors chasing returns. As matter of fact, when I look at the money market outflows, last week's money market outflow for instance, it was unbelievable. Institutions took roughly $1.4 billion dollars out of money markets and put them into the equity markets and into fixed income. Individual investors last week took out $12 billion dollars out of money markets. So, what you have is

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individuals running after this market. And it'll be interesting to see what the pension funds ultimately do. Most of them have been at a standstill for the last 12 months. Marc Lowlicht: You know, I want to just add to a couple of points in here that will address both pensions and individuals. And I think it's fairly consistent across the board. You know, what Hilary had mentioned about Yale, you know, the other pensions and foundations and endowments are trying to follow the Yale model to get return, and it was about return. I agree with that. And I think the problem in the markets overall is that everybody judges on return and nobody looks and says, "How much risk am I taking to get that return?" Now, if Yale gets an X amount of return for Y amount of risk, but Princeton goes in and follows the same model and gets X amount of return for Z amount of risk, you can't compare the two because, you know, risk and return are supposed to, you know, correlate to each other. And any time you see a commercial to the individual investor about a mutual fund, they only say how much "this fund returned 25% last year." They don't tell them, "but it had this much risk in standard deviation or beta or whatever." They just tell you how much return they had. So, there is no simple term for people to quantify the risk, especially the individual investor on how much risk they've taken to achieve a return. And that's a problem. And what's happening to me that I'm observing is when people look at the market, and it's at 7,200 and they want to throw their money out the window and go, "I'm out, I want nothing to do with the market. You're at 7,200." This person's now taking their money out of the money market funds and institutions, as Hilary pointed out, and going into the market at 9,500 after it's up 40%. So, I'm going "Wait a minute." You now have much more risk for less return because you got out 2,000 points ago. And now, you're chasing the return. Kramer: Yeah, they sold in March. Individual investors, they stood, they waited, they waited, they waited, and they couldn't take it anymore in early March. And that's when you had capitulation. And you had this incredible bull market. They're all very upset, depressed, angry that they haven't enjoyed the rally and they're jumping in. Lowlicht: And they're ignoring the risk is my point. What I'm saying is they are totally ignoring the risk now because they're afraid they sold out and won't capture the rest of the upside. What has to change in the investing public's eye is to look even when they've lost 30% to 40% on their money, and say, "I have a 10-tear time horizon, the market's at 7,200. I'm down from, you know, where were the highs, 14,000? I'm down 50%, 40% if I was just in an index fund, my risk at this point, where's the market going to go? 5,000? OK, I have another 25% downside. Maybe I can make 50% on the upside. Now, your upside's 20% and your downside's 50%.

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But you're getting back in. So, what I'm saying is there has to be the opposite view of how you invest. Everybody shouldn't say, "How much return can I get?" The first question should be, "How much risk am I taking? And how much risk am I taking by staying in at this point? How much risk am I taking by adding money at this point? And how much risk am I taking over the timeframe I have?" There was no risk in staying in the market, in my opinion, at 7,200 if you're not touching your money until 2019. Forbes: Sure. I mean, I guess what happens is people have these scenarios that play through their head which is, you know, why couldn't the market go to 3,000? Maybe this is the great reawakening of the dark ages or something like that. It never happens till it happens, right? Hammond: I just wanted to add something to this because I think this is a really interesting discussion, and that is that I think that, you know, jumping back and trying to consider both individuals and institutions. Let me suggest there's a macro element that makes it even worse. And that is the global glut of savings. When you get that the average Chinese household saves 40% of their income, and in most countries in the world households array their savings rates between China and the United States which is right now at about 6% but that's very unusual. We're more often near zero. But when you get that kind of a phenomenon, you've had over the last 15, 20 years, a rise of this global pool of savings looking for places to invest. And so, in a sense, it doesn't even require self-control, or non-self-control on the part of investors. This is just a pool of money that wants to go somewhere. So, it's been finding places to go and creating bubbles. And I think the danger is that it's going to go on doing that so that we're in bubble world, we're not necessarily in inflation world in the next 10 years. Forbes: So, what do you think would be some bubble candidates? Hammond: Well, we've just seen one. You know, the interesting thing is that we've had one in effect, this is our third stock bubble although we don't call it that because the Dow isn't back at 14,000. But we had the one that ended in 2000. We had the one that ended in the end (depending on how you count it) of 2007 or the end of 2008. And now, we have one that is certainly continuing. So, stocks are always a candidate. And as my colleagues have been saying, there's some reasons why people might be want to be picking stocks right now because of the kind of fears of what happened in the alternative space. But I suspect that we're going to get other kinds of bubbles, too. We just had one in real estate. And it's quite possible that what we'll do is we'll find ways to have one in either emerging markets or stocks, bonds, or real assets. And I think that's a reasonable candidate. Forbes: If the pensions and the various groups you were talking about are thinking about changing how they invest, about stocks and bonds, what could that mean to the average investor?

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Hammond: Well, I think that we've all been kind of talking about that. And so, I invite my colleagues to join in too. But you know, there really is an effect, the sort of flow effect. And if you get and combine that with bubble-ology, and you get a lot of investors who might see the beginnings of a sea change in investing such as we've just been describing, potentially gun shy about certain asset classes, they return to more traditional asset classes. And once you see the flows, it's self-reinforcing because you get, sort of, the structural conditions for a bubble that are there already. And it's just looking for a place to start the bubble. And this bubble starts when the market starts seeing flows somewhere. And I think that phenomenon is going to continue. And I think for the average investor, it's going to be harder and harder to take the long view. If so, two things: one is, how do you resist taking the short view when the world is characterized by a series of bubbles? And second, are there going to be some products that are going to be created to help with that? In other words, bubble-proofing investments. And I think you'll see both kinds of phenomenon coming out.

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Value Investor Insight

Wisdom From The Value Crowd John Heins and Whitney Tilson, Value Investor Insight , 01.21.09, 06:00 PM EST

Some sage advice that will pay dividends for years to come.

The differences in strategy and style among value investors are many. Some invest primarily in small-

cap stocks while others stick to large-caps; some invest overseas while others stick to U.S. markets;

some run concentrated portfolios while others are more diversified; some are activists while others

never are; some are long only while others are actively short. The list goes on.

At the same time, there are several fundamental characteristics that value investors tend to share as

well. We've identified an even dozen:

--They tend to buy what's out of favor rather than what's popular.

--They focus on intrinsic company value and buy only when there is a substantial margin of safety,

rather than trying to guess where the herd will go next.

--They understand and profit from reversion to the mean rather than projecting the recent past

indefinitely into the future.

--They understand that beating the market requires a portfolio that looks different from the market.

--They focus on absolute returns, rather than outperforming a benchmark, and on avoiding permanent

losses.

--They typically invest with a multiyear time horizon rather than focusing on the month or quarter ahead.

--They pride themselves on in-depth and proprietary analysis in search of "variant perceptions," rather

than acting on tips or relying on Wall Street analysts.

--They spend far more time reading things like business publications and financial reports, rather than

watching the ticker or TV shows about the market.

--They focus more on analyzing and understanding micro factors, such as a company's margins and

future growth prospects, and less on trying to predict the direction of interest rates, commodity prices or

the overall economy.

--They cast a wide net, seeking mispriced securities across industries and types and sizes of

companies, rather than accepting artificial limitations on market capitalization or other criteria.

--They make their own decisions and are willing to be held accountable for them, not seeking safety in

what everyone else is buying or decision making by committee.

--They admit their mistakes and seek constantly to learn from them.

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It's in this spirit of continuous learning that we present a sampling of wisdom taken from the pages of

Value Investor Insight, celebrating both the similarities and differences in how the best investors apply

their craft.

We focus first on good businesses, with high returns on capital, barriers to entry and significant free

cash flow generation over a cycle. If you're right about the business, time should be your friend, so

catalysts are not important. -- Charles de Vaulx, International Value Advisers, 11.26.08

[W]e basically spend our time trying to uncover the promising turnarounds, dullards and assorted

investment misfits in the market's underbrush that are largely neglected by the investment community.

One of the key metrics we assign to our companies is an "analyst ratio," which is simply the number of

analysts who follow a company. The lower the better--as of the end of last year, about 65% of the

companies in our portfolio had virtually no analyst coverage. -- Carlo Cannell, Cannell Capital, 3.31.06

One of the first questions we ask about a possible investment is "Why is it mispriced?" If you don't have

a reason, there's a good chance it isn't really mispriced. -- Jeffrey Tannenbaum, Fir Tree Partners,

7.31.07

We sometimes buy companies with bad management, if that fact is more than accounted for in the

price. At a cheap enough price on a decent business, I'm willing to ride out any problems until

somebody, if not current management, figures out how to turn things around. -- Robert Olstein, Olstein

& Associates, 9.28.05

[Regarding uncovering value:] It's often when companies are in the midst of change--buying or selling

divisions, installing new management, reorganizing or restructuring. Change brings uncertainty, so

many investors want to wait out that uncertainty until the situation is easier to analyze. We think that

uncertainty is what creates opportunities. -- Peter Langerman, CEO of the Mutual Series division of

Franklin Templeton, 12.30.05

We don't have a problem with cyclicality. Wall Street still looks for certainty in areas that are uncertain.

We feel good about lumpiness. We just try to be cash counters--if you can buy something at five times

free cash flow with a limited chance of permanent impairment, even if it earns only half of what we

originally thought, that's OK. -- Bruce Berkowitz, Fairholme Capital Management, 4.28.06

Human beings are subject to wild swings in their levels of fear, risk tolerance and greed. That won't

change. I base my whole approach on buying when others are fearful and selling when others are

greedy. The reason Shakespeare is so relevant still today is that his plays were all about human nature,

and human nature never changes. -- Mark Sellers, Sellers Capital, 6.19.05

The most important change in my 40 years of investing has probably been in investors' time horizons.

Today the majority of investors--Ben Graham would call them speculators--are focused so closely on

this week, this month and this quarter. Stocks are bought and sold on penny deviations from short-term

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estimates, which is mind-boggling. Crazy as it is, we can't complain--it just creates more opportunities

for investors with longer time horizons. -- William Nasgovitz, Hartford Advisors 9.30.08

There is no way to make a good deal with a bad person. It's the character of the people you go into

business with that will fundamentally determine your investment returns and your ability to sleep well

and eat well in the meantime. If you're not comfortable with the people involved because of their prior

conduct and how they've treated shareholders, you're probably not going to be comfortable with

yourinvestment results. I take it to heart and use it as a screen for potential investments. -- Thomas

Russo, Gardner Russo & Gardner, 4.27.05

You can't overstate the importance of the CEO in judging an investment. My best ideas, by far, have

been in situations where a new CEO takes over an undermanaged franchise. If we only focused on one

thing, that would be it. -- Kenneth Feinberg, Davis Advisors, 5.31.07

We try to fight against statements like "this would be a great investment if it were 10% cheaper." That's

a wussy conclusion because you can't be wrong: If it goes down, you can say you knew it was too

expensive. If it goes up, you can say you knew it was a great investment. But if you know it's a great

investment you should buy it. -- Christopher Davis, Davis Advisors, 5.31.07

Traditional value investing strategies have worked for years, and everyone's known about them. They

continue to work because it's hard for people to do, for two main reasons. First, the companies that

show up on the screens can be scary and not doing so well, so people find them difficult to buy.

Second, there can be one-, two- or three-year periods when a strategy like this doesn't work. Most

people aren't capable of sticking it out through that. -- Joel Greenblatt, Gotham Capital, 11.30.05

Classical buy-and-hold is really a dying concept. The notion that there are safe companies--like AT&T

or IBM once were--is a real miscalculation on the part of people who can least afford it. You're more apt

nowadays to come across the blue chip that has cracked. …. Now those we love. -- Shawn Kravetz,

Esplanade Capital, 12.30.05

One reason it's important to be more international in your outlook: If you're not paying attention to what

competitors in emerging markets can do, you're likely taking on risk with U.S. company investments that

you shouldn't. -- Robert Williamson, William McAree Investment Partners, 8.31.08

A[n] argument is made that there are just too many question marks about the near future; wouldn't it be

better to wait until things clear up a bit? You know the prose: "Maintain buying reserves until current

uncertainties are resolved," etc. Before reaching for that crutch, face up to two unpleasant facts: The

future is never clear, [and] you pay a very high price for a cheery consensus. Uncertainty actually is the

friend of the buyer of long-term values. -- Warren Buffett, Berkshire Hathaway, 4.30.07

Wall Street sometimes gets confused between risk and uncertainty, and you can profit handsomely

from that confusion. The low-risk, high-uncertainty [situation] gives us our most sought after coin-toss

odds. Heads, I win; tails, I don't lose much! -- Mohnish Pabrai, Pabrai Investments, 6.29.07

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I'm a golfer, and one of the things I love about it is that you can play the same course 20 days in a row

and every day will be different. It just rained, or it's hot, or the wind is blowing from a different direction.

You have to adjust all the time for a lot of changing factors, which is also true of investing. People who

really love to invest wouldn't have it any other way. -- Robert Lietzow, Lakeway Capital, 2.29.08

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THE BULLS AND BEARS INTERVIEW Intelligent Investing with Steve Forbes

Bullish Strategy

Steve Forbes: What are some of the specific characteristics you look for in value investing? Do you try to size up a management? Do you look at cash flows? What kind of metrics do you use that you find particularly helpful? EBIT I don't think is one of them.

Jean-Marie Eveillard (Senior Adviser, First Eagle Funds): No, it is not one of them. Although we are partial in terms of valuations to enterprise value to EBIT, because enterprise value introduces a balance sheet, which price-earnings ratio does not.

And EBIT admittedly--earnings before interest and taxes--interest and taxes have to be paid, but to the extent that not always, but most of the time, we buy the stocks of companies that are financially safe, as Marty Whitman puts is, and where there is very little or no debt, then there is no interest expense. And as far as taxes go, I've always been somewhat suspicious--well, except in countries such as Hong Kong, where the corporate rate, your official corporate rate is very low. Otherwise, I'd be somewhat suspicious of companies where the tax rate is lowered. I figure that either they're cheating the tax authorities and maybe the authorities would catch up with them, or they're overstating their profits.

Forbes: A lot of managers call themselves value investors. How do you distinguish yourself in terms of picking securities?

Bruce Berkowitz (Founder, CIO & COO, Fairholme Capital Management): Well the one key characteristic is cash. We basically count the cash that a company generates because, after all, what else can you spend?

And frankly, I mean, investing, whether you call it value investing, whatever type of investing, is all about comparing what you give versus what you're gonna get over time.

So you give the cash to purchase the investment and then, it's our job to estimate how much that investment's going to pay us back over time in cash.

Forbes: So you're looking for distressed merchandise that has a huge cash flow.

Berkowitz: That's what we're looking for, free cash flow. I think Benjamin Graham called that "owner earnings." Yes, what can be given to the owners of the company. I know that's a concept a lot of people aren't using these days, especially management. But yes, we're looking to see what the shareholders will receive over time.

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Forbes: So how would you describe your investment approach? You have several newsletters. You've got a new mutual fund. Do you have various classes, various approaches, or what's your brand?

Tom Gardner (Co-Founder & CEO, The Motley Fool): Well, I think probably more than anything else, it's fundamental analysis. We're not interested in stock price movements over a weekly or quarterly basis. We're really looking at the business and trying to evaluate it.

We probably spend more time on the strength of the business than the value of the stock, although both are obviously quite important. And we have a number of different approaches at The Motley Fool. I mean, for example, my brother is a little bit more of a VC-type investor. He's happy to have six or seven disappointments in order to have a company like Marvel Entertainment show up in his portfolio and go up 15 times in value. I, on the other hand, like to look at the stock market as an auction market. I like to look for unknown companies that aren't very closely followed. An investor that I really admire, Walter Schloss, did a similar thing. Just going out and seeing merchandise that nobody is paying attention to, bidding on it when there aren't many bidders and letting the company succeed over a number of years.

So I spend a lot of time looking at the ownership, how much stock is owned by the CEO, how long has he or she been with the business, and I think we right now live in a marketplace where there's such a short-term focus, even after what's happened. And I think if people learned to look at businesses over 10, 15, 20 years, they'd find people like Jim Sinegal at Costco Wholesale. They'd find the Walton family at Wal-Mart Stores. They'd find Buffett at Berkshire, Gates at Microsoft, Jim Bezos at Amazon.com. People who give their life to their company is what I'm looking for, not public companies that have a new CEO every three to five years.

Bulls On Parade

Forbes: Do you still find, though, Japanese equities attractive, because companies, certainly the large ones, do have a tendency to have globs of cash. Casualty insurance companies have even more cash.

Jean-Marie Eveillard (Senior Adviser, First Eagle Funds): Well, that's an interesting point. Because for a long period of time, investors said to companies, "Well, you have to optimize your balance sheet." Which of course is code for taking on debt, buying back your stock, and et cetera.

But you know, in the midst or after a major financial crisis, companies that are sitting on cash--and that includes Japanese companies--they are in a position where they will

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emerge for whenever that comes from the current rut a lot stronger than their competitors who are burdened with debt. And there are some industrial companies in Japan where I think currently they are getting even stronger than they were vis-a-vis the European or American competitors.

Forbes: What companies come to mind?

Eveillard: Fanuc, which is best known for its robots, but actually, what's more important is numerical controls for machine tools, which is, in essence, software, and where they truly dominate the field. And they are sitting on a ton of cash. And I think they are getting stronger in the process. And SMC, which is less dominant ... is involved in--don't ask me to define it--in pneumatic equipment, which is gaining market share vis-a-vis hydraulic equipment. It's machinery, basically. And an American competitor is Parker Hannifin, and where I think SMC is gaining market share at the expense of Parker Hannifin, not so much because Parker Hannifin has a lot of debt, which they don't, but because Parker Hannifin is, like many American companies, a little bit of a slave of Wall Street.

And Wall Street tells them you have to increase your earnings per share as much as you can in the short term, which sometimes works to the detriment of the best long-term interests of the business.

Berkowitz (Founder, CIO & COO, Fairholme Capital Management): If we have the cash, and the patience, and the fortitude, then we can take advantage of situations that are generating huge amounts of cash, even though some people believe down the road they won't. I mean, one case in point was healthcare companies, health insurers

where –

Forbes: Explain that a little bit 'cause you have Pfizer is huge.

Berkowitz: Oh, we have Pfizer.

Forbes: And you have HMOs.

Berkowitz: And we have Pfizer. We have Forest Drugs, Forest Labs. We have Humana, and WellPoint, the health insurers. You know, these companies form the healthcare system of the United States. And they've done a good job. Could they do a better job? Of course. But their profits are reasonable.

They don't make an egregious profit margin. They make, you know, single-digit --

Forbes: Not even Pfizer?

Berkowitz: Even Pfizer today. And what happened was, the reason why I became very interested in them is not because of the unbelievable money that the companies are making. It was because of the fear that the new administration was going to destroy our

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drug companies, destroy our healthcare companies which sent the prices of these securities over the cliff. And thus, the price you paid versus the earnings that the companies were making were quite reasonable and one could get a double-digit yield.

It wasn't that long ago, a decade ago, where people were paying, investors were paying 40 times earnings for our drug companies. And today, they're in the high to mid-single digits with rock solid balance sheets and you really can't ask for much more. And my question is: Well, if these companies aren't gonna do it for else in healthcare, who is going to do it for us?

Forbes: Are you still bullish on defense?

Berkowitz: Again our defense companies have took a real hit on the basis that our defense budget will eventually come down hard with the new administration.

But we take the tact again, it's a very, you know, single-profit margins, very reasonable. And you know, the Boeings, the Northrops of the world, they are our defense system. They are the defense community. And they're absolutely essential to the health and well-being and security of the country.

And as long as we have all the global situations that are going on, we have so many people who disagree with our way of life, then we're going to need them. And again, for what they're priced at versus the reasonable profits that they make, it's a good investment.

Forbes: You look for things that are kind of unique. Like, what is it, Buffalo Wild Wings? Tell us about that.

Tom Gardner (Co-Founder & CEO, The Motley Fool): Steve, have you never been to a Buffalo Wild Wings?

Forbes: I haven't. I'm still going to Sammy's, in the dark, dank thing where you scream and throw beer at the big screen.

Gardner: Exactly. And I don't think, but I don't know if Buffalo Wild Wings is in New York City yet, but Buffalo Wild Wings is a national sports bar. There is not a national sports bar brand. So, think of obvious--

Forbes: Sort of Starbucks.

Gardner: It has Starbucks-like qualities. Although, obviously, it's going to be a smaller category than getting a cup or two cups of coffee every day. But Buffalo Wild Wings, a very well-run business. Also, a business with high insider ownership. The two women, the CEO and CFO that have run the business, have been there for well more than a decade.

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It's just, the economics are great. It's been a great stock. It's been a great stock through a down period. It's not an expensive ticket at the restaurant, so it's on college campuses also around the country. So, I love to find, you know, high returns on equity, high returns on invested capital, no leverage, plenty of cash on the balance sheet. That's probably my favorite. The stock is not as cheap as I'd like it to be, at about $40 a share today, but I think it's got great prospects over the next decade.

Forbes: What are other ones like that, that go in unique areas?

Gardner: Well, Quality Systems has been my best recommendation. Quality Systems is electronic medical record keeping. It's been about a 10-bagger over the last six years. It is a very well-run business, and this is a major wave, as we know. Most of us go to our doctor's office, and you can see on the wall, pencil and paper records of your visits over the years. It's not the most efficient. It is expensive to upgrade to electronic medical record keeping, but it's a much better service. Particularly when you think of Hurricane Katrina rolling through, and destroying a lot of hospital records in the basements of hospitals. It's just ridiculous that these records weren't digitized. So, Quality Systems is, has the leading software package to digitize medical information.

Economy Is Weak, Bears Roar

Forbes: You were worried about housing back in 2002. The air really didn't start to go until 2006 and the smash in 2007. That's four years of gains you would have missed. What did you do in that period? When did you feel better get out even if the bubble gets bigger?

Gary Shilling (President, A. Gary Shilling & Co.): Well, I did not participate in the housing bubble on the way up. But certainly, in our portfolios, we made a lot of money on the way down.

And it's interesting, we did a study on this looking at this whole idea of when you ought to be in stocks, or by extension, any other market. And it turns out that, yes, those blow-off months can be very rewarding on the upside, but you're actually better off if you miss the blow-off months and are absent from a declining market on the way down because markets fall a lot faster than they rise. And if you do that, you're better off at the bottom then, you're cooler, you're more collected. You haven't had your head handed to you. You're better able to assess the situation rationally and take advantage of whatever's going to happen next. So, I think history shows, and certainly that's what I've been guided by, that you're better off letting somebody else play the big bubble, and take advantage of the downside, which we did on basically being short subprime mortgages, and then being ready for what follows.

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Forbes: Were you surprised by the turnaround in the stock market in March? Is that for real, or is this just a temporary bump up that's going to get bumped down again?

John Jacquemin (Founder & President, Mooring Financial Corporation): Well, it's a hell of a bump.

Forbes: Thirty percent, forty percent.

Jacquemin: Right. It's a lot bigger bump than I had expected, frankly. It's natural to have. Nothing goes straight up. Nothing goes straight down.

So we expected a rally at some point. We didn't expect one quite as vigorous as this one. Whether or not it can last, we tend to think not because there are two measures that we use that are very important in determining what the timing might be for real recovery in the economy. One is the housing market. We think that there is still a tremendous oversupply of housing. And as long as you have an oversupply of any asset you have a downward pressure on prices. And we think it will take about a year to two years to absorb that 2 to 2.5 million units that there's nobody to live in right now. You need new household formation. You need immigration. And as long as we have that oversupply, we think there will still be weakness in the residential real estate market.

The other side of this is consumer spending. Consumer spending, well, consumer saving, has gone from, in the last 15 years or so, from about 10% of disposable income to zero until the last several months. And that really, I guess it was caught up with a philosophy that we seem to have developed in this country that we needed to have everything now, even if we have to borrow.

Forbes: So you think that's reversing?

Jacquemin: I think that's reversing.

Forbes: So you're not going to get a real surge of consumer spending?

Jacquemin: No. Because in the past four months now, there's been net consumer saving. And it jumped up from 4.5% to 5.6% between March and April. I think it continues to at least at that level and probably increases even more. But the consumer's net worth has really been bashed through housing, through equity markets and through an overload of debt. That's why I don't think that this rally is the real thing.

Forbes: Now, the stock market has had a great rise since March. We saw a lot of bargains in the beginning of the year. Do you think the market is now where it should be? Has it shut its bolt already?

Whitney Tilson (Founder & Managing Partner, T2 Partners): Yeah.

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Forbes: Because, by the way, maybe you should preface that--you're still bearish on the economy itself.

Tilson: We are. I mean, we are probably slightly more bearish than consensus. The consensus view out there these days is that while the economy may continue to decline, it's probably pretty close to a bottom both in terms of GDP decline as well as any further housing- price declines, which has been the locomotive of the decline. And that we're going to reach a bottom sometime later this year. Our view is that a bottom is probably 12 months out, not six months. And we thought that our bearish scenario was absolutely built into stocks three months ago at their March lows. And so we were buying aggressively at that point. As hard as it was short term, every single day, we seem to get whacked over the head and take a beating.

But we knew what we owned was really, really cheap and had very high conviction that if we could just have staying power, just hung in there, that we would be rewarded. Today there aren't any more 80% certainty bets out there. The stock market's up 35%, that's three years' worth of gains in three months in our view. And so we've been trimming our long portfolio. We haven't gone to cash or totally defensive positioning. But we've gone from in the hedge funds we manage, 100% long, 50% short to something closer to 80% long, 50% short. We're still keeping a lot of hedging in place 'cause we think there is downside risk. But also we like the stocks we own enough to maintain a net-long position.

What To Avoid

Forbes: Commodities. A year and a half, two years ago, you were bearish on commodities, and were born out. They've had some rally in the recent months. Where do you see oil going? Where do you see copper going?

Gary Shilling (President, A. Gary Shilling & Co.): Oil is always very tricky because you don't know what OPEC is going to do. And with a cartel, you're not always sure it's going to be driven by economic fundamentals.

Copper, I think is much more indicative of it's an excellent proxy for global production because copper goes into almost anything that's manufactured--cars, houses, appliances, computers, machinery, you name it. And I think with a rather sluggish global economy in coming years that copper prices are probably going to decline and many other commodities as well, industrial commodities. Agricultural commodities, of course, weather is very important. Weather looks very good this year. So, it looks like we're going to have bumper crops of soybeans and corn in particular. But I don't think we have another big play in commodities. And commodities were driven not only by very strong global demand earlier in this decade, and actually in the '90s, but also the treatment of commodities by institutional investors, pension funds, endowment funds and the like as well as individuals.

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Forbes: So they made it a security?

Shilling: Yep, as investment classes. Well, I always thought that was nonsense, and I think a lot of them have concluded that commodities are speculation, they're not an asset class, and they have retreated even faster than they rushed in. So, that has, I think, removed that sort of buying power.

Forbes: You certainly wouldn't go in the stock market. You would short commercial real estate. And regional banks? You would take a dim view of regional banks. Why?

John Jacquemin (Founder & President, Mooring Financial Corporation): Well, primarily because of their commercial real estate exposure. We think that they have, well, commercial real estate is what brought down many, if not most, of the banks in the early 1990s. And we think many of these banks were competing with the CMBS deals for commercial mortgages. And so we're forced to do many deals without guarantees, with loose covenants. And we think that there's a day of reckoning coming for those banks in commercial real estate.

Forbes: So the KRE [SPDR KBW Regional Banking ETF], you would short?

Jacquemin: We are short the KRE. Yes, we are, and it has rebounded quite a lot. But we've remained short the KRE and a number of specific regional banks.

Forbes: Wells Fargo and American Express, which even now have come back from their March lows. But they may need additional capital, if the government's to be believed.

Whitney Tilson (Founder & Managing Partner, T2 Capital): Well, both of them, actually, the government required them to raise additional capital, and they by and large have. Our belief is that they will not need to raise more capital beyond what they've been required to do. And it's important to understand that the stress test that the government did, many investors are looking at that and thinking that's the final stage.

And, you know, whatever company's there, raise the money the government said they had to raise, then all those companies are free and clear. Well, we're short some of those companies. We're long American Express and Wells Fargo. We're short Capital One and Bank of America, for example, because we think BofA and Cap One are going to need to raise even more money than what the stress tests indicated. We jokingly called the stress test the “stress-less test" because, for example, their stress-test scenario for unemployment was 10% next year. Well, that's not a stress test, in our opinion, that's virtually certain, given that unemployment rate's already above 9% and rising rapidly. And it's a lagging indicator.

Forbes: Right.

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Tilson: The Fed itself says it's going to go higher than 10%. So we think the stress test was an important first step, but you got to understand it's a first step. There are almost certain to be many companies that are going to need to raise additional capital. Many of those companies may not be able to raise it privately. So those that are raising capital today are being very smart to do so. There's a window to raise capital. But if we're right about the magnitude of the losses coming in later this year or next year, and keep in mind homeowner defaults nationwide this year are running at a higher level than last year. And last year's defaults took down our financial system.

So, they're not diminishing. They're increasing over last year. We think the financial system is not out of the woods. Certain blue-chip companies like AmEx and Wells Fargo will, we think, be able to outrun their losses because they have enormous earnings power, but many financial institutions won't be able to do so.

Bearish Picks

Forbes: So, going down the list, stocks, if anything, listening to you, stay out or go short. Commodities, no play there. Dollar's a default position. Let's get to a favorite of yours, Treasuries.

Gary Shilling (President, A. Gary Shilling & Co.): Ah, long Treasuries.

Forbes: You long Treasuries.

Shilling: You bet.

Forbes: Again, to pat you on the head, you were in Treasuries when everyone else said by golly, they've reached their peak, they can't get any better. Well, they did. Now, at the end of last year, though, you go out, and now you're coming in again.

Shilling: You know, if you look at a Treasury, I think they're about 4.1% on the 30-year, and you look at the CPI down 1.5% year-over-year, you add the two together, you get 5.6% real return. Hey, that ain't bad.

Whitney Tilson (Founder & Managing Partner, T2 Capital LLC): The main advice I would give to the average person is you don't have to be a hero. You don't have to invest in the financial sector at all unless you really know a company well and can really do in-depth analysis and reach a very firm conclusion. You're probably better off buying something cheap and safe like Berkshire Hathaway, for example, and let Warren Buffett find the distressed investments in the financial sector for you. And as another example, we think a lot of blue chip stocks have not rallied much in this rally since March. Pfizer's got $18 billion in net cash. They've got the biggest drug distribution network in the world, and they trade at eight times earnings.

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A company like Pfizer shouldn't trade at eight times earnings unless you think earnings are going to collapse. And we think there's going to be a headwind to earnings, but we don't think they're going to collapse. You can build a very nice, pretty safe blue-chip portfolio that isn't going to double in the next few months but is very likely to double in the next few years. And that's a pretty satisfactory return.