Tag: premium

PETER FRANCESE, ROBERT KLEINSCHMIDT AND TOM PETRIE TRANSCRIPT

February 6, 2009

On this week’s Consuelo Mack WealthTrack we’ll talk about long-term demographic trends and the investment opportunities they are creating with demographics pioneer, Peter Francese, the founder of American Demographics magazine. Plus we’ll explore some of the deep values being created in the beaten down oil patch with veteran analyst and investor Tom Petrie, and in a WealthTrack television exclusive, delve into other sectors of the financial markets with fund manager Robert Kleinschmidt of the highly regarded Tocqueville Funds.

CONSUELO MACK: This week on WealthTrack, what will rescue the economy and investors from these treacherous seas? Leading demographer Peter Francese, contrarian investor Robert Kleinschmidt, and energy analyst Tom Petrie provide some lifelines next on Consuelo Mack WealthTrack.
Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. PIMCO bond king Bill Gross told Bloomberg News this week that the U.S. may slip into a mini depression unless the government spends trillions of dollars to support the economy instead of the billions being talked about. Mr. Gross is going to be sorely disappointed by what is actually happening in Washington right now. According to an analysis by Andy Laperriere of ISI Group top ranked Washington team, the dollars that are going to reach the economy this fiscal year, when its needed most, are going to be well under one trillion and there is a danger that very little of that will be spent right away. Of the approximately $233 billion slated to be spent in the second and third quarter in the Senate bill for instance, payments to states are nearly double the amount the federal government spends. And much of the transfer of payments to individuals, things like unemployment benefits, food stamps, and health insurance go through the states. How quickly will that get into the hands of citizens and how stimulative will it be?

Meanwhile, although there have been some signs that the rate of economic decline is slowing, the pressure for stimulus is increasing. The nation’s unemployment rate rose to 7.6% last month as businesses shed nearly 600,000 jobs from their payrolls, and the stock markets continued to flirt with recent lows although the S&P did finish with a gain for the week after the worst January in history. If not from the government, where can we look for economic growth? Noted demographer Peter Francese has some answers. Plus how much more risk remains in the stock and oil markets? We’ll ask contrarian money manager Robert Kleinschmidt and veteran energy analyst Tom Petrie, next on Consuelo Mack WealthTrack.

What forces will pull the economy out of recession? How much more risky are the stock markets and what’s the outlook for oil? We try to focus on longer term trends here at WealthTrack and we have three guests who are experienced enough to have that kind of perspective. Our first guest is a WealthTrack television exclusive. He is a well-known demographer who has written widely about trends that drive consumer spending. He is Peter Francese, founder of American Demographics magazine. Peter is currently the demographic trends analyst for the global ad agency, Ogilvy and Mather. Our second guest is a WealthTrack regular who is also a WealthTrack exclusive. He is Robert Kleinschmidt, president and chief investment officer of Tocqueville Asset Management with $5.5 billion under management. As Kiplinger’s Personal Finance magazine noted, his flagship Tocqueville Fund has compiled “a terrific record by staying true to his contrarian instincts.” And we are delighted to welcome back an old friend and another WealthTrack regular. He is Tom Petrie, one of the savviest oil and gas analysts and advisors in the business. Tom’s longtime research and investment banking firm Petrie Parkman was bought by Merrill Lynch in late 2006. Now he is a vice chairman at Merrill Lynch which is owned by Bank of America. Welcome to all of you. Great to have you here on WealthTrack this week. It’s nice to have you down from New Hampshire, Peter Francese. So I want to get an economic reality check from each of you before we start our discussion, and that is how worried, number one, are each of you about the economy? And also, if there’s one thing that you all think that the government should do or not do, what is it, in the weeks ahead? Peter, first to you.

PETER FRANCESE: I think the very best thing the federal government could do would be to do something for the average American homeowner, and they seem to have that in mind. I don’t know whether it will pass or not. But the idea of a 4% mortgage, the 30-year fixed 4% mortgage, a $15,000 tax credit– those ideas are floated around now and may actually be in the bill. If those pass and they can actually jump start the housing market or at least get people to come back into the housing market and start buying again, I think that will make a huge difference. Housing is really the fundamental thing, in my view, that we need to fix first.

CONSUELO MACK: Okay. Robert Kleinschmidt?

ROBERT KLEINSCHMIDT: I agree, housing markets have to clear. I don’t know if additional government intervention in the housing markets will make that better or worse, but until housing markets clear, the housing prices are not going to stop going down. I think what the government needs to do is increase transfer payments to lower income people, unemployment, et cetera so they can broaden the social safety net, but then they have to let companies fail. They have to let creative destruction happen. You can’t save every auto supplier. You can’t save every auto maker. You can’t save every industry that comes to Washington with a hand out. If you do that, I think that’s just a recipe for stretching out this recession for another 10 years or so. The other thing that they have to do, if they’re going to do tax cuts, they have to make people believe they’re permanent; because temporary tax cuts aren’t going to do anything for anybody. It’s not going to change people’s behavior. So if you have transfer payments and tax cuts that appear to be permanent, such as capital gains taxes, or maybe corporate taxes or maybe dividend taxes, something people perceive as being a long-term change, then you’ll get re-investment and you’ll be able to help the people hurt by this economy through it as a result of the fact of more generous social network. And I think that’s what you really need to do. It’s not going to happen because the political pressures are all to the other side. It’s all to saving companies and keeping industries afloat that are probably not economic.

CONSUELO MACK: All right. Tom.

TOM PETRIE: In the energy area, they need to proceed with caution on some of the things that were advertised during the campaign- the notion of a carbon tax or cap and trade. Those are things that could really elongate this downturn.

CONSUELO MACK: When you say proceed with caution, they shouldn’t do them?

TOM PETRIE: That would be even better. Political reality may say totally abandoning them will be a tough proposition, but if they move along the lines they’ve talked about, this is how you take a two-year problem and make it a five-year problem or longer.

CONSUELO MACK: So let’s get to how we get out of this recession. And that really is– I think it’s something that all of us are optimists. We’re investors and demographer, so I know there will be an end to this recession at some point. Peter Francese, you think that demographics is going to be key to pulling us out of this recession, and you brought a chart, which actually shows the 50-plus U.S. population growth. Tell us why this chart is so important.

PETER FRANCESE: Well, because, in the past, if you had very large growth in the elderly population, you say that would be terrible.

CONSUELO MACK: Exactly.

PETER FRANCESE: And these are dependent people. We’ve got to support them and all sorts of things. But you can’t forget, these are baby boomers. And baby boomers are still working. A majority of them have said they intend to continue working after they turn 65. They really have no intention of retiring. But people in this country, according to the Federal Reserve Bank, who have the most assets are people 55-74 years old. So the growth in this market is very positive. Because they are transforming retirement because they’re not retiring, and they’re transforming being grandparents.

CONSUELO MACK: So that’s a key–what’s going to make the baby boomers, and I’m a baby boomer, what’s going to make me spend and my parents’ generation spend?

PETER FRANCESE: What’s going to make you and your parents– I know you’re not a grandmother yet, but when you become a grandmother, trust me, you will spend fortunes on your grandchild. You’re smiling.

CONSUELO MACK: Agree.

ROBERT KLEINSCHMIDT: Including the tuition.

PETER FRANCESE: Whatever, whatever it takes. If your son asks for something, you’d say, “well, money’s tight.” But the grandchild? Whatever, whatever it takes. So I think that baby boomers are going to transfer immediately an awful lot of money down to the next generation, which are the children.

CONSUELO MACK: And that could happen quickly, especially in times of economic distress.

PETER FRANCESE: Absolutely. More in economic distress than might otherwise.

CONSUELO MACK: Let’s hope that’s the case. I will look to my own pocketbook here. Robert Kleinschmidt, you think we see a sea change in investment risk. Tell us, what’s the big change?

ROBERT KLEINSCHMIDT: I think the big change is we have taken a giant step or a giant half-step to be a more European-style economy. The public sector, as a result of events of the last fall, the public sector took a big step into the private economy, and it’s not the history of governments to voluntarily pull back. So it seems to me that the level of government intervention in the U.S. economy, while it’s not yet France, it’s a lot more towards that model than it has ever been in the past. And that means– and I think that the public’s behind that, by the way. It’s not what I prefer, but I think the general public is in favor of more government intervention, more regulation, more government services, more health care, et cetera. And what that means is that you’re looking at an economy that, going forward, for whatever else might be good about it, it will not grow as quickly it as did in the past. And that changes one’s investment outlook, particularly when you’re look at various kinds of companies where’s you need a certain amount of economic growth in order to make an investment case.

CONSUELO MACK: So how does it change the investment outlook? Slower economic growth, even in a recovery?

ROBERT KLEINSCHMIDT: Even in a recovery. The last two recoveries have been classified as jobless recoveries in the early ‘90s and 2000s. People complained about how long it took for unemployment to begin to come down–

CONSUELO MACK: The jobless recovery.

ROBERT KLEINSCHMIDT: Right. And it will be worse this time. And I think the permanent level of unemployment in the United States is likely to more towards the European model than it is the historical U.S. model. In terms of investments though, that may have negative impact on smaller companies that are not global. It may have a negative impact on the overall valuation of the U.S. economy from a PE point of view versus global markets. So I think we’re still working out the implications of all of this. I think the one thing you can say for sure, when the federal government and state governments go from 30% of the economy to maybe 40% of the economy, that’s a big change, and it’s a big weight on the productive side of the economy. And it’s very unlikely that the private sector will be able to claw that back because governments don’t normally like to give you the power that they’ve accumulated.

CONSUELO MACK: Unless it becomes temporary, which is certainly some of the talk in Washington, but we’ll see what action speak louder than words. Tom, speaking of risks, you’ve been telling clients that we’re really in a black swan world. You brought a chart as well– Peter’s not the only one who brought a chart along. And your chart really shows that the oil patch has had black swan events that have been drivers of oil prices, really for a long time.

TOM PETRIE: Over four decades, there’s been a series of events, and on this chart, I show a few of them. There’s the first oil spike, the Yom Kippur War back in the early 70s, the Iranian revolution that drove the second spike. Then a long slide through the 80s, a collapse in the mid-80s of oil prices, and then really a long recovery. And then only, really more than halfway through this decade, did we get back in real price terms to where we were at the end of the 1970s. But lots of events in between that came out of the blue were not well anticipated, and, therefore not well provided for, whenever we had a meaningful move in the price of oil. This time, the most recent black swan event may be on the fortuitous side. You can have good or bad deviations on the normal distribution that we show on that curve. And when you think about that, right now the best stimulus we’ve had so far is a $100 decline in the price of oil, $100 per barrel in less than six months. That’s a billion dollars a day in round terms–

CONSUELO MACK: Fortuitous for the economy and consumers, not fortuitous for oil producers.

TOM PETRIE: That’s right, certainly fortuitous for the consumer. The one that got out there faster than anything that’s going to happen from the government. By itself, it is not enough to turn it around but it is a relief to the system to some degree, and it’s front-end loaded compared to many things.

CONSUELO MACK: So the oil outlook from here. We’ve had this big decline.

TOM PETRIE: Looking forward from here, we’ve got a lot of different issues that are cutting in both directions, but resource maturity is a major issue. Conventional oil is changing in character. The new oil is in deep water. It’s above the Arctic Circle. It’s in Russia. It’s in other parts of Asia where there’s a lot of political instability. And so that’s going to drive, tend to drive prices higher. The slow growth, or the slower growth in the future recovery that Robert talks about, maybe helps us work through the problem. There are big adjustments coming, it’s clear from what President Obama has talked about, he believes there needs to be a transformation in the patterns of our consumption, to the degree that it’s government-driven, it has a lot of issues with it, but it’s hard to argue against the notion that better efficiency, better conservation are needed as part of the solution to the problem, and to counter that issue of resource maturity.

CONSUELO MACK: So what where do you think oil is heading? What are we looking for in the next year?

TOM PETRIE: We were at an overshoot at 147. We’re in an undershoot now. The range we’re in now, sub 40, maybe it’ll get back down and test $30 a barrel or a little lower, but in those kind of price ranges, we’re talking about a non-sustainable situation. I think it will be back in probably a $60-80 range. It may take a year and a half or two years to get there. But that’s a range where you can see new developments bringing on oil that helps meet the world’s needs.

CONSUELO MACK: Peter, you mentioned the baby boomers plus are hopefully going to bail us out of this recession. How much attention should we as investors be paying to demographics? And when did demographics really start paying off as far as investment trends?

PETER FRANCESE: I think they can pay off any time. But they pay off on a longer term scale. Demographics don’t help you if you go in and out of the markets in three months but if you can put some money in a stock or in a mutual fund and leave it there for five, six, or eight years- certainly for 10 years, then the money– I’ll give you an example. On the chart that you showed, the 75 and older population is growing at twice the rate of the regular population. And a lot of them are going to need homecare but we don’t have the people, we don’t have the staff to provide all this homecare. And so who are the device makers out there who are manufacturing devices that can help one nurse or one home care agent–

CONSUELO MACK: Monitor the number of homes–

TOM PETRIE: Productivity gains in that service.

PETER FRANCESE: Productivity gains. And the number one company in my view in that area is Intel. They have these fantastic devices which they’ve invented which do all kinds of things that never have been possible before. Can they get reimbursed for that? We don’t know that yet. But the fact of the matter is, people are in health care information business, the people that I would watch– not the people providing the health care, but people providing information to make it more efficient. If I could just say a word about Robert’s comment, the states and localities taking on more employees and so forth- there’s a really important countervailing force to that, and that’s home-owning baby boomers because they watch their property taxes. I live in New England where property taxes are very high, and they fight tooth and nail to bring down any budget increases. So there is a countervailing force. I’m not sure which force is going to win out. But the people’s not willingness to pay any more property taxes mitigate against–

ROBERT KLEINSCHMIDT: Growth in government?

PETER FRANCESE: The growth in government.

ROBERT KLEINSCHMIDT: That’s very touching but there’s no evidence in the last several hundred years that governments tend not to grow. They do tend to grow, and if they can’t get the money for taxes, as we’ve seen, they’re perfectly content to borrow it And so what you’re going to see, in my view–

CONSUELO MACK: At the federal level.

ROBERT KLEINSCHMIDT: At the federal level, I think the dollar is in jeopardy. The dollar is certainly a currency that sooner or later people will begin to worry about it in a significant kind of way, and government bonds, I’m very negative on government bonds because I think that the– it’s been the most crowded trade for the last several months or so as people have rushed to what they perceive as quality, but sooner or later you’re going to have to be paid a lot more to hold U.S. government bonds if you think the currency is going to go down and if you think the overall inflation rate is higher. Those are the forces that are in play.

PETER FRANCESE: That screams for international, global investing.

CONSUELO MACK: Let me ask in this world where the public sector in the U.S. is going to be much more involve in the private sector, so how are you changing your investment strategy?

ROBERT KLEINSCHMIDT: Well, one of the things we’re looking at– speaking of oil– we’re looking at natural resources because they’ve been devastated in this market decline. But it’s very clear to me that all the money printing that’s going on, sooner or later will be effective. Right now you’ve got this tug-of-war between the commercial market shrinking through deleveraging and on the one hand, and the government printing a lot of money on the other. Sooner or later the governments will win, and it’s my contention that the governments will not pull in their horns the minute they reach the tipping point.

CONSUELO MACK: Like Paul Volker did.

ROBERT KLEINSCHMIDT: The political pressure will be, keep it on the accelerator for awhile and we will unleash, in my view, an inflation not terribly unlike what we saw in the 1970s. And you’re on aboard with that, I think.

TOM PETRIE: I am.

ROBERT KLEINSCHMIDT: As a consequence of that, I think that you want to own some oil stocks. You want to own some gold. You want to own copper stocks. You may want to own timber. Those are fair things to own that can make you some money in this environment.

CONSUELO MACK: And start owning them now.

ROBERT KLEINSCHMIDT: You want to own them now while they’re out of favor. And the one thing you don’t want to own are government bonds.

TOM PETRIE: One of the points I’ve made is people often say to me, when will we get back to $100 oil? I say it’s not simply a supply-demand issue. It may well be the next time we see the $100 oil is when the value of the dollar is depreciated, that’s the price that’s demanded by those who say, “I don’t want your dollars.” We’re flirting with that this time around, just like we’re worried about the issue, will China buy our bonds? We need to think about it.

CONSUELO MACK: You can’t give specific investment advice, Tom Petrie, however, for those of us who have well diversified portfolios, we’re interested in energy holdings, which have been lousy investments for the last year, but what hasn’t other than Treasury bonds– what should our investment strategy be?

TOM PETRIE: It basically should be resource-oriented. There are well-run companies because they’re cycle tested that have not relied on high-financial leverage–

CONSUELO MACK: These are some of the big oil companies, for instance?

TOM PETRIE: Certainly among the majors there’s value. But also among the EMP companies, there will be a phase where they will move into actual growth in output of natural gas and oil.

CONSUELO MACK: This is exploration production. The one thing that investors are looking at as well are dividends and a lot of dividends are not secure. How secure are the dividends you would find in some of the major oil companies?

TOM PETRIE: I think they’re relatively secure. Basically, for the very large companies, they, by virtue of their integrated operations and so on and the relatively conservative policy they’ve had, their dividends look to be secure.

ROBERT KLEINSCHMIDT: And many have cut back on their capital spending.

TOM PETRIE: In preference of making dividends.

CONSUELO MACK: So Peter, you brought one more chart, which is really a stunner, talking about, you were just saying looking globally, and this is a chart that shows the population right now of 15- to 24-year-old males. Why is that important and what is this chart telling us?

PETER FRANCESE: What this chart tells us is that there are only 22 million men 15-24 in the United States.

CONSUELO MACK: My son is one of them.

PETER FRANCESE: Your son being one of them, one of the few. But in Latin America, there are over 50 million of them. There are over twice as many in Latin America. In Asia, there are over 350 million. Those young men are going to, sooner or later most of them, are going to get married to some young woman and start having children, and that’s going to unleash an enormous amount of economic activity, and every one of those young men is going to be looking for a job and going to start spending money once they find a job, whether that job is here because they’ve immigrated here or whether it’s in their country.

CONSUELO MACK: The best way for the One Investment that all of us should own something of in a long-term diversified portfolio, the best way to play this demographic is young men.

PETER FRANCESE: It’s to own an emerging market fund. Because emerging markets are youthful markets. There are many, many more young people who are going to be building families and spending money and earning money and creating wealth in the emerging markets. So one of my favorites is the Vanguard Emerging Markets Index Fund (VEIEX). Vanguard is good at spreading the risk around. They have Brazil in there and China in there and a number of others. But if you wanted to invest in an individual country, we were talking about this earlier, all you have to look at, Consuelo, is how they treat women.

CONSUELO MACK: I have to cut you off. That’s a very interesting comment. But Robert Kleinschmidt you were saying bet against Treasuries. So how do we do that as an individual?

ROBERT KLEINSCHMIDT: Well if you can’t short stocks, you can buy an ETF, symbol is TBT, which works inversely to the price of bonds, so that when bonds go down because interest rates go up, your ETF goes up. I own that in a number of accounts.

CONSUELO MACK: I’m going to have to leave it there, unfortunately. Peter Francese, great to have you here, our demographics guru. Robert Kleinschmidt from the Tocqueville Fund, wonderful to have you here as well, and from Bank of America Merrill Lynch, Tom Petrie, great to you have here, too. Thanks for joining us on WealthTrack.
At the conclusion of every WealthTrack, we leave you with one action to take to build and protect your wealth over the long term as well. This week, we are focusing on protecting yourself from financial scams. Everyone knows about Bernie Madoff’s massive $50 billion Ponzi scheme, but it turns out his is only the biggest and best known. In January alone, at least six multi-million dollar fraud cases have emerged across the country, all uncovered by the bear market. Most have a common theme: they offered outsized returns. So this week’s Action Point: protect yourself from financial fraud.

How do you do that? Beware the current hot investment pitch. According to white collar crime experts, criminals chase the news- they like to exploit whatever is current and hot. For instance, in this low return environment, a common scam has been high yield promises of better than bank returns. To avoid becoming a victim, law enforcement officials advise: be skeptical. Don’t rely on word of mouth referrals or assume others have done the due diligence. You have to do your own or hire a reputable professional to do it for you. So get a knowledgeable second opinion, and be sure to check the financial adviser’s own credentials. Much of the money that was lost with Madoff came through intermediaries who received hefty fees for directing business his way. Another tip from the experts: if you don’t understand the business or investment strategy behind the scheme, don’t invest. And if it sounds too good to be true, you know the answer to that, it really is.

We’re facing a hard truth right now, we are almost out of time. Next week, we are going to reassess the outlook for the economy, markets and your retirement portfolios with noted NYU economics Professor Mark Gertler, well known financial journalist Dave Kansas who just authored The Wall Street Journal Guide To The End Of Wall Street As We Know It, and Kristi Mitchem, head of the U.S. defined contribution business that includes 401(k)s for Barclays Global Investors.

Until then, to watch this program again go to our website, wealthtrack.com. Starting on Monday you can see it as a podcast or as streaming video.

Thanks for visiting with us, and make the week ahead a profitable and a productive one.

BURTON MALKIEL, TOM PETRIE AND DAVID LAIBSON TRANSCRIPT

February 29, 2008

This week on WealthTrack, it’s back to school with three experienced investment mentors- Random Down Wall Street’s Burton Malkiel, Harvard behavioral economist David Laibson, and energy market veteran Tom Petrie. They all have pointers for tough market tests ahead on Consuelo Mack WealthTrack.

CONSUELO MACK: Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. There are volumes of research proving the futility and destructiveness of investors trying to time the market. Most of the time, we get it exactly wrong, and only the savviest of pros get it right. As Warren Buffet famously said, “We want to do business in times of trouble.” Well, times of trouble are here. Mr. Buffet has been putting Berkshire Hathaway’s prodigious billions to work, while individual investors are selling stocks in droves and fleeing into short-term cash instruments like bank CDs and short-term treasury securities. According to Charles Biderman, publisher of TrimTabs, which tracks daily money flows in mutual funds and ETFs, “it’s as if investors made a New Year’s resolution to get out of the U.S. stock market.” Since the beginning of the year, selling of U.S. stock mutual funds of all sorts has been accelerating. The selling has spread to international stock markets as well, especially emerging markets, which, as you know, have been stellar performers for the last several years.

Meanwhile, long-term institutional investors have been putting money to work in the most downtrodden sectors of the market. Recently on WealthTrack, third-generation value investor Chris Davis of the Davis Funds explained why his firm invested $1.2 billion in Merrill Lynch stock. After following the company for ten years, he now believes it offers good value. In recent months, Warren Buffet has purchased a distressed re- insurance company, started a municipal bond insurance firm, and purchased a 60% stake in Marmon Holdings, a manufacturing and service business conglomerate. Buffet called the $4.5 billion purchase of Marmon a “very large bet on America over a long period of time.” Sovereign wealth funds, investment funds controlled by foreign governments, are also making large long-term bets on American companies. Singapore’s Temasek holdings was another big investor in Merrill Lynch. Citigroup has tapped not only Singapore, but sovereign wealth funds of Abu Dhabi and Kuwait. And China has invested in Morgan Stanley. Is this any time for you to be making some new investments? We’ll ask Burton Malkiel, David Laibson, and Tom Petrie next on Consuelo Mack WealthTrack.

How efficient are the markets right now? Where do China and energy fit into your portfolio? And how can you prevent yourself from making harmful investment mistakes? Our first guest almost needs no introduction. His classic, A Random Walk Down Wall Street, now in its ninth edition, has sold over one million copies and introduced the concept of index investing to millions more. He’s Burton Malkiel, professor of economics at Princeton University, and now the author of a new book, From Wall Street to the Great Wall, about the opportunities he sees in China. China looms large in the energy market, and one of the savviest experts in the business is our next guest. He is Tom Petrie, whose longtime research and investment banking firm was bought by Merrill Lynch in late 2006. Now, he’s a Merrill Lynch vice chairman, where he focuses on investment banking in the hyperactive energy field. Our third guest is a PhD economist and professor of economics at Harvard University who works at the intersection of economics and psychology, a field called behavioral economics, among others. He’s David Laibson, named one of the ten people to watch by Fortune magazine in 2005. One of his many interests is the puzzling behavior of individual investors. And puzzling it is indeed, especially seeing what’s happened since the beginning of the year. It’s great to have you all here. Professor Malkiel, let me ask you, the ninth edition of Random Walk Down Wall Street, does the efficient market theory still hold up? Has anything changed?

BURTON MALKIEL: One of the things I do when I do new editions, I keep asking myself, is the advice in the first edition that you are probably better off just buying a low cost index fund, does that still hold up, and, in fact, it holds up beautifully. Index funds continue to beat about two-thirds of the actively managed funds, and the one-third that may win in one year aren’t usually the same ones that win the next year.

CONSUELO MACK: Let me ask you about that. Because we did some research in down markets and it turns out that the median actively managed funds outperforms the index funds. In down markets, is that really the case?

BURTON MALKIEL: There is a slight —

CONSUELO MACK: Slight.

BURTON MALKIEL: But I emphasize slight tendency for index funds not to do as well in down markets for one obvious reason. That actively managed funds typically will have 5 to 10% holdings in cash. The index is 100% invested, and therefore there is a tendency for it to not do as well in a down market. Having said that, though, you’re never going to know exactly when the down and up markets are over the long haul, indexing is still the place to be.

CONSUELO MACK: Tom Petrie, you have spent most of your difficult life trying to disprove Burton Malkiel.

TOM PETRIE: The first half of my adult life, anyway.

CONSUELO MACK: You research companies and try to find the best companies for your clients. How efficient is the energy market, is the oil market for instance?

TOM PETRIE: I think it does vary over time. There is a good chunk of time in the ’80s when oil was not very much in favor. I think there was an inefficiency at that time. But over longer periods of time, I would not argue that there is a real effort — the competitiveness in the sector has resulted in a high degree of efficiency. And the professor’s findings are ones I’m aware of, and I would not take great issue with them.

CONSUELO MACK: What about the oil market now? I’m specifically referring to oil.

TOM PETRIE: Oil has a degree of complexity, and arguably inefficiency in it because of the variety of grades of oil and locational advantages and disadvantages, and the different markets that they serve. All of that can introduce pretty good opportunities for arbitrage and for capturing some errors in valuation. In the property market, where I spend a lot of my time, there is an inefficiency in that market. Although I will say, it is much more competitive today, and it is becoming a lot more efficient. What we’re working on in terms of differences in valuation today are much less than they were five, ten, 15 years ago.

CONSUELO MACK: That’s interesting. David Laibson, perhaps the most relevant part of this discussion is how individual investors react to whatever advice Burton Malkiel is giving or Tom Petrie. How efficient are individual investors in taking advantage of investment opportunities?

DAVID LAIBSON: I love that question. I think the problem is the individual investor thinks they can take advantage of market inefficiencies, and even if those inefficiencies are there, the individual is actually going to make a mistake, is going to not pursue the strategy that will take advantage of the inefficiency and will instead be the person who is getting exploited, the person who is making a poor investment. So for most individual investors, I would say for almost all individual investors, that index fund looks very, very appealing, even if the market is inefficient in some way.

CONSUELO MACK: Why is that? Can you give us an example when individuals do essentially shoot themselves in the foot?

DAVID LAIBSON: There are a lot of mistakes individual investors make. They’re going to fail to diversify, they’re going to pick high fee funds, they’re going to chase returns, and they’re probably going to be behind the people who know exactly what they’re doing. Think about a diverse environment- there are really some sophisticated investors, and they’re going to be ahead of the market. There are a huge group of unsophisticated investors, and they’ll be on the other sides of the trades. Do we think that Warren Buffett is going to make a mistake? No. Who is he trading with? Everyone on the other side. Those are the small investors. They’ll be the ones chasing the return, in fact, chasing the return in the wrong way. So we basically know that the sophisticated investors take advantage of the unsophisticated investors. The way to avoid that is to stop trying to be an active trader if you’re a small investor; buy the index fund and get a low fee.

BURTON MALKIEL: Can I just add to that?

CONSUELO MACK: Yes.

BURTON MALKIEL: Because I think it is so important. One of the things I added in the ninth edition is a new chapter on behavioral finance. Let me give you a perfect example of the mistakes individuals make. When did people put – individuals– put most money into mutual funds? It was the first quarter of 2000, just when optimism was at its peak. And what funds did they buy? They didn’t buy the value funds which actually did well in the next year? They bought the high-tech funds. When did most people take their money out of the stock market? They actually took most of it out in the third quarter of 2002, which turned out to be the low of the market. As you said, they’re taking it out now. Is this the low? I don’t know. Nobody can time the market perfectly. But when we look back on it, I am sure we will see it is precisely the time when individuals panic, that that’s the time that they shouldn’t, and that they make systematic mistakes.

TOM PETRIE: And what you end up with is, whenever something is really in favor, that’s when it gets mispriced.

BURTON MALKIEL: Right.

TOM PETRIE: We saw energy right at the top there in the late ’70s, and we were expecting $100 oil, and we triggered long-term demand and lo and behold, we find OPEC would spend 15 years in the penalty box as things unwound from the price signals that we sent, and here we are–

CONSUELO MACK: What about now, Tom?

TOM PETRIE: We’re back at finally at a price that’s —

CONSUELO MACK: In the 90s, oil.

TOM PETRIE: $90 oil is flirting with the inflation adjusted old high, and at 100 it is clearly there. There are some issues, and we were talking about this earlier, that would suggest that I think it may take an even higher price to trigger the long-term and demand elasticity. But the cumulative drag that is being introduced in the system, and the price signals, having gone from $25 oil to $100 or close to it, is beginning to create real change. This time around, we don’t have the wild euphoria that we had because we have the lesson from the last time, but we’ll get there. And probably not too far down the road, before the end of the decade.

BURTON MALKIEL: But don’t we have a new factor now? In that we have China.

TOM PETRIE: Yes.

BURTON MALKIEL: Growing at double-digit rates, and India growing at rates not quite, not so far behind.

TOM PETRIE: And the fallout from those two into the rest of Asia. So you’re right and that’s a very big distinguishing factor, Burton. That’s why we were having a debate. Will it trigger $100 or will we take $120 or $150 oil? I would sense it may well be that we’ll get to that price. We may be triggering something now, but it doesn’t mean we’ve seen the peak.

CONSUELO MACK: To affect the demand in India and China?

TOM PETRIE: And to affect the demand here, too.

CONSUELO MACK: You think it would be that high a price?

BURTON MALKIEL: I wouldn’t be surprised if it took much higher.

DAVID LAIBSON: We have China, but we also have alternative energies that are competitive at these current prices. So it’s very hard to know where the price of energy is going to go. Once again, I would tell the small investor, don’t try to make these predictions, don’t make these big bets, don’t buy a commodity fund right now, don’t short commodities. Hold a diversified portfolio.CONSUELO MACK: Let me ask you about your new book, From Wall Street to the Great Wall and How Investors Can Profit From China’s Booming Economy. Why China — especially when I consider the Chinese stock market because it is still a tiny percent of the world market capitalization.

BURTON MALKIEL: It was a tiny percent, but it is now a much larger percent.

CONSUELO MACK: The economy is.

BURTON MALKIEL: The economy is and the stock market as well, as some of the government enterprises are being privatized. There has never been in history, during the growth phase of any country, that any country has grown the way China has since what I would call the revolution of Deng Xiaoping, who essentially introduced capitalism into China.

CONSUELO MACK: And I have to tell our viewers, one of the neat things about your book is that you do give a history, in the beginning of the first chapters of the book, about China, which is really fascinating.

BURTON MALKIEL: China was basically falling apart during the Cultural Revolution, and Deng Xiaoping came in and said socialism doesn’t mean we have to have shared poverty. He actually said to be rich is glorious. He said it doesn’t matter whether the cat is black or white, only that it catches mice. And you had a practical nature of the Chinese government, and what was unleashed was the entrepreneurial power of the Chinese people. China has always revered education, since the time of Confucius, and the genius of Deng Xiaoping was to unleash the risk taking, and the entrepreneurial spirit. And China has been a tremendous growth story, and in my view, it is going to continue. After the Olympics, Shanghai is going to have a world’s fair to end all world’s fairs in 2010, and I think that growth is going to continue for decades to come.

DAVID LAIBSON: 10% growth?

BURTON MALKIEL: No, it can’t possibly continue at 10%, but in high single digits, yes.

TOM PETRIE: Much higher than we would see.

CONSUELO MACK: The developed world, at any rate, because China certainly is coming into its own as a developed country very quickly as well. Tom, how big of an impact is China having on the oil market?

TOM PETRIE: It is very big. I was in China in 1983, and saw the early stages of this, and I agree with what’s been said. It took a while for China to come to grips with it because they were — their natural resource was coal. And they’ve been using that. But as this has developed, they come to realize they really need to reach out and secure reliable supplies of liquid fuels, and that’s caused an outreach into the rest of Asia, and into Africa and so on. They’ve gone from being an exporter — when I was there, they were still an exporter. They were producing two million barrels a day, and consuming one. Today they’re consuming seven, producing 3.5, and importing 3.5, and on their way to 10 and arguably 15, and at some point, we’ll be competing with them as to whether we’re a larger importer than they are.

CONSUELO MACK: David Laibson, listening to this conversation, pro-China and pro-energy, it sounds like oil prices are going to go up. There is tremendous demand and there is still supply constraint. Thinking about how we should all have diversified portfolios, don’t you feel like we should be overweighting China and overweighting energy? Are there decisions you think can work for individuals like that?

DAVID LAIBSON: If an asset has great prospects and the market knows it has great prospects, if an economy has great prospects, that gets priced in. So it doesn’t mean that Chinese stocks are a good buy. In fact, if anything right now, most pundits are saying that Chinese stocks are in a bubble. So period of spectacular growth often can actually produce a mispricing, not an opportunity. I think right now I wouldn’t be overweight in China. I would argue at best, diversify, and maybe worry about the bubble that so many people are describing.

BURTON MALKIEL: Can I make two points about what David said?

CONSUELO MACK: Yes. I kind of had a feeling you would.

BURTON MALKIEL: First of all, when you talk about Chinese stocks, it is very complicated. There are A shares for locals, and there are H shares that Chinese companies trade in Hong Kong, and there are N shares that are Chinese companies traded in New York.

TOM PETRIE: You never know their real ownership.

BURTON MALKIEL: And the problem is that the same companies — a few of them trade in all three markets, and the prices in Hong Kong and New York are the same, but in Shanghai, they are 50 to 100% higher. When David talks about a bubble, and I think he has a point here, we’re talking about the A shares, not the H and the N shares. Secondly, I agree with him 100%, diversification, I’ve been on the diversification bandwagon —

CONSUELO MACK: That’s been your mantra —

BURTON MALKIEL: Forever. But I would argue that most investors are actually underweighted in China. And I just want them to be diversified and would like them to have at least a market weight in China, India, and some of the other developing countries.

DAVID LAIBSON: How do we do that?

CONSUELO MACK: Go ahead.

DAVID LAIBSON: They’re underweighted internationally, in general. So the way you fix that is by holding international mutual funds, not necessarily holding the India fund or the China fund. You want to hold a diversified bundle of foreign stocks. The best way to do that isn’t to focus on a single country here or there. You buy the portfolio.

BURTON MALKIEL: I certainly agree that someone ought to have a broadly diversified international portfolio, a broadly diversified emerging market portfolio, but most of those indices are as of now underweighted in China. I think to be diversified, you’re going to have to have at least a piece of it that is China.

TOM PETRIE: Interestingly, in energy, people, in my view, many people are also underweighted there because there is a sense that this future cycle is going to be a replay of the cycle we saw after 1980, ’81, when oil prices peaked and that drove prices — the price of oil way down and put us in effectively about a 10-year depression in the sector. A lot of the outperformance of certain money managers who were active was a function of their having no representation in energy. There are some who think that history will repeat itself. They miss this role that China is going to play, and that’s going to cause some who are now betting on being underweighted in energy to find some other—

DAVID LAIBSON: But there is enormous exposure of energy through emerging stocks, through domestic stocks, that which now have high market capitalization.

CONSUELO MACK: Certainly the energy sector of the last four years has. What should our energy strategy be, Tom?

TOM PETRIE: I think one needs to have representation that’s about market weighted, I’m not arguing–

CONSUELO MACK: And market weight now is —

TOM PETRIE: Market weight in the U.S. would be about 10% or 11%, not including utilities, just the main energy producers, primary energy producers. But on the international side, most of the energy stocks there are intermediaries, the refining companies and so on. Most of the producers of primary energy today, three-quarters or more, are in the hands of national oil companies that aren’t publicly owned.

CONSUELO MACK: David, one quick question before we get to the One Investment, and that’s as far as you’ve been talking about diversification, should we be rebalancing, for instance? You’re a big advocate of rebalancing portfolios. Is this the time? What would you rebalance out of China — energy for instance? Sectors that have gone up a lot?

DAVID LAIBSON: I basically wouldn’t be trying to pick individual industries. I would be holding market portfolios. I would be holding international indices, and domestic indices. They automatically weight according to market capitalization. Now where I would rebalance is if international portfolios have done very well, as they have over the past few years, I might be rebalancing away from international into domestic. So those are the rebalancings that I would mostly recommend.

CONSUELO MACK: So I need to switch us to the One Investment. Burton Malkiel, tell us what you’re recommending.

BURTON MALKIEL: Sure. I absolutely agree with David on the international diversification, but as he said himself, most people are underweighted internationally, and therefore I’m not sure I want to take money out of that. I really do think most people are underweighted in China. I would put a Chinese investment in. If I were to pick one right now, I would take a closed-end investment fund, the Templeton Dragon Fund (TDF), it is an active fund run by Mark Mobius–

CONSUELO MACK: Yes, it is.

BURTON MALKIEL: It is an active fund, but the reason I like it is, it is selling at a 15% discount. If you can buy assets at 85 cents on the dollar, generally that is a good deal. China has cooled off the H and the N shares owned in that fund. That’s where I would go.

CONSUELO MACK: David Laibson you have about 20 seconds.

DAVID LAIBSON: I would think international bonds. I agree with you, we need more international exposure to the extent that we’ve heard that message, we’ve moved to stocks, but international bonds are the one big area American investors haven’t touched.

CONSUELO MACK: We’re giving Tom Petrie a pass, because as a vice president of Merrill Lynch, he cannot make specific recommendations. So thank you all so much for being here. We could go on and on with this conversation. Burton Malkiel from Princeton, great to have you here. Tom Petrie, Merrill Lynch, and from Harvard, David Laibson. Thank you for joining us, we really appreciate it.
Every week on WealthTrack, we leave you with one recommendation, one possible action you can take to help you build and protect your wealth. This week’s Action Point, with few exceptions, choose low fee and low turnover mutual funds. Burton Malkiel, Jack Bogle, and David Laibson now have been preaching this gospel for decades for a reason.
There is a body of research that shows that fees are the one sure long-term predictor of mutual fund performance. There is the pure arithmetic aspect- the higher the mutual fund fees, the less you get as an investor, and the more trading in the portfolio, the higher the turnover costs. But there is also research to back up these claims. David Laibson brought what he calls the gold standard of this research to my attention. It’s a paper published in 1997 by Mark Carhart. It is entitled, “On Persistence in Mutual Fund Performance.” We’re going to provide a link to it on our website. It basically concludes that the investment costs of expense ratios, transaction costs and load fees all have a direct negative impact on performance. It does say “the top-decile mutual funds earn back their investment costs”, but “most funds underperform by about the magnitude of their investment expenses.”

So, how much should you pay? In A Random Walk Down Wall Street, Professor Malkiel recommends his 50-50 rule. He suggests that investors buy only actively managed funds with expense ratios below 50 basis points, or one half of 1%, and with portfolio turnover of less than 50% a year. I believe there are exceptions to this rule, especially among our WealthTrack guests. But for the most part, following the low-fee, low-turnover route is the road to more riches.

And with those directions in hand, we will conclude this edition. Join us next week for a discussion on the huge critical but little understood credit markets with two bond market mavens- Jim Grant is the editor of the contrarian journal Grant’s Interest Rate Observer and Paul McCulley is a portfolio manager and Fed strategist at bond powerhouse PIMCO. To view this program again, however, just go to our web site wealthtrack.com, starting on Monday to view it as a podcast or as streaming video.

Until next time, make the week ahead a profitable and a productive one.

WHITNEY TILSON, RANDALL FORSYTH AND AMANDA WALKER TRANSCRIPT

February 22, 2008

What are some of the most expensive mistakes that investors can make in the current market? On hand to dispense advice to WealthTrack viewers will be Barron’s Online Editor Randall Forsyth, value investor Whitney Tilson and Consumer Reports Personal Finance Columnist Amanda Walker.

CONSUELO MACK: This week on WealthTrack, where to take risks in a risk averse world, while most investors are seeking shelter, others are heading out to sea searching for new opportunities. We join the quest next on Consuelo Mack WealthTrack.

Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. No matter where you look in the financial markets you can see evidence of investors fleeing perceived risk. According to a recent survey by Merrill Lynch, risk aversion among global fund managers is at the highest level its been in seven years. Risk appetite has plunged to new lows with a net 40% taking a lower level of risk than normal. Fears over the economy and corporate profitability have driven a net 41% of the managers to hold overweight positions in cash, the highest since the 911 terrorist attacks. And 30% say they are hedged against further falls in equities over the next three months. Then there is the bond market. Spreads, the difference between yields on U.S. Treasuries and high yield bonds have widened dramatically. Investors are demanding much higher returns than they have in years to buy higher risk bonds. In some cases they refuse to buy them at all. Are these fears justified? Is this the wrong or the right time to pull back? As Forbes honor roll mutual fund manager Hersh Cohen puts it, referring to the stock market, “the market goes up about 70% of the time. It’s the 30% of the time when it’s flattened down that scares people out of it. And that’s exactly when people ought not to be selling.”

One of the greatest fears among investors right now is that the U.S. economy is not only slowing down but is heading into a recession. Some pros say we are already in one. If history is any guide that could be a positive for investors. If you look at this chart from Legg Mason, showing the historical performance of the S&P 500 before during and after the last nine recessions, on average stocks decline six months before, flatten out about half way through and recover prior losses within a year after the recession ends. So what are we afraid of? Or what should we be afraid of? We’ll ask our distinguished guests next on Consuelo Mack WealthTrack.

Is this the time to be risk averse with your investments or a time to increase your appetite for risk? Our first guest is a value investor in the warren buffet mold. He’s Whitney Tilson, founder and portfolio manager of money management firm T2 partners and two mutual funds, Tilson Focus and Tilson Dividend Fund. Tilson, is also co-editor of the newsletter, Value Investor Insight and writes a regular column for the Financial Times. Our next guest has a familiar and highly respected byline as online editor of Barron’s and a columnist on the credit markets for Barron’s weekly print edition. Randy Forsyth has been keeping his readers abreast of the unfolding turmoil in the financial markets and will update us in a moment. In the latest Consumer Reports magazine there was a thought provoking article entitled “12 Money Mistakes That Could Cost You a Million Dollars” here to explain what some of those mistakes are and how to correct them is Amanda Walker, senior editor of Consumer Union’s Personal Finance Group. So welcome to all of you. It is great to have you all here. I would say these markets are froth with possibilities of making a lot of money mistakes. Whitney, I want to start out with you. You have been increasing the risks, actually, in your portfolios, you’ve trimmed positions in some what you’ve called defensive stocks, one being Berkshire Hathaway, and another being target McDonald’s, even though some would not call them defensive stocks, and you used the cash to buy things like Borders and Sears. Why are you doing that?

WHITNEY TILSON: This period of time reminds us of late ’02 and early ’03 when investors were similarly bearish on anything related to the U.S. consumer. Stocks got very, very cheap in those
sectors, anyway. In 2002, it was pretty broad-based, today it is not so broad-based. But in the consumer sector, retailers, restaurant stocks, that kind of thing, we’ve got quite a bear market here. We’re seeing valuations we haven’t seen in probably five years or so. And the lesson coming out of ’02, early ’03 was, if you owned the blue chip names, you doubled your money. If you owned the sort of lower quality businesses with cheaper valuations, you tripled or quadrupled your money. Berkshire Hathaway and Target are two of our largest stocks, but we trimmed them a little bit. To generate a little cash to buy some of the stocks that have really gotten massacre.

CONSUELO MACK: But you could be early —

WHITNEY TILSON: We’ve been early for about six months, and we could be early for a little while longer. Fortunately we’re patient and have a strong stomach and our investors do, too, and we think we will do well eventually. Hard to predict the bottom here.

CONSUELO MACK: You think there is a big difference between uncertainty, which scares people, and risk.

WHITNEY TILSON: Yes.

CONSUELO MACK: What’s the difference?

WHITNEY TILSON: Uncertainty is if we’re buying trading one-third of asset value, or half of what any rational buyer would pay to own the entire company, the fact that the stock might go down a further 20% isn’t risk in the way we define risk, which is permanent loss of capital. As long as you hold on or you’re right about the intrinsic value, you’ll do fine. But who knows when the American consumer is going to pick up. So we’re comfortable with uncertainty, as long as we don’t think we’re taking much risk.

CONSUELO MACK: That’s a very important distinction. Randy, as far as the bond markets are concerned, there seems to a lot of both uncertainty in the bond markets and a tremendous amount of risk in the bond market. So what is your assessment?

RANDALL FORSYTH: The risk is only being now — finally being reflected in the valuations. Only partially. We don’t — there is a lot of uncertainty. Actually, I would say it is almost certain that things are going to get worse. The credit problems that have caused the decline in the economy, that have stopped the stock market from going up, those factors are only, I think, going to get worse and there is nothing but time that will heal that.

CONSUELO MACK: So — and we’re talking about the real risk, which is the possibility of actually losing money — so do you think that there are real risks still in the credit markets?

RANDALL FORSYTH: Absolutely.

CONSUELO MACK: And it is not just uncertainty. There is real risks —

RANDALL FORSYTH: Of definitely losing money and principle because the assets backing up a lot of the credit market instruments are still going to decline in price. The main one is housing. And house prices have farther to fall. They are, essentially, the backing for so much of what is in the credit system now. Now, that said, there are other parts of the market where there is some irrational fear and there are opportunities.

CONSUELO MACK: Such as?

RANDALL FORSYTH: I would say municipal bonds would be the number one example.

CONSUELO MACK: Okay.

RANDALL FORSYTH: States and municipalities are not going to go away. Their default experience is vastly better than anything in the corporate bond market. There are a lot of worries about the insurers of the municipal bonds who got mixed up in all of the crazy mortgage stuff, but it doesn’t affect the underlying state and municipal finances.

CONSUELO MACK: You would agree with that?

WHITNEY TILSON: Absolutely. I think it is important for your viewers to understand, there may well be some risk owning muni bond funds because if the bond insurers get downgraded, and it looks quite likely they will, the two largest, then the muni bonds could get downgraded and it could trigger institutions who own these bonds, who have an investment mandate, and if the bonded insurers go away, it could force a selloff. And if you own a fund, the funds could get really marked down. However, if you own individual bonds, if you own the city of Wichita, 20-year bond, Wichita is not going to default on that bond. It doesn’t matter what it is rated. The bond is money good. There is a difference in owning a bond and individual bonds.

CONSUELO MACK: If you’re a long-term investor and you’re owning most of the municipal bonds in the municipal bond funds —

WHITNEY TILSON: That fund may take a markdown, and it may look like a loss, but as long as the fund holds the city of Wichita bonds and so far and it wasn’t speculating in CDOs or other derivatives that are rooted in bonds, and if you have that kind of conviction, you’ll be fine in the bonds as well.

RANDALL FORSYTH: I would add that a lot of the markdowns have already happened. The market is not giving any triple A credit to ensured bonds. And the best bond funds never took the insurance into consideration in the first place. They were only looking at the credits, and the credits as I emphasized, are solid.

CONSUELO MACK: Very interesting. So Amanda, back to — we’re talking about what could be some costly mistakes or not, but consumer reports did an article about it. And one of the most expensive mistakes we can make as individuals is that you can invest too conservatively in your retirement years.

AMANDA WALKER: Right.

CONSUELO MACK: When looking at the markets now, I can certainly vouch for my parents’ generation, they’re looking at the markets and saying, I just want out. I don’t care —

AMANDA WALKER: Or not even in.

CONSUELO MACK: Exactly right. But you’re saying that could cost you big time. Up from a $500,000 portfolio, it cost you over your retirement, $360 to $750,000. How did you figure that out?

AMANDA WALKER: We looked at different time frames, 25 and 30 year cycles between 1940 and 2006. And there are two different dollar amounts. We assume people would take out about 3% a year, and they’re invested in stocks versus an all bond portfolio.

CONSUELO MACK: That’s absolutely fascinating. Whitney, you in T2 partners, your hedge fund, you can short, and a lot of us wouldn’t dare, but some are going long, actually, some of the things you’re shorting. I mean, financials, for instance, home builders. Why aren’t you joining some of your value peers?

WHITNEY TILSON: Well, that’s what makes markets, of course. It makes me think real hard about going short something if someone I respect is longing it, but we make our own decisions. We are still quite bearish for some of the reasons randy cited. Anything related to home building and financials that have exposure to homebuilders, and to mortgages in particular. I could give an hour long slide presentation and show you the data, but the data is saying very clearly to us is that what we’re seeing now were bad mortgages written in early ’05, that the two-year teaser expired a year ago, and it takes a year for the banks to foreclosure and auction off those homes. We’re seeing the first indications of a title wave of foreclosures and auctions of these homes that are going to crash home prices this year. I don’t mean crash 50%. But nation-wide, I think it is almost certain home prices will decline by double digits nation-wide. Never before happened. Which means that given that half the markets around the country didn’t get overheated, so it means 20% or greater declines in the coastal markets and in the overheated markets, and I think that has a lot of negative implications for financial institutions that own hundreds of billions of dollars of structured finance products that are backed by these mortgages that are all going bad, as well as certainly for home builders. Believe it or not, we are long some retailers, some particular situations. Even though we’re very bearish on the American consumer — that’s right, we’re bearish on the consumer, but we think there are a handful of companies that enough things are going right in the company, even though they’re swimming against the tide for the next 12 months, we’re still comfortable owning the stock because the stock is cheap enough and enough good things are happening internally.

CONSUELO MACK: Such as?

WHITNEY TILSON: Target is our largest, other than Berkshire Hathaway. We think the stock is just above 50. We started buying it in the mid-60s, so we were a little early, but we think it is worth $100 or more a share a couple years out. Eventually, the American consumer will start to look a little better. It might be a year out before we start to see a turn. But they own most of their real estate, and they’ve got a very valuable real estate and credit card portfolio and they’re taking advantage of the declining share price to buyback $10 billion worth of their stock. The fact that they’re able to buyback 25% of their outstanding shares at a depressed price, actually makes the company more valuable a couple of years out, we think. So in the meantime, though, you sort of have to sit and be patient.

CONSUELO MACK: Right. From your point of view, the financials, for instance, you know, would this be a time, if one wanted to take a little bit of risk, would you step into any of the financials? Or do you think they’re great shorts as well.

WHITNEY TILSON: I don’t know if they’re great shorts. So many of them, the stocks have been cut in half. I wanted to sort of — it’s not either or. I want to get a point that Amanda was talking about of not being in the market. I think her comparison was being all in bonds or all in stocks. Overtime but you don’t give up a lot by having a big chunk of fixed income to smooth out the bumps along the way. It’s not either or. I wouldn’t be jumping into financials now, but I wouldn’t be liquidated stocks at these levels.

CONSUELO MACK: That’s our bottom line recommendation. You might want to keep the same diversified portfolio before you retired, after you retired, whether it is 70/30 or 80/20.

CONSUELO MACK: And another one of your points, Amanda is one of the biggest mistakes money- wise you can make is retire too early.

AMANDA WALKER: It is such a sad piece of advice. Someone who gets out at 62, versus someone who stays to 66, which has the average income, 55,000 dollars a year. What they lose in their income each year from their job, plus another 4% increase in their raise each year. What they have to pay for their own healthcare on the market because, of course, they’re not qualifying for Medicare. And it costs them about $200,000 to $300,000.

CONSUELO MACK: Wow. So keep working is the advice —

AMANDA WALKER: That’s the bottom line.

RANDALL FORSYTH: If you can.

CONSUELO MACK: If you can. Right. Randy, I want to get back to the shorting question. I know that some very experienced money managers have told me they think the best short is U.S. treasury bonds?

RANDALL FORSYTH: Perhaps.

CONSUELO MACK: Is that the most overvalued security on earth right now?

RANDALL FORSYTH: I don’t think they’re particularly overvalued or under valued. Given what I think the federal reserve will be reducing interest rates much further, but I think there is much, much better —

CONSUELO MACK: Which helps the bonds.

RANDALL FORSYTH: Which helps the bonds, but I think there are better alternatives that don’t have a lot of risk. There are still a lot of risk in the corporate market. I would say a Ginnie Mae fund — not something in crazy mortgages, but mortgages that are backed by the U.S. government or just agencies, Fannie Mae and Freddie Mac debt, because of the uncertainty, they’re giving a wider spread without a lot more risk. And the main risk, historically is people will refinance. People can’t refinance willie millie anymore.

CONSUELO MACK: Costly mistakes, we’ve been talking about them. What is one of the most costly mistakes you think an investor could make right now in this kind of a market environment?

WHITNEY TILSON: I think looking at big declines and seeing a lot of panic and uncertainty out there in the marketplace, and just sort of wading in and buying beaten down financial stocks.

CONSUELO MACK: Being too aggressive?

WHTINEY TILSON: Yes. Particularly in anything related to housing and mortgages. It reminds me of sort of middle of ’01, 2001, when the Nasdaq had fallen from 5,000, and unprecedented bubble, and it has been cut in half, and everybody was saying it has been cut in half, it can’t go down any further, we reached bottom. And I was writing at the time, saying when you come off one of the world’s great bubbles, it doesn’t come down and hit the trend line. It always slices its way through it. I was warning people it is not safe to go in. Your anchoring on what was a ridiculous high. And if you look at the fundamentals, things are going to get a lot worse. And the Nasdaq went down another 50, 60% from there. I feel similarly about some of the financials and home builders who were drinking the Kool-Aid of the biggest credit bubble and mortgage bubble in history. And they’re all down 50%, but this has not yet played its way out. There is not good disclosure there, and nobody knows where the bonds are hidden. Unless you can very precisely identify who has exposure and who doesn’t, stay away from that.

CONSUELO MACK: Randy, the most costly investment mistake people can make?

RANDALL FORSYTH: To jump out and go 100% into cash. Your returns on cash — one thing I can say with absolute certainty is your returns from cash are going to dwindle. By the end of the year, your money market fund will be paying under 2%, I think, and you need something more than that to survive and stay ahead of inflation. You have to remain invested, but diversified.

CONSUELO MACK: Amanda, quickly, in a housing recession, you’re saying one of the biggest mistakes you can make is to underinsure your home.

AMANDA WALKER: Yes, you should be investing correctly, so you can pay to rebuild your home. About 55% of people have underinsured their home about 28%. If you’ve been in your home ten years or more, it probably has appreciated, and probably about 50% or more. You want to make sure you’re ensured for the proper amount.

CONSUELO MACK: Let’s talk about the one investment for a long-term diversified portfolio. Whitney?

WHTINEY TILSON: Berkshire Hathaway (BRK.B) has been my favorite for years. It is the only stock we’ve owned more than nine years. It has ranged from a 3% position to a 30% position.

CONSUELO MACK: What is it now?

WHITNEY TILSON: We owned it through options, and we have custom written five-year options on it, as well as some stock. Looking through options, it is north of a 20% position for us, even after we trimmed it down a little bit. The reason is in this environment, we’re looking first and foremost for safety. Berkshire Hathaway has probably the strongest balance sheet of any company in the world. 50 billion of cash run by the most conservative capital allocator and investor, Warren Buffett, in history, probably. But — and we think the stock is probably 20% undervalued without giving any Warren Buffett premium, just the current business. And lastly, this is the kind of environment where other investors are panicking, where Warren Buffett can put that capital to work. Because in the land of the blind, the one-eyed man is king, and Buffett has two eyes and the land of the blind.

CONSUELO MACK: And he is doing it all right. Putting some of that capital to work.

WHITNEY TILSON: He is certainly making offers, like the offer he made to the bond insurers. It gives you the idea the kind of thing he can quickly put 5 billion or 10 billion to work where nobody else can.

CONSUELO MACK: Randy, misunderstood munis, you mentioned them before, you think we should all own a municipal bond fund.

RANDALL FORSYTH: If you pay taxes, which covers everybody. And once more, I predict in 2009, it is fairly certain all of us will be paying more taxes. That makes the taxes income from municipal bonds even more valuable. You have a very unusual situation now. Where top quality municipal bonds pay the same interests virtually as taxable treasury bonds. I think the best way for most people to invest in it, who don’t have the ability to buy their own bonds and hold them, is in very conservative, well- regarded mutual fund.

CONSUELO MACK: And we have two Morningstar recommendations, because as a journalist you can’t recommend them yourself. There are two we have up on the screen. I have to move to Amanda. You think there is a bargain of a lifetime out there for…

AMANDA WALKER: Term insurance. One of our money mistakes concerned term insurance. We recommend it for a long time, versus something like a whole life policy. It is cheaper, versus thousands of dollars a year. You can have more to spend to invest with smart money managers, instead of investing through an insurance policy and having that extra layer.

CONSUELO MACK: Great advice one and all. Whitney Tilson, great to have you here. Randy Forsyth from Barron’s online, thank you so much. And Amanda Walker from Consumer Reports. Great to have all of you back on WealthTrack for another visit.

Every week on WealthTrack we leave you with one piece of advice to help you build and protect your wealth. This week’s action point picks up on Mandy Walker’s recommendation: don’t be too conservative when investing during retirement. It might feel counterintuitive in today’s volatile markets but investing too conservatively can cost you a lot of money over time.

While the worry of losing hard- earned savings during down markets is a real one, the biggest risk you run over the long run is that your nest egg doesn’t keep up with inflation. If you keep your retirement savings mainly in bonds, money market accounts or CDs, even though it looks like you are getting a safe and decent return on paper, in real life you are not. Even benign inflation takes a substantial toll on the purchasing power of a fixed income portfolio and if inflation heats up it can be devastating. The easiest way to stay ahead of inflation is by owning more stocks. Over the past eight decades stocks as measured by the S&P 500 had a compound annual rate of return of over 10%. Super safe 30-day treasury bills over the same period only returned about three and a half percent. According to the research of Consumer Reports and Ibbotson Associates, an all-stock portfolio of $500,000 during the period 1940 to 2006 would have outperformed an all-bond portfolio by as much 750,000 dollars.

And that is definitely worth some angst of owning stock. Thanks for joining us. Next week we’ll talk about how efficient the markets really are, with the expert in the field, Princeton economist and Random Walk Down Wall Street author Burton Malkiel. We’ll also discuss investor behavior with noted Harvard professor David Laibson and delve into energy investments with veteran oil analyst Tom Petrie. And don’t forget, to see this program again, go to our website wealthtrack.com. Starting on Monday you can view it as a podcast or as streaming video. Until next time, make the week ahead a profitable and a productive one.

ED HYMAN, CHRIS DAVIS AND TOM PETRIE TRANSCRIPT

January 19, 2007

This week on WealthTrack, three investment stars exclusively for you. Wall Street’s number one ranked economist for 27 years running, ISI Group’s Ed Hyman, and former Morningstar fund manager of the year, Davis Funds’ Chris Davis, and the energy expert Merrill Lynch just brought in house, their new Vice Chairman, Tom Petrie. They’re all on our red carpet next on Consuelo Mack WealthTrack.

CONSUELO MACK: Hello and welcome to this edition of WealthTrack, I’m Consuelo Mack. We have an all star cast lined up for you on WealthTrack this week and they have plenty to talk about. The Street’s long time number one ranked economist, ISI Group’s Ed Hyman shared some of his signature charts with us which I will get to in a moment. This week we learned from various Federal Reserve banks around the country that the economy is growing at a modest pace in most regions and even manufacturing is picking up. But inflation does not seem to be a problem. U.S. consumer prices rose at the slowest pace in three years last year and as you can see from this amazing chart showing a composite of consumer prices in 35 countries, global inflation is restrained as well. One development keeping inflation in check has been falling oil prices. Crude oil has fallen by double digits this year alone and down just over one third since hitting its all time record of over $78 a barrel in July. We’ll ask energy expert Tom Petrie to explain that. And the stock market has been full of surprises. We focus on longer term trends around here, but there’s no denying it’s been a rough start to the new year, but not for everything. ISI Group pointed out to clients this week that the mega caps are back. Over the last year the largest 50 companies by market value have outperformed both the S&P 500 and the Russell 2000 after lagging for several years running. Where’s the value to be found in the markets? We’ll ask value investor Chris Davis. What the markets, the economy and energy mean for your portfolio are next on Consuelo Mack WealthTrack.

On WealthTrack this week, we are reviewing the investment climate through the eyes of three guests at the top of the professional game, and all TV exclusives to WealthTrack. You’re not going to see this kind of investment fire power anywhere else. First up, the man institutional investors have voted the number one economist on Wall Street for an unprecedented 27 years in a row, Ed Hyman, co-founder with Nancy Lazar of ISI Group, one of the most highly regarded sources of independent economic research. It is considered a daily must read by many professional investors around the globe, and oversees nearly a billion dollars in bond funds. Great to have you here. And one of the things they track is the energy market, and one of the sector’s savviest experts is also here, Tom Petrie, until recently the head of his own research and investment firm Petrie Parkman, but no more. Merrill Lynch decided to bring Tom’s expertise in house, and last month bought the firm and made Tom Vice Chairman of Merrill Lynch where he will be focusing on investment banking. Is there value to be found in the energy sector or anywhere else for that matter? Our next guest has value in his blood, Chris Davis co- manages three highly rated value funds including selected American shares that has earned Morningstar’s highest rating for over three years, and the equity fund manager of the year in 2005. It is great to have all of these stars with us. So thank you very much for being here. Ed, I want to start with you and have you set the stage for us with the economy. What kind of an economy is it going to be this year for investors?

ED HYMAN: Let me say, it is nice to be on your show, and with Tom and Chris, and thank you so much for having me. I think the economy will slow down a lot this year, and it will be a very good year for the market. Because I think the Fed will ease towards the latter part of the year. But currently the economy is accelerating. Retail is strong. And for the past five years, the economy has picked up early in the year, and it is doing it again. You had more bonus payments, and warm weather, and you have these gift cards, and the economies picked up. There is a tendency for inflation to be bad early in the year. So I’m, frankly, scared for the next, say, two months.

CONSUELO MACK: Scared for the market?

ED HYMAN: I’m scared that the Fed might think about tightening in the next few months, particularly in the next two months. And so I’m trying to get through that. And then we’ll see if my view of the economy will slow is the correct view or not. Right now it is going up, and there is a little inflation coming here in January.

CONSUELO MACK: If the Fed does tighten, is that going to be a problem? Or how much of a problem will it be for the markets and the economy?

ED HYMAN: I think they’ll just tighten until they get the economy to slow down. I see no chance they will stop without succeeding. And if they go back and tighten, I would guess the market would go up about 1% a quarter. The market was going up something like that, 15% a quarter. In ’04, ’05, the first part of ’06, the market was going up about 1% a quarter, because earnings were great, but the Fed was tightening. Right now we’re in 1Q acceleration for the economy, and I’ll let you know in March if it is going to slow.

CONSUELO MACK: We might know even if you don’t let us know. Let’s assume that your forecast is correct, and the first quarter acceleration and you just raised the GEP forecast to 3.5% for this quarter. And then you’re saying it will slow down. What is going to slow it down?

ED HYMAN: These are the factors: there is a lagged impact of the 17 rate hikes, and the yield curve is inverted, and house prices are going down. And consumers were taking a lot of money out of their house.

CONSUELO MACK: Right.

ED HYMAN: And that’s coming down, called MEW- mortgage equity control. And that package, history tells me, will slow the economy. But right now, I’m unable to tell if it is working because these three factors, more bonuses, more people are getting bonus pay, every year, and the gift cards pushed some of the Christmas into the first quarter, and we’ve had warm weather.

CONSUELO MACK: Right.

ED HYMAN: The warm weather works not only for helping housing, but everybody is happy with their energy bill.

TOM PETRIE: It’s in lieu of the interest rate cuts for the moment.

ED HYMAN: So at the moment, the argument for the economy not slowing is pretty good. And I think the bond yields will move up further, say to 5% or higher. And they’ll be worried that the Fed is going to tighten them. At this moment, when we talked to investors, there is now no expectation — the consensus is for no Fed easing.

CONSUELO MACK: Right.

ED HYMAN: Where there was one month ago, there were like three Fed easings, and people were worried about a down-turn in the economy. And that, in four weeks, has changed. And my guess is in four more weeks there will be an even more hawkish concern that the Fed didn’t get the job done.

CONSUELO MACK: That the Fed might tighten.

ED HYMAN: That 5.25 wasn’t enough and they’ve got to go to 5.50 or 6. I don’t think they are. I’m sorry to be on your show with a move here and then a move there, but that’s the way I think it is.

CONSUELO MACK: Which is why investors read your research because you follow exactly what is going on.

ED HYMAN: Beyond this, economy will slow, and the inflation is low, I think, and I think rates will come down, and we’ll have a good year for the market in the same sort of vein that we had in the latter part of last year, starting in August, September, October, November, which was the first phase of what we call a mid-cycle slowdown.

CONSUELO MACK: Let me turn to energy because we did get a big tax cut with oil prices going down. Tom, what’s your outlook for oil?

TOM PETRIE: We’re still within the range I talked about last time, $50 to $70 a barrel 80% of the time, and some smaller percentages below 50 or above 70. But we’re testing it. The key thing right now is geopolitics are driving it. The Saudis have come out and said we don’t need to cut production, which is signaling to the rest of OPEC, either you guys have to come along and do your cuts, we’ve done ours, or else the price is going lower. Or if you want to stabilize somewhere near here. Otherwise I think we will spend a little bit of time with another round of decline seasonally. In the very near term, we’ve got a very warm winter; the warmest winter maybe on record is in the making. And that’s contributing to this. But even if it were a cold winter and we get a snap, and some recovery, there is going to be a seasonal test of the real lows this spring.

CONSUELO MACK: Let me ask you about that. A former WealthTrack guest, Bill Miller, was on here saying he is personally shorting oil. Let me ask you on his behalf, because I talked to him again today, basically he thinks oil is oversold and it might go up to $55, if that, but it is going to fail there and he thinks it is going to go lower. What is your advice to Bill Miller?

TOM PETRIE: That is a pretty logical conclusion. One, we are seeing some weather finally arrive here. And for those who are short and were short at 50 or 65 or 63, you could be short 63 six, eight weeks ago, and they made a lot of money. The way they nail it down is to cover, and that takes prices back up some. But I tend to agree with him, I don’t think it goes very far up before it runs out of steam, and then you have the seasonal effects to deal with. All of this is masking the long-term we talked about the last time. Resource nationalism, in terms of Russia, Venezuela, and others, and resource maturity, in terms of conventional oil development, is still there. And the effect of all this is we’re going to compress the cycles. Some of what Fed is talking about really resonates for me because the cycles are compressing, and we’re having to deal with these things changing much more rapidly than they have historically. If you go back and look at historical cycles for capital investment in this industry and so on, it misleads you as to what the lead times are. And, you know, I think as a result, 2007 is going to be a challenging year.

CONSUELO MACK: Challenging meaning that oil prices are going to go lower?

TOM PETRIE: Oil prices are not your friend, which they have been for the past four years. But I also think we’re a lot near our bottom now than a real plunge into the low 40s or lower. I think the odds of that — they’re not zero, but the odds are very small, single-digit probability.

CHRIS DAVIS: It is also interesting that the oil stocks didn’t seem to be discounting. They certainly weren’t discounting $80 oil, and many of the stocks did a lot less badly than you would have thought with oil going from 80 to the low 50s. The interesting question is what is priced into the equity prices for oil stocks.

CONSUELO MACK: Chris is speaking — you were buying energy positions and the 1990s.

CHRIS DAVIS: Yeah.

CONSUELO MACK: And you’ve got major holdings in Conoco-Phillips, and Oxidental Petroleum, that you’ve held since the late 90s, and you’ve decided to stay with your energy holdings?

CHRIS DAVIS: We have very low turnover, and so we tend to have a very long time horizon. We see it more of a buy on the dips then sell on the strengths, sort of long-term play in energy if you look out ten or — our holding period of ten years. I think they’re discounting oil prices about in the low 50s, and that’s probably at the low end of what might be a reasonable range over the next period of time.

CONSUELO MACK: What is Chris going to go through in the next one, two, or three years?

TOM PETRIE: Well, I don’t think — I think what I’m talking about is literally the first half of ’07. And that’s why I went to the resource nationalism resource maturity. Those two factors have been alive and well post-9/11, and we’re seeing more and more evidence that the development of significant new low- cost oil is not occurring on a global basis. And that really underscores the position, the strategic positioning of the kinds of names Chris was talking about.

CONSUELO MACK: Chris, where else are you finding value in the marketplace? One of the things you were watching you told me earlier, you’re watching this kind of growth versus value type of dynamic.

CHRIS DAVIS: And large versus small. I think Ed’s chart was terrific. This is an amazing number, but that the largest 50 companies in the S&P 500 in March of 2000 traded at, I think, 170% premium in terms of valuation to the next 450 companies. And that bottomed at about 5% discount in the beginning of last year. And sort of maybe set the stage for some recovery. There just doesn’t seem to be any real appetite for these really large companies. All of the hedge funds that are getting huge incomes are skewed towards small and mid-sized companies. You mentioned Bill Miller, and he had a great phrase “we’re in a just in time market.” Nobody wants to be early investing in anything because so much of the money is in funds that are being judged over a quarter basis. A lot of hedge funds can have a bad three months and be put out of business, let alone a bad year or two. There is a lot of money waiting for things to start moving and waiting for catalysts, and it can create a good opportunity if you’re willing to look sort of beyond the dips. I do think the large companies, the high quality, and the global companies, stronger balance sheets, and global positions, maybe less exposure to commodity prices, and the ability to pass on price increases if needed. And it’s amazing they aren’t trading at the premium that they traded on average for 30 years; they’re trading at a discount. It seems to me that’s a fairly good place to hide when risk premiums are very, very tight. In a world where there is no premium — god forbid a terrorist event or some sort of shock in the system, I think you’ll see the quality spreads change in the fixed income markets of course, and also in the equity markets where people will pay up for the lower risk and the higher quality global names.

CONSUELO MACK: Right. Does that work in energy as well?

TOM PETRIE: It probably does. Quality does matter. And this dichotomy between short-term orientation, versus what is the real two, three, four-year outlook, which gets you on the way towards that ten-year horizon that Chris talks about. It is totally different from what the near term focus is of the hedge funds. Really, when you think about what’s been going on, once we knew that things were running very, very warm in terms of this winter, you know —

CONSUELO MACK: The hedge funds got out —

TOM PETRIE: The near-term trade was obvious. And now the real issue is: is China slowing? China’s imports last year were 14.5% above the year before. And that demand growth is one of the fundamental drivers that is not going away.

CONSUELO MACK: And it is interesting that research in China — you’ve got a group that is dedicated to that. What’s the answer to that question?

ED HYMAN: First, I think that the developing economies in general, and China included, are one of the most important dynamics in the world economy. And boy, they are growing. And it’s not just China. All these countries that are being involved in the globalization are doing very nicely.

TOM PETRIE: The greater Pacific rim, and other parts of the world.

ED HYMAN: Latin-America, and Eastern Europe. I mean it’s amazing, and, of course, they’re very big commodity consumers. One thing I would share is the idea that the Fed is in play. And I don’t see any chance they will stop until they have produced a significant slowdown in the economy that will make this inflation worry be put aside. And so if the economy doesn’t slow in the second quarter, as I expect, they’ll come back and tighten again.

CONSUELO MACK: And you expect it will slow —

ED HYMAN: I think it will slow. But if it doesn’t, the Fed will come in and tighten again.

TOM PETRIE: And going back to what you said earlier, you’re worried about the next two months. If it gets cold and the oil prices go up, that would reinforce their inclination.

ED HYMAN: That would reinforce their inclination, but this drop in oil is going to pull the rug out of inflation for six months. It may disguise inflation for six months —

CONSUELO MACK: So that would be a positive, actually?

ED HYMAN: That’s a positive —

CONSUELO MACK: It would hold the Fed back.

ED HYMAN: It would hold the Fed back. But they’re going to be focused more on growth, and if the unemployment rate heads towards 4%, it is currently 4.5%, if it goes to 4.3 or 4.2, they’re going to come back and hit the economy.

CONSUELO MACK: You sound worried, Ed.

ED HYMAN: Actually, I’m not.

CONSUELO MACK: Okay.

ED HYMAN: Because I’m so confident of my forecast.

CONSUELO MACK: Well, that’s why for 27 years you’ve been the number one economist on Wall Street.

ED HYMAN: But if it doesn’t, they’re going to come back and tighten again. One thing on the side is that if this is right, that they are so adamant, and I watched the Bernanke testimony this week to see if the Democratic Congress would be pushing back, and they didn’t. They’ve still saying, you can do your job.

TOM PETRIE: And there were predictions they might.

ED HYMAN: There were predictions they might. The longer term inflation picture looks pretty favorable because the Fed is in good position.

CHRIS DAVIS: And it does seem that the real estate bubble, that really could have had a bigger impact, now is being deflated. That is the one thing I wanted to ask about, this idea that if it seems that adjustment is sort of rolling through or if the market is not clearing yet? I sort of get different reports from different areas.

ED HYMAN: It looks like housing starts, the building of new houses —

CONSUELO MACK: Have picked up a little bit.

ED HYMAN: Have bottomed and picked up a little bit. And we got today the first piece of news I’ve seen that existing house prices, existing market, might be improving. There was a Michigan survey out that showed improvement in plans to buy a house.

CONSUELO MACK: But in your gut, do you think that that is the case, that housing might bottom?

ED HYMAN: Yeah, I do.

CONSUELO MACK: That doesn’t mean it will turn up any time soon?

ED HYMAN: Chris and I were talking earlier about the decade performance of the stock market, which is not very good. People love housing. It still looks like the best thing you could put your money in.

CONSUELO MACK: Okay, we have to go to the one investment for a long-term diversified portfolio which we do at the end of every WealthTrack and Tom Petrie cannot participate because he is now the Vice Chairman of Merrill Lynch in the investment banking department and it is totally separate. So, Ed Hyman, we’ve been talking about this. Your one investment has to do with something you recommended here before, and that was large cap growth stocks?

ED HYMAN: Well, I would — first, my best investment idea would be to invest in Chris’ funds.

CONSUELO MACK: Which one? Like the New York Venture, or…

ED HYMAN: The one he told you about. But I like GE (GE) as a company. I like their global footprint.

CONSUELO MACK: Right.

ED HYMAN: I like the valuation, and I like the way the stock is trading. And so — I’m not a stock picker, but that would be —

CONSUELO MACK: I know you’re not.

ED HYMAN: If we were placing bets tonight for who would win by the end of the year, I would put GE as my interest.

CONSUELO MACK: Are you two in cahoots?

CHRIS DAVIS: I’m so glad to be able to agree with everything Ed said; he has a 27 year record of being right. I agree with every word. I don’t happen to own General Electric (GE), but I just spent a day at their investor day, and I was talking to my father —

CONSUELO MACK: Shelby, who used to run Davis Advisors.

CHRIS DAVIS: And he was saying the same thing. Not necessarily that you would retire rich, this is not Google, but it is enormously high quality, trading at a reasonable valuation, which seems to be a very honorable management team, and much higher quality earnings than they have for the last decade. The earnings are up substantially, and the multiple is down in half or so from the peak, and outside of our own funds or the stocks we own, my father said to me, “why don’t we own GE?” And having heard it from Ed, I think I better get back to work.

CONSUELO MACK: We’ll leave it there. Tom, do you own GE personally?

TOM PETRIE: No, but I might think about it.

CONSUELO MACK: After tonight. Thank you all so much. Ed Hyman, great to have you. And Tom Petrie, Vice Chairman at Merrill Lynch, thanks for being here as well in from Denver, and Chris Davis, great to have you as well.

At the conclusion of every WealthTrack, we give you one suggestion to help you build or protect your wealth. And I am going to follow up on the sentiments of today’s guests that quality counts. As Chris Davis and Ed Hyman said many blue chip American companies are bargains right now, especially compared to their less than stellar competitors. One measure of a company’s financial strength is its ability to generate cash and pay a dividend. Over the past century dividends have contributed more than 40% of the stock market’s returns. So this week’s action point: pay attention to dividends.
Research by past WealthTrack guest Rob Arnott and colleague Clifford Asness found that higher dividends equal higher earnings growth. Over ten year periods, the average rate of earnings growth was nearly four percent greater when companies’ dividends were high than when they were low. Other research by Columbia University professors found that companies that raise their dividends have superior stock returns. One of last year’s best performing strategies was to buy stocks with high dividend yields. The most recent evidence of dividend allure is a recent Merrill Lynch poll which found that a record 53% of fund managers surveyed want cash returned to them via either dividends, share buybacks, or cash acquisitions. 46% believed dividend payout ratios were too low. So as you look for higher returns, pay attention to companies paying dividends and increasing them. They can payoff in both the short and long term.

And that concludes this edition of WealthTrack. Next week we are going to help you avoid some classic investment mistakes in mutual funds, stocks and art with Morningstar’s Christine Benz, Money magazine columnist Jason Zweig and Art and Auction’s Ann Berman.

And don’t forget if you want to see Ed Hyman, Chris Davis and Tom Petrie again, and who doesn’t, just go to our website wealthtrack.com. Starting on Monday you can view this program on a webcast or podcast. And before we leave you we want to welcome a new station to the WealthTrack family, Norfolk, Virginia’s WHRO is airing us Sunday afternoons at 2:00. We are delighted to be there.

Until next time, make the week ahead a profitable and a productive one.

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