June 9, 2009
Three of the industryâ€™s most accomplished value investors â€“ Bruce Berkowitz of the Fairholme Fund, Tom Marsico of Marsico Capital Management and Wally Weitz of Weitz Funds â€“ spoke at a panel discussion at the Morningstar Investor Conference on May 28.Â Pat Dorsey, Morningstarâ€™s Director of Equity Research, moderated the discussion.
Below are some excerpts of their thoughts on key questions raised during the panel.
Are valuations low?
Marsico: Â Valuations are not as compelling as in 1981-2, when interest rates were high and P/E ratios contracted.Â The opportunities are great, especially with the financial stocks.Â Valuations in certain areas are better than in 1981.
Berkowitz: In September and October every day was a knife fight.Â This was the definition of a difficult bear market.Â It was the cheapest period I have seen in general, although some sectors may have been cheaper at other times.Â Most stunning was the cheapness of companiesâ€™ senior credit, which were giving excess equity returns.Â This was the first time I have seen this in my career.Â We could be creditors and end up with 20% annual returns.
Is it different this time?
Weitz:Â A lot of financial institutions will have to follow their capital requirements more closely, and if this lasts another year or two and people get really discouraged we could see the fear of stocks that we had coming out of the 1930s.Â There will be bad news for a year or two, but consumers will be out spending and overall it wonâ€™t be so bad.
Marsico:Â The regulators were not on their watch.Â The regulations in place need to be enforced and we need transparency, especially in the hedge fund community and among other financial intermediaries.Â We must get rid of naked short selling and the unregulated CDS market.Â Weâ€™ve created a situation where small price movements can create large market moves.Â Our banking system is responsible for a much smaller share of overall lending.Â We need to shift lending back to financial institutions, because it is easier to see what is on their balance sheets.
Berkowitz:Â This time is different because of the role of derivatives, but every time there is a difference.Â It was impossible to know what banks owned and owed.Â
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