Value Will Win Out in the Long Run

Value Will Win Out in the Long Run, by Bill Staton

We urge you to take a look at this interview with Bill Miller, one of the great money managers of all time:

http://www.morningstar.com/cover/videocenter.html?bctid=1541038835&lineup=funds.

It's called "Contrarian Toughness." Actually, there are a number of other interviews with Miller, all short, all more than worth listening to if you'd like to sharpen your investment skills. You'll also end up with a much better understanding of what's really going on with the economy and stocks. Miller was named the greatest money manger of the 1990s and outperformed the S&P 500 for 15 consecutive years through 2005. We are unaware of any other manager any place on the planet that is able to lay ownership to that claim. Not even Warren Buffett, the world's richest person. If you do watch this short interview, about five minutes long,you'll note Miller comments that stocks making new highs, forthe most part, are in the momentum category. That is, thehigher they go, the more suckers there are who want to buy them. (Remember the hundreds of dotcoms that ultimately turnedinto dotbombs?) Take a look at today's new highs list in yournewspaper and see all the names you've never heard of.

Meanwhile, the new lows list is filled with the crème de la crème of American corporations. Names like AAA-rated Pfizer at a 15-year low. Bank of America, the nation's second-largest bank, hit a multi-year low yesterday. PFE has 41 straight years of higher dividends while BAC has 31. Yet both are the subject of speculation about their dividends being cut. The financials, especially, have been clobbered including American Capital Strategies/ACAS. The mainstream media and various and sundry talking heads tellus commodities are going to the moon, and it's the end of the world for banks and their brethren. Meanwhile Charlie Munger, Buffett's one and only investing partner, likes the prospectfor well-chosen financials a whole lot better. Whom should you believe?

Richard Pzena, a world-class money manager, believes Munger. He put together the chart above. Just a few years ago, it was smart to sell financials and buy commodity stocks. Today it's just the opposite. The current Barron's features an article by Michael Santoli who writes, "Extrapolating the horrid 2007 mortgage-loss experience far overstates the likely ongoing level of pain. The salient indicators of credit-market stresses are all far more benign today (than in mid March) from the corporate swap spread to Fannie Mae spreads. And the yield curve is steeper, thus more favorable. "Michael Darda of MKM Partners notes that while bank stockshave fallen about as much as they did before bottoming in the1989-90 recession, the yield curve, federal-funds policy andother capital-markets conditions are far more favorable now.

Now let's turn to housing. Why would a director of Home Depot, which has been struggling earningswise for more than two years, buy $18 million-plus of the stock last week? What does he know that the average investor doesn't?

Housing has become incredibly affordable compared to just oneyear ago. The average mortgage payment of the typical home isabout 20% less. Last July the median price of an American homewas $230,000, and a long-term mortgage was around 7%. Today that same home is $200,000 with long rates closer to 6%. That would take the monthly mortgage payment to under $1,000 from a little over $1,200 just 11 months ago.

Home Depot is a value. Ditto for American Capital. And Bank ofAmerica. And Pfizer. And the other nine stocks in The Baker'sDozen Guided Portfolio®. Arne Alsin, a columnist for The Financial Times, wrote this onMay 24. His words should be taken to heart by us all:"If you're like many investors, you look at the falling priceand it makes you nervous. In your mind, it means you made amistake. You worry that the stock price may fall further. Andso, if you're like a lot of investors. You sell. "It is always a mistake to sell because of a decline in price.Why? Because price, by itself, is meaningless. Price drives perception. If the price goes down, something must be wrong. Sell the stock. If the price goes up, enthusiasm follows. Buy the stock. "But what really counts is values notes Alsin.

"Those who understand value enjoy a significant edge," heconcludes