Values Abound email, sent early March 2009

I wanted to check in with you, since market sentiment has turned as ugly as it was at our last discussion. In looking over your holdings, I am reviewing any smaller positions, as well as any European and Global stock positions. As bad as things are here, you no doubt are hearing stories from friends and family that the rest of the world is doing worse. The thesis is this: since the U.S. led everyone into the recession, the U.S. will be the first to snap out of it. While our political class is doing some big spending, they also are at least acting quickly, a stark contrast to the in-fighting among countries in Europe over what to do. Thus the rally in the U.S.$ and short term Treasury securities.

What I’m trying to do is continue to allocate to areas that should be viewed as very strong companies with strong balance sheets and earnings, and to allocate to companies and sectors that should do very well once we get a whiff of relief. I’m currently doing mostly email to cover the most ground; I do want to talk or meet with you to go over any of this if you prefer.

Here are some thoughts on valuation and market sentiment.
We are fast-reaching a bottom and eventually a clearing price will be reached where buyers actually buy. Historically speaking investors tend to make bad decisions using emotion at bottoms, and then miss the upside when mass psychology turns favorable. This environment is awful, which to the contrarian mind is a good place to make investments in high quality companies-- exactly when no one wants to own them. This is the exact reverse of 1999, when everything “felt good” and prices were exorbitantly priced; now everything “feels bad” and prices are selling beneath the intrinsic values of companies. Just look at GE, which was trading at 40x earnings in 1999 and is now selling at 4.5x earnings in 2009. The environment is getting pretty ridiculous out there in terms of sentiment. If I had prognosticated in 1999 that GE would go from 40x earnings to 4.5x earnings, people would have thought I was crazy. So now here we are with GE at 4.5x earnings, and this is one of many situations I would consider purchasing at these levels. It is precisely times like this when long term investments make the most sense, since the price paid for the security is being determined by an inefficient, emotional market. There has been indiscriminate selling; first it was the hedge funds, then mutual funds, exchange traded funds, and now we’re getting back to the basic building blocks of which all of these investment vehicles contain: common stocks.

You continue to own high quality companies, and I will continue to do the best job possible for you in this very difficult environment.