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November 11, 2008

Greenwald Looks For Best Value

Catherine New
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Where are value investors looking for in today’s market? In an interview with US News & World Report on November 7, Professor Bruce Greenwald discussed the effects of the current market on the mindset of value investors, Warren Buffett’s investments in General Electric and Goldman Sachs and where the best opportunities lie. (Read the complete interview.)

Excerpted from the interview:

Does the weak credit environment change the value investing proposition?

The first thing is that for value investors, you are not going to try to forecast the future. Most value investors would say if it’s anything like credit crunches we've seen in the past, it will be gone in a year. That’s what the betting has to be. It’s a short-term problem and not something you focus on. It has, however created opportunities in debt markets. Banks are dumping senior secured debt, selling it on the market for 50-60-70 cents on the dollar. The implied returns are north of 15 percent, and because you’re senior to everybody else in the event of bankruptcy, you’re likely to get paid. That’s where opportunities have been created by the credit crunch. If you listen to Buffett, it’s where he’s been investing up until now. Those opportunities are still there, but my guess is they’re going to go away.

Any advice for investors who are still nervous?

If you look at any (mutual) fund and you look at the average annual return — a dollar invested every year through the life of the fund — and then you look at the returns weighted by how much money was in the fund … the difference in those two returns is 6 percent a year. Thats true almost across every category of funds. What that means is investors are buying in at exactly the wrong time and dumping things at the exactly wrong time. In this environment, the people who are dumping things are getting out at almost exactly the wrong time. What you want to have is a steady, well-developed policy you stick to.

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