The Long Slow Death of Citigroup

By Morgan Housel 

February 23, 2009 

"Political leaders must make the sound decisions critical for economic success, even when the politics are difficult."
-- Citigroup annual report, 2006

Ah, the irony.

Another day, another Citigroup (NYSE: C) bailout. I don't know what we call this one: Grandson of TARP? The Pandit special? Bailout round three? I've lost count.

Nothing's written in stone just yet, but The Wall Street Journal reports that Uncle Sam is set to convert most of its $45 billion of preferred stock into common stock, for an ownership stake worth as much as 40%. That would open the doors to quasi-nationalization of what once was the largest company in the world. The new ownership structure would be something akin to the government's partial takeovers of AIG (NYSE: AIG), Fannie Mae (NYSE: FNM), and Freddie Mac (NYSE: FRE) last year.

Good news? It has its ups and downs. For Citigroup shareholders, this plan is certainly better than a platoon of government officials marching in with American flags and employing full nationalization, as the market has feared for the past few weeks.

For Citigroup the company, converting preferred stock to common stock provides some breathing room, at least for now. By axing preferred shareholders, the burden of having to directly repay taxpayers is eliminated. With a new slug of common equity, asset writedowns will have a fresh capital cushion to charge against. At last count, Citigroup had about $23 billion in tangible common capital supporting almost $2 trillion of assets -- about as close to failure as you can get without collapsing.

For other banks, this should quell fears over the specter of all-out nationalization. Bank of America (NYSE: BAC), in particular, was beaten down to Reagan-era lows last week, as dark nationalization clouds  loomed overhead. Even relatively strong banks like Wells Fargo (NYSE: WFC) and JPMorgan Chase (NYSE: JPM) fell off a cliff as the thought of a universally insolvent banking system gained acceptance.  

Don't miss the buy-one-get-mugged-free sale
For taxpayers, this is a pretty raw deal. While no new money will be added to the tens of billions already ponied up, the money we've already injected gets immediately hacked down in value.

Let's say all $45 billion of preferred stock already injected gets converted into a 40% ownership stake. Citigroup currently has a market cap of $10.8 billion, so a 40% stake is worth about $4.3 billion. Since first injecting preferred shares in mid-October, common shares have plunged about 90%. If taxpayers' preferred shares were converted into a 40% stake today, it'd essentially act like a 90% loss as well. In other words, "preferred" shareholders have fared about the same, if not slightly worse, as common shareholders. In case you're wondering -- no, it's not supposed to work that way.

For taxpayers who feel they've been mugged, you've now been sucker-punched, too. Citi's common stock will have to produce something in the neighborhood of a 10-bagger for taxpayers to recoup their initial investment. Adding insult to injury, bailout part deux back in November slashed common dividends to $0.01 per share, rather than the 5% dividends the preferred shares were receiving.

Will any of this work?
The biggest question, of course, is whether this approach will work. I have my doubts. Switching to common equity is a big step in the right direction, but -- like all other bailout attempts over the past six months -- it's likely too little, too late.

A recent report by independent research firm CreditSights predicts that Citigroup could be in store for another $101 billion in future credit losses. If those estimates are even in a ballpark range of accuracy, converting $45 billion of taxpayer funds into common stock will simply ignore how dire this problem really is.

As politically unpopular as all-out nationalization is, we can't keep crossing our fingers and hoping that maybe, possibly, the credit crisis has just been a figment of our imagination and everything will be OK if we keep implementing derisory measures. Someone, someday, has to bite the bullet and make tough decisions in the face of the pants-wetting news we're facing today.

Why should we sell?

Why You Should Sell

By Brian Richards and Tim Hanson
February 20, 2009 

I can be just as dumb as anybody else. -- Peter Lynch, September 2008

Peter Lynch earned near-30% annual returns running Fidelity Magellan from 1977 to 1990. He's sold millions of books, raised millions for charity, and holds the rare distinction of having a Motley Fool Global HQ conference room named after him.

But in September 2008, Peter Lynch also had the ignominious honor of holding both AIG (NYSE: AIG) and Fannie Mae (NYSE: FNM) in his personal portfolio -- as they dropped 82% and 76%, respectively, during that month alone.

Ouch.

For those of us who have spent our investing careers trying to match the great Peter Lynch … well, if you lost 80% in September, then congratulations -- you did it! If you did better than negative 80%, then you beat the great Peter Lynch.

Invest like Peter Lynch
We kid, of course, and we're in no way demeaning Lynch or his illustrious career. Rather, we're just pointing out how hard it's been to avoid a flameout lately. When the blue-chip S&P 500 has dropped some 40% over the course of a year, you know it's bad.

And when companies like Boeing (NYSE: BA) and Adobe Systems (Nasdaq: ADBE) drop more than 50% in the course of a year -- even though they're historically strong operators that appear to have little to do with the crisis on Wall Street -- you know it's rough out there for pretty much everyone.

In other words, even if you don't own AIG or Fannie, you probably own a stock like AIG or Fannie. We sure do. Brian, for example, has ridden Whole Foods Market (Nasdaq: WFMI) from $40 to $12, while Tim has watched pump-maker Colfax sink from $20 on down to $10. Ahem.

We are not alone
And while there are many stocks that will recover from this market downturn, it's likely we're all continuing to hold stocks that won't. New research, from Professors Nicholas Barberis and Wei Xiong of Yale and Princeton Universities, gives a name for this tendency. We're exhibiting "realization utility."

Realization utility encourages investors to hang on to stocks that have sunk -- even when those stocks have dim futures. Here's how they explain it:

The authors consider an additional experimental condition in which the experimenter liquidates subjects' holdings and then tells them that they are free to reinvest the proceeds in any way they like. If subjects were holding on to their losing stocks because they thought that these stocks would rebound, we would expect them to re-establish their positions in these losing stocks. In fact, subjects do not re-establish these positions.

That's right. If we force-sold all of your stocks and gave you the cash to reinvest, would you buy the stocks we had just sold? Odds are, you wouldn't.

So, why would you hold on to stocks that you don't think will recover? We'll let the good professors give it to you straight:

Subjects were refusing to sell their losers simply because it would have been painful to do so … subjects were relieved when the experimenter intervened and did it for them.

Wait a second
But aren't we the guys who pounded the table two years ago about how individual investors like us sell winners too early, missing out on life-changing multibagger gains to lock in a modest return? "Quick trigger fingers aren't rewarded," we wrote at the time.

And that's still true. But down markets like this one present an enormous long-term opportunity for investors … only so long as you're willing to do some selling.

See, when stocks are expensive, we may invest in mediocre stocks because they look cheap, while passing on superior operators because they're too expensive. Today, however, those superior operators are all down double digits at least.

Google (Nasdaq: GOOG), for example, dropped more than 50% in 2008. Dream stock Microsoft (Nasdaq: MSFT) -- given its growth, FCF-generating abilities, competitive advantages, and bulletproof balance sheet -- has a P/E in the single digits!

In other words, now is the time to upgrade your portfolio.

Why you should sell
You should always sell when you have a better place to put your money -- and today, a host of superior companies are on sale. The takeaway, then, is to recognize when realization utility may take root, take a sober view of your holdings, and take advantage of this down market to upgrade your portfolio. Ten years from now, you'll be very glad you did.

Buffet predicted housing bubble since 2005.

The oracle speaks

Warren Buffett and Charles Munger warn of real estate 'bubble,' the risk of terrorist nukes. May 2, 2005: 9:22 AM EDT  By Jason Zweig

OMAHA (CNN/Money) - It was below freezing here early Saturday morning, with frost silvering the golf courses and rolling lawns of the city where Warren Buffett's Berkshire Hathaway Inc. is headquartered. But the atmosphere was warm inside the Qwest Center arena, where roughly 20,000 shareholders gathered from around the world to hear Buffett and his vice chairman, Charles Munger, answer questions for nearly six hours. Not a single individual shareholder asked whether Berkshire might be implicated in the widening scandal about alleged earnings manipulations at American International Group – and even the money managers in the audience whose questions touched on the subject approached it gingerly. (Buffett announced at the outset that, at the request of the investigators who are exploring the AIG case, he could not discuss what he or other Berkshire executives might have revealed about AIG to the authorities.) Buffett's shareholders are true believers; to them, the idea that he could have done (or known about) anything wrong is absurd. In his answers to shareholders' questions, Buffett made it clear that he remains concerned about the trade deficit and the U.S. dollar, although he is bullish on the long-term strength of the U.S. economy. But he and Munger issued stern new warnings about the residential real estate "bubble," the destabilizing effect of hedge funds on the financial markets, and the possibility of another terrorist strike against the United States. They also warned that they do not see a clear future for pharmaceutical stocks, that GM and Ford face severe trouble over pension and health costs, that hedge funds could wreak havoc in a market decline, and that the New York Stock Exchange is doing a disservice to investors by going public. On real estate Buffett: "A lot of the psychological well being of the American public comes from how well they've done with their house over the years. If indeed there's been a bubble, and it's pricked at some point, the net effect on Berkshire might well be positive [because the company's financial strength would allow it to buy real-estate-related businesses at bargain prices].... "Certainly at the high end of the real estate market in some areas, you've seen extraordinary movement.... People go crazy in economics periodically, in all kinds of ways. Residential housing has different behavioral characteristics, simply because people live there. But when you get prices increasing faster than the underlying costs, sometimes there can be pretty serious consequences." Munger: "You have a real asset-price bubble in places like parts of California and the suburbs of Washington, D.C." Buffett: "I recently sold a house in Laguna for $3.5 million. It was on about 2,000 square feet of land, maybe a twentieth of an acre, and the house might cost about $500,000 if you wanted to replace it. So the land sold for something like $60 million an acre." Munger: "I know someone who lives next door to what you would actually call a fairly modest house that just sold for $17 million. There are some very extreme housing price bubbles going on." The trade deficit and the value of the dollar Buffett: "That really is the $64,000 question. It seems to me that a $618 billion trade deficit, rich as we are, strong as this country is, well, something will have to happen that will change that. Most economists will still say some kind of soft landing is possible. I don't know what a soft landing is exactly, in how the numbers come down softly from levels like these.... "There are more people [like hedge-fund managers] that go to bed at night with a hair trigger than ever before, it's an electronic herd, they can give vent to decisions that move billions and billions of dollars with the click of a key. We will have some exogenous event, we will have that. There will be some kind of stampede by that herd.... "When you have far greater sums than ever before, in one asset class after another, that are held by people who operate on a hair-trigger mechanism, then they lend themselves to more explosive outcomes. People with very short time horizons with huge sums of money, they can all try to head for the exits at the same time. The only way you can leave your seat in burning financial markets is to find someone else to take your seat, and that is not always easy...." Munger: "The present era has no comparable referent in the past history of capitalism. We have a higher percentage of the intelligentsia engaged in buying and selling pieces of paper and promoting trading activity than in any past era. A lot of what I see now reminds me of Sodom and Gomorrah. You get activity feeding on itself, envy and imitation. It has happened in the past that there came bad consequences." Buffett: "I have no idea on timing. It's far easier to tell what will happen than when it will happen. I would say that what is going on in terms of trade policy is going to have very important consequences." Munger: "A great civilization will bear a lot of abuse, but there are dangers in the current situation that threaten anyone who swings for the fences." Buffett to Munger: "What do you think the end will be?" Munger: "Bad." Buffett: "We're like an incredibly rich family that owns so much land they can't travel to the ends of their domain. And they sit on the front porch and consume a little bit of everything that comes in, all the riches of the land, and they consume roughly 6 percent more than they produce. And they pay for it by selling off land at the edge of the landholdings that can't see. They trade away a little piece every day or take out a mortgage on a piece. "That scenario couldn't end well. And we, also, keep consuming more than we produce. It can go on a long time. The world has demonstrated a diminishing enthusiasm for dollars in the last few years as they get flooded with them – every day there's $2 billion more going out than in. I have a hard time thinking of any outcome from this that involves an appreciating dollar. [But, Buffett later added, he is not predicting an end to U.S. economic power.] "If you have a good business in this country that's earning dollars, you'll still do okay. Twenty years from now, a couple percentage points of GDP may go to servicing the deficit, but you'll do fine.... I don't think trade deficits will pull down the whole place; the country will survive those dislocations. I'm not pessimistic about the U.S. at all.... We have over 80 percent of our money tied to the dollar. It's not like we've left the country." The threat of terrorism Buffett: My job is to think absolutely in terms of the worst case and to know enough about what's going on in both [Berkshire's] investments and operations that I don't lose sleep. Everything that can happen will happen.... It's Berkshire job to be prepared absolutely for the very worst. A few years ago we did not have NBCs [nuclear, biological and chemical attacks] excluded from our exposure, but we do now.... "If you go to lastbestchance.org, you can obtain a tape, free, that the Nuclear Threat Initiative has sponsored, that has a dramatization that is fictional but is not fanciful. We would regard ourselves as vulnerable to extinction as a company if we did not have nuclear, biological and chemical risks excluded from our policies. There could be events happening that could make it impossible for our checks to clear the next day." The overall climate for investors Buffett: "If the [stock] market gets cheaper, we will have many more opportunities to do something intelligent with money. We are going to be buying things [like stocks and other financial assets] for as long as I live, just as I'm going to be buying groceries for the rest of my life. Would I rather have grocery prices go up or down? "The stock market works the same way: If I'm a net buyer, obviously I would rather have prices go down than up. Charlie and I spend no time talking about what the stock market is going to do, because we don't know. We're not operating on basis of a market forecast. We don't make a list of the good things that are happening, or bad things. "Overall, I'm an enormous bull on the country. This is the most remarkable success story in the history of the world. It does not make sense to bet against America. I do not get pessimistic about the country. The real worry is what can be done by terrorists or governments that may have access to nuclear or other weapons.... "If you had to make a choice between long-term bonds at around 4.5 percent and equities for the next 20 years, I would certainly prefer equities. But if people think they can earn more than 6-7 percent a year, they're making a big mistake. I don't think we're in bubble-type valuations in equities -- or anywhere close to bargain valuations. "If you told me I had to go away for 20 years, I would rather take an index fund over long-term bonds. You'll get a chance to do something extremely intelligent with your money in the next few years. But right now there doesn't seem to be a clear enough direction to conclude anything dramatic." The auto industry Buffett: "[GM boss] Rick Wagoner and [Ford chairman] Bill Ford have both been handed, by past managers, extremely difficult hands to play. They're not the consequences of their own doing, but they have inherited a legacy cost structure, with contracts put in place decades ago, that make it very difficult for them to be competitive in today's world. "Just imagine if they'd been made to sign contracts that made them pay several more tons per steel than their competitors have to, people would feel that's untenable. [GM and Ford] have to pay contracts that give them immense obligations for health-care and retirement annuities at high cost. Their competitors can buy steel and other commodities no cheaper, but the competitors don't have nearly the same level of costs for these [health-care and retirement expenses]. "Someone once asked Bill Buckley what he would do if he actually won his race for New York mayor back and the 1960s and he said, 'First thing I'd do is ask for a recount.' Well, that's what I'd do at GM. You've got a $90 billion pension fund, $20 billion set aside for health-care liabilities, and the whole equity value of the company is $14 billion. That's not sustainable.... Something will have to give." Munger: "Warren gave a very optimistic prognosis. Some people seem to think there's no trouble just because it hasn't happened yet. If you jump out the window at the 42nd floor and you're still doing fine as you pass the 27th floor, that doesn't mean you don't have a serious problem. I would want to address the problem right now. They'd better face it." The NYSE's merger with Archipelago Buffett: "I personally think it would be better if the NYSE remained as a neutral, not-for-big-profit institution. The exchange has done a very good job over the centuries. It's one of the most important institutions in the world. The enemy of investment is activity.... I know the American investor will not be better off if volume doubles on the NYSE, and I know the NYSE will be trying to figure out how to do that if it is trying to maximize its own earnings per share. GM or IBM will not earn more money if their stock turns over more actively, but a for-profit NYSE will." Munger: "I think we have lost our way when people like the [board of] governors and the CEO of the NYSE fail to realize they have a duty to the rest of us to act as exemplars. You do not want your first-grade school teacher to be fornicating on the floor or drinking alcohol in the closet and, similarly, you do not want your stock exchange to be setting the wrong moral example." Whether pharmaceutical stocks have become bargains Buffett: "That industry is in a state of flux right now. It's historically earned very good returns on invested capital, but it could well be that the world will unfold differently in the future than in the past. I'm not sure I can give you a good answer on that." Munger: "We just throw some decisions into the 'too hard' file and go onto others."

How These 6 Simple Questions Have Made Warren Buffett Wealthy

By Steve Christ
Thursday, February 14th, 2008

Forget Coke. Forget McDonalds. And you can even forget the queen of talk Oprah Winfrey. That's because when it comes right down to it the best brand in the business belongs to Warren Buffett, that grandfatherly billionaire from Omaha, Nebraska.

That's true now more than ever up on Wall Street, where the investing classes hang on his every word these days as they continue to come to grips with the dangers of a sub prime contagion that was never contained.

Of course, to the set of value investors that have been following Warren Buffet's investment principles for years, all of this renewed attention probably comes as no surprise at all. There is a reason after all that he's called the Oracle of Omaha.

But with the mortgage related mess now threatening to take the markets even lower, and investors of every stripe looking for a savior, Warren Buffett's billions, and his stellar reputation, may be just the answer that the markets are looking for.

And while Saint Warren certainly isn't going to save the market from all of its excesses, (not even he has that much money) he may just be able to bailout the only portion of the bond insurance market that is worth saving. That alone would be likely be enough to bring the markets back from the current abyss.

Warren Buffett to the Rescue

In fact, just two days ago the mighty weight of the Buffett Brand was on full display, when he called Becky Quick and the gang on Squawk Box for a little chat. The Dow futures, by the way were solidly in the red at the time.

It was during this chat that Buffett revealed that the his company had approached the three largest bond insurers last week - Ambac Financial Group Inc. (NYSE:ABK), MBIA Inc.(NYSE:MBI) and FGIC Corp.--offering to reinsure about $800 billion in municipal bonds in order to allow them to maintain their triple "AAA" ratings.

Of course, at the very moment he uttered those words the futures staged a big comeback going green to the tune of 72 points in an instant.

That green tide, not surprisingly, carried on into the day's trade as the markets rallied on mere hope of a Buffett solution, even though it was nothing more than a proposal. And in fact, one of the three troubled insurers had already turned him down, which wasn't surprising considering that he was basically asking them to fall on their swords.

Nonetheless, investors were warm to the idea of a Buffett solution, hopeful that it could alleviate one of the major market fears that have weighed heavily on the financial markets. "This would just eliminate one major cloud from the market," said Buffett on the call, and the Street agreed.

It was, in short, just part of what might be the master stroke in a legendary career spent buying things on the cheap.

In fact, when it is all said and done, it wouldn't surprise me one bit if Buffett's newly found bond insurer is practically the only one left standing-that's how downtrodden the bond insurer have become and how decisively Buffet has acted.

Warren Buffet's Six Investment Principles

So how does he do it, buying companies and investing on the cheap?

Well in short, he keeps it as simple as possible and he's incredibly patient, moving only when the markets are so far in his favor that he can hardly lose. And of numerous books have been written about him, a few of his many tenets for successful investing stand out.

These are a few of them; investment questions that when answered properly have helped Buffet cement his reputation as the best in the business.

They are:

• Has the company's performance been consistently good?-Buffett's tool in this regard is return on equity or ROE. Return on equity is a company's net income divided by shareholders equity (book value). Buffett uses ROE as a measure of company has consistently performed over time vs. its peers. A good ROE in this regard would be a 5 yr. average between 15-17 percent.

• Does the company carry too much debt compared to its peers? ---The measure of debt Buffett uses in evaluation is the debt/equity ratio. Buffett, in general, frowns upon companies with high levels of debt. Instead he prefers that earnings growth is generated by shareholder equity as opposed to borrowed funds. In this case, the higher the ratio, the more debt that a company carries. And while this figure varies from industry to industry, a good way to measure it would be by looking for a ratio that is less than 80% of the industry average.

 

• Are profit margins high compared to its peers? Are they increasing?-Buffett looks for companies with above average profit margins. It's calculated by dividing the net income by the net sales. Companies with a strong history in this regard over an extended period of 5-10 years typically outperform. An above average performer will typically carry profit margins that are 20% above the industry average. Moreover, those same profit margins will tend to rise as the company becomes more efficient over time.

• How long has the company been public? -In general, Buffett typically only considers companies that have been around for at least 10 years. That gives them the historical track record to make a proper evaluation of the company's future prospects.

• Are the company's products vulnerable to "commodity pricing"?-Buffett is a strong believer in the economic moat. Therefore, if the company doesn't offer anything that is unique or substantially different from its competitors he's generally not interested.

• And finally, is the company cheap on a valuation level? This is the part of the Buffett magic that is hard to quantify because it deals with a company's intrinsic value. That's the value that goes beyond its liquidation value and includes all the many intangibles that are hard to put a figure on, such as the worth of a brand name. In general, Buffet will want to purchase a company that is available at a 25% discount to its intrinsic value.

These, of course, are just a few of the many ways that Warren Buffet has built up his massive portfolio over the years. That's because to a large extent, Buffet never buys stocks, he buys companies.

The difference between these two styles has not only made him wealthy, but has also made him the best brand on the market today.

When he speaks, the markets follow.

Value Investing Principles

How to Shop for Real Stock Market Bargains

By Steve Christ
Thursday, September 11th, 2008

Baltimore, believe it or not is the home to the famous streak.

And I'm not talking about Cal Ripken's famous run or Johnny Unitas' mark of 47 straight games with a touchdown pass.

Instead, I'm talking about the investment streak of a life time for Legg Mason's Bill Miller. His Legg Mason Value Prime (MUTF: LMVTX) mutual fund beat the S&P 500 for 15 straight years, making him a legend in the world of value stock investing.

But as impressive as Miller's run was, it ended just like all streaks do. Miller eventually came up short in 2006 with a 5.6% return while the S&P delivered 15.8%. And unfortunately for Miller and his investors, it has been downhill for his legend ever since.

In fact, Miller latest bungle was loading up on shares of Freddie and Fannie as late as this summer costing his shareholders big time. In 12 short months both of them have fallen by over 98%.

Miller's fund—not surprisingly—has fallen right along with them, as some other bad bets on "values" never materialized either. In fact, Miller's famous fund is down some 48% in the last 15 months.

That's not exactly easy to do in a diversified fund—especially one built on value.

But despite Miller's recent trials with this time-tested style, value investing lives on. The key however, as Miller has found out is sticking to the value plan. And doubling down like some desperate gambler isn't exactly part of it.

What are the Core Value Investing Principles?

And at is core, the plan is as simple as the man who devised it—Benjamin Graham. It is to buy companies at a deep discount to their intrinsic value.

That involves a fundamental analysis of a company's balance sheet. So typically, value investors select stocks with lower-than-average price-to-book or price-to-earnings ratios and/or high dividend yields.

The key here, of course, is the business model, and in that respect a true value investor is never interested in companies that lose money.

And while that may seem pretty obvious to some, the biggest mistake retail investors make is chasing companies that have never booked a profit. I see it all the time.

It's risky and it's wrong.

Not surprisingly, one of Graham's greatest students was none other than Warren Buffett himself.

His value legend is untarnished so far as he has racked up one terrific buy after another. And while there have been a few flubs, there is a lot to learn about investing by looking at the way "the Oracle" determines value.

Investing in Value Stocks with Warren Buffett

So how does he do it, buying companies and investing on the cheap?

Well in short, Buffet keeps it as simple as possible and he's incredibly patient, moving only when the markets are so far in his favor that he can hardly lose. And while numerous books have been written about him, a few of Buffett's many tenets for successful value investing stand out.

These are a few of them - investment questions that when answered properly have helped Buffet cement his reputation as the best value investor in the business.

They are:

• Has the company's performance been consistently good? A value investor's tool in this regard is return on equity or ROE. Return on equity is a company's net income divided by shareholders equity (book value). Value investors use ROE as a measure of how a company has consistently performed over time vs. its peers. A good ROE in this regard would be a 5 yr. average between 15-17 percent.

 

• Does the company carry too much debt compared to its peers? The measure of debt a value investor uses in this regard is the debt/equity ratio. Value investors like Buffett, in general, frown upon companies with high levels of debt. Instead they prefer that earnings growth is generated by shareholder equity as opposed to borrowed funds. In this case, the higher the ratio, the more debt that a company carries. And while this figure varies from industry to industry, a good way to measure it would be by looking for a ratio that is less than 80% of the industry average.

• Are profit margins high compared to its peers? Are they increasing? Value investors look for companies with above average profit margins. It's calculated by dividing the net income by the net sales. Companies with a strong history in this regard, say over an extended period of 5-10 years typically outperform. An above average performer will typically carry profit margins that are 20% above the industry average. Moreover, those same profit margins will tend to rise as the company becomes more efficient over time.

• How long has the company been public? In general, Buffett typically only considers companies that have been around for at least 10 years. That gives them the historical track record to make a proper evaluation of the company's future prospects.

• Are the company's products vulnerable to commodity pricing? Buffett is a strong believer in the "economic moat" and value investors need to be too. Therefore, if the company doesn't offer anything that is unique or substantially different from its competitors it true value is suspect.

• And finally, is the company cheap on a valuation level? This is the part of the Buffett magic that is hard for value investors to quantify because it deals with a company's intrinsic value. That's the value that goes beyond its liquidation value and includes all the many intangibles that are hard to put a figure on, such as the worth of a brand name. That's the gray area that separates the men form the boys. In general, Warren Buffet buys companies he believes are available at a 25% discount to their intrinsic value.

These, of course, are just a few of the many ways that a value investor like Warren Buffet has built up his massive portfolio over the years. That's because to a large extent, successful value investors never buys stocks, they buy long term values at an intrinsic discount to their earning potential.

That is the key to successful value investing. It's not always all about price.

USD will be kept as the key currency

Japan PM says dollar must remain key currency

Japanese Prime Minister Taro Aso said Tuesday that he and US President Barack Obama agreed the dollar must remain the world's key currency despite the US-bred economic crisis. Aso, the first foreign leader to visit the Obama White House, said he and Obama spent roughly half of their one-hour meeting discussing the deepening global economic woes. "In terms of finance, we said it is important to maintain confidence in the dollar as a key currency," Aso told Japanese reporters in Washington after his meeting with Obama. 

"If confidence in the dollar is damaged, it would cause significant effects," he said. Aso said, however, that the US side did not indicate any wish for Japan to increase its purchase of US debts. 

Secretary of State Hillary Clinton on a visit to Beijing last week called on China to continue buying US Treasuries. China last year overtook Japan as the United States' biggest foreign creditor. Japanese officials said that Obama called in the summit with Aso for major economies such as Japan and China to continue efforts to revitalize the international economy. "President Obama said that the United States has been working hard" to boost its economy, said a Japanese diplomat who attended the White House talks. "He then said he wanted other nations of the world to also take action, in particular for major countries such as Japan and China to stimulate their domestic demand," he said. 

Japan, the world's largest economy other than the United States, is suffering a worsening recession due to falling exports and slumping consumer spending. Aso, who is suffering rock-bottom approval ratings, has pushed a plan to give cash handouts to the public in hopes of helping revive the economy. Obama and Aso also agreed to coordinate efforts for the next Group of 20 meeting of developed and developing countries in London, slated for April, the Japanese diplomat said. 

Recession may cause Unemployment in SG (DBS Report)

SINGAPORE, Feb 25, 2009 (AFP) - Singapore could lose a total of 99,000 jobs during the current recession, with more than half of the cuts in the key manufacturing sector, an analysis by local bank DBS said Wednesday.

"There will be a net loss of about 99,000 jobs due to the current recession and we also expect this to stretch into 2010", the bank said in its report.

Unemployment is likely to hit 4.8 percent this year and peak at 5.0 percent by the middle of 2010, it said.

"Labour markets are expected to deteriorate further," DBS added.

"The manufacturing sector is expected to be the worst hit with job losses of about 58,000 as the global recession chokes up demand for our manufactured exports."

The bulk of output from Singapore's manufacturing sector ends up as exports to the world's major economies, but recessions in those markets have severely affected local factories.

DBS said it has also downgraded its growth outlook for the city-state to a contraction of 4.8 percent this year from 3.8 percent previously, due to the "sharp collapse in global demand and export sales."

An "aggressive" stimulus package totalling 20.5 billion Singapore dollars (13.4 billion US) will only cushion the blows from the recession, the bank said.

Latest official data in Singapore said the seasonally adjusted unemployment rate rose to 2.6 percent in December, and companies laid off 7,000 workers during the last three months of 2008.

Singapore's worst recession occurred in 1964, just before independence, when the economy shrank 3.8 percent.