The Truth about Gold:
Why Conventional Wisdom is All Wrong!

Dear Friend,

It’s been impossible not to notice the huge climb in the price of gold over the last few months.

After all – the yellow metal is up more than 60% since last November – and it closed Friday at a whopping $1,151 an ounce.

Of course, even though that price is an all-time high for gold…it’s still trading well below its inflation-adjusted high of $2,290 an ounce, set in January 1980.

So with gold prices soaring – and the U.S. Government spending at an alarming rate – it’s fair to ask the question: Is gold a good bet for your money as a hedge against inflation?

Like most people, my instinct said the answer to this question would be “yes” – simply because that’s what the conventional wisdom has been for decades.

But then I did some research – and what I found out about gold, inflation and Warren Buffett was an eye-opener…

Welcome to the 1970s

The period of the 1970s is now known as the Great Inflation. Many economists say that the government’s monetary policy was the leading cause of out-of-control inflation. It started in the 1960s, when the Fed allowed the money supply to bulge in order to fund the Vietnam War and domestic spending. Inflation started to inch up, and by 1974 inflation hit double digits.

In 1980, the inflation rate, as measured by the Consumer Price Index (CPI), hit a record 14.8%. Prices rose not by a few cents here and there, but by whole dollars and seemingly all at once. It was the first decade since the Great Depression that Americans ended the decade poorer than when they began it. Prices exploded ever higher as businesses tried to recoup lost profits with immediate price hikes. Increasing government spending and out-of-control deficits caused the prime rate, which is the rate at which banks lend to their most creditworthy customers, to balloon to rates comparable to those offered by back-alley loan sharks. The prime rate hit a jaw-dropping 20.5% in the summer of 1981. Consumer confidence and consumption were down in the dumps. For many retirees and others living on a fixed income, canned cat food is what they called dinner, as the purchasing power of the dollar was cut in half.

From 1974 to 1981 inflation soared over 104%. Any investments made during that time period had to increase by at least the inflation rate or were losing money. Most investors were buying gold because they were told that historically gold keeps pace with inflation. And in fact during this eight-year period, it did its job. The value of gold rose by more than double the rise in inflation and actually increased purchasing power.

I wanted to see how the world’s greatest investor, Warren Buffett, fared when facing such headwinds as high interest rates, double-digit inflation, and a dollar that was losing purchasing power by the day. I looked at Berkshire Hathaway’s growth in book value and was prepared to be pleased, but instead I was pleasantly surprised. I know that Buffett stuck to investing in controlling positions in businesses and large positions in stocks. I assumed that he would at least outperform inflation, but I was blown away when I saw how well he did.

Over the eight-year period from December 31, 1973, to December 31, 1981, the price of gold rose 254.1%, while the book value of Berkshire increased by over 612%. What is even more interesting is that Buffett achieved that phenomenal growth not by investing in gold, silver, precious metals, artwork, rare coins, or the other investments gurus peddle during times of high inflation, but by investing in solid businesses when he could own them outright, and pieces of them, or stocks, when they were selling at a discount.

Not Such a Good Hedge

It appears that while most investors were concerned about hedging or protecting their portfolios, Buffett was focused on growing his. The media followed the price of gold on a daily basis, and things reached a fever pitch right after December 24, 1979, when the Soviet Union invaded Afghanistan. Prior to the invasion, gold was trading in the $470 range, but one week later it had shot up to over $600 an ounce. It continued to climb ever higher for the rest of December and into January.

Most gold bugs can remember when gold peaked on January 21, 1980, at $850 per ounce but fail to recall that it tumbled over 43% over the next two months to $481. The price of gold was not trading off of the economic fundamentals; instead, it was trading on emotion. Inflation continued to rise while gold was falling. It seemed that the price of gold became disconnected from inflation, and that left investors with big losses. Gold did not serve investors looking to hedge their portfolios during this period.

But that wasn’t the only time that gold did not protect investors from rising inflation. After gold reached an all-time high of $850 per ounce in January 1980, it took close to 18 years for gold to trade at $850 again, which happened in January 2008. Investors that bought and held gold, hoping that it would protect them against inflation, were very disappointed. Over a long period of time, gold does a miserable job of protecting investors against inflation and as an investment.

What Gold Isn’t

Owning gold in order to protect you from inflation presents other problems as well. If you went out and bought gold bullion, you would be investing in an asset that has the risk of theft, and if you store it at home, most likely your homeowner’s policy will not cover its theft. If you store it at a bank, you will need to pay storage fees. When you buy or sell gold, be prepared to pay a high markup, usually 5%, and of course gold doesn’t pay any dividends or interest.

If you buy gold mining stocks, even if gold rises, your shares may go down because of unprofitable mines or large investments in equipment that eat into earnings. Exchange traded funds, or ETFs, don’t track the price of gold accurately and are subject to the rise and fall of the stock market. Since gold futures are bought with leverage, you can rack up big losses rather quickly if gold doesn’t go your way.

Gold is an asset whose only value is what people can do with it, and it has very limited industrial applications. Dramatic and brief price spikes, followed by long periods of decline, define the price of gold. Given the huge quantity of stored gold, compared to the annual production, the price of gold is mainly affected by changes in sentiment, rather than changes in annual production.

Buffett himself emphasized the nonproductive aspects of the yellow metal in a speech at Harvard University in 1998. He said,

“It gets dug out of the ground in Africa or someplace. Then we melt it down, dig another hole, bury it again, and pay people to stand around guarding it.”

On the other hand, stocks represent a claim on real assets; in other words, as a stockholder you own a percentage of a business and its assets. You also receive a percentage of the future stream of earnings and dividends that the business generates. As the company grows and generates cash, a stockholder sees the stock price rise with the worth of the underlying business.

Buffett learned early on to make a purchase only when he gets more value than what he is paying. If the cost to produce one ounce of gold was trading below the cost of extracting and refining it, perhaps Buffett might be interested in buying gold. In the summer of 1997, Buffett did invest 2% of Berkshire’s investment portfolio in silver. He had watched the price carefully for more than 30 years before making his purchase. Only when he came to the conclusion that current inventories of silver were way below the current mine production and user demand did he make a purchase. In other words, it was a good value.

Most investors confuse storytelling for history. Prior to doing my research I too fell into the trap of believing firmly entrenched stories, like buying gold during times of inflation. But as history teaches, it’s not really so and stocks are a much better alternative.

By investing in financially strong companies that are simple to understand, have top-notch management and a competitive advantage, and can be purchased at a fair price is an approach that has successfully worked during difficult economic scenarios. This approach should continue to work simply because it is both logical and rational.

Limited Time Offer: Try My

Hidden Values Alert FREE for 30 Days!

So where do you find these financially strong companies – those that are priced at a discount and simple to understand?

I’d like to show you…

Each month – in my Hidden Values Alert advisory letter – I provide two thoroughly researched “extreme value” recommendations.

But rather than just tell you about my Hidden Values Alert – I’d rather let you see for yourself…with a FREE ISSUE.

So right now – for a limited time – I’m offering you a no-risk, FREE trial to Hidden Values Alert …my highly successful advisory service that serves as the Ultimate Insider’s Guide to Value Investing.

Click on the link below to claim your FREE 30-Day PREVIEW of Hidden Values Alert. Then you can decide if the service is right for you before you ever pay so much as a dime.

No gimmicks…no catches…and no tricks.

Just click here now to claim your 100% RISK-FREE trial subscription to Hidden Values Alert-and get immediate access to my complete list of open recommendations.

Sincerely,

Charles Mizrahi, Editor

Hidden Values Alert

P.S. The only companies who make it into my Hidden Values Alert portfolio are great businesses trading at deep discounts – and as you just saw…those businesses provide a much greater return than gold – even during periods of high inflation. I’d like you to try my wealth-building service RISK-FREE with this special 30-day FREE preview. Click here to begin your journey right now!

Eastman Communications Inc.

PO Box 290708 · Brooklyn, NY 11229

Hidden Values Alert, a general interest newsletter is not liable for the suitability or future investment performance of any securities or strategies discussed. Hidden Values Alert is published by Eastman Communications, Inc. As a publisher of a financial newsletter of general and regular circulation, we cannot tender individual investment advice. Only a registered broker or investment advisor may advise you individually on the suitability and performance of your portfolio or specific investments.

Historical investment return examples given are hypothetical, and not to be taken as representative of any individual’s actual trading experience. Eastman Communications, Inc. is the publisher of Hidden Values Alert.

Copyright © 2009 Hidden Values Alert. All Rights Reserved.

Can Black Friday Help You Become a
Successful Value Investor?

Dear Friend,

Every year, it seems, the media makes a big fuss about “Black Friday” – the traditional beginning of the holiday shopping season.

Truth is – this kind of story is fastball right down the middle for most media types. It’s very easy for local television stations to send reporters to a local shopping mall or big box store to capture the frenzy of shoppers racing after bargains at odd hours.

And the financial press, naturally, makes a big deal out of “Black Friday” when it comes to retail sales as well. That sort of coverage is only intensified in a year like this one – when “experts” look to sales figures from a single day as if they could foretell an early end to the recession…or six more weeks of winter.

But there is a certain, fundamental truth about “Black Friday” that often gets overlooked.

At the end of the day…what is it that consumers are looking for? They’re looking to buy solid products – gifts they know their loved ones will enjoy – at the lowest possible prices.

And while I don’t necessarily agree with the idea of heading out to the store at 4:00 a.m. and standing in line to buy gifts…I think we all have to admit that when you look closely at “Black Friday” – you see that many of the consumers are exhibiting some of the most basic traits of the world’s most successful Value Investors.

What does it take to be a Successful Value Investor?

Not long ago, while delivering a presentation, I was asked a very simple question:

What does it really take to be a successful value investor?

I thought for a few seconds and answered, “Think differently and independently.”

That was my two-second sound-bite answer; it was perfect for an interview or presentation but didn’t really answer the question.

Since being asked that question, I’ve thought long and hard on what it takes to be a successful value investor. And hearing all the talk about “Black Friday” reminded me that everyone – at some level – has a desire to become a successful value investor.

So I wanted to be able to boil it down to a few main traits that I have learned and observed from the “value gurus”. Let’s get started with the world’s most famous value investor – Warren Buffett…

What’s The Secret?

Many people know that Warren Buffett reads a lot of newspapers - perhaps that is the secret?

While it is true that Mr. Buffett reads The New York Times, the Wall Street Journal, USA Today, the Financial Times, the Omaha World Herald and American Banker every day, reading won’t guarantee investment success either.

In the mid-1970s the Reichmann family of Toronto bought a package of eight skyscrapers in Manhattan for a fraction of their value. Over the next decade, their development company, Olympia & York, was the greatest property development company in the world. At its peak the company was worth over $10 billion.

The genius of the family was Paul Reichmann, an Orthodox Jew who said that his commercial decision making was rooted in Talmudic methodology. It was said that real estate brokers in London and New York could be seen leafing through the Talmud in hopes of discovering Reichmann’s secret.

You won’t find the “secret” in high IQs, college degrees, experience or reading. Keep in mind that while all these will help you, in and of themselves they are not the secret. Perhaps by looking at training and occupations we can come closer to finding what it takes for success? Looking at the occupations of the investors Warren Buffett showcased in his presentation on “The Super Investors of Graham and Dodgeville” (1984) still offers no clue.

Buffett showed the track records of great value investors who came from all walks of life: a lawyer, an IBM salesman, a chemistry major, an advertising executive, a high school graduate. They all shared the same investing principles laid down by Benjamin Graham, but not much else.

Without teasing you any longer, the secret boils down to temperament: how strong one’s convictions are and how stringently one sticks with them.

Confidence

Value gurus seem to think differently than other people. They get enjoyment from being immersed in the company they are researching, becoming fluent with the financial statements and then forming opinions based on their findings. I can’t recall reading about a value guru who offered “my gut” as the thesis for an investment idea. That is far from the way the majority of value investors behave.

Instead, a valuation on the security is formed after all the facts are gathered, and not before. These investors are not concerned if they are in the minority; in fact, most of them like to be invested where most investors fear to tread. Those investments most times offer the greatest returns. They understand and completely believe that over the short term stock prices move based on popularity, and over the long term based on the fundamentals of the company.

It really boils down to having an information edge over Mr. Market and a way to determine the value of the company. If you don’t know, you’ll have to take the last price the stock traded at in order to determine the value of the company. By rolling up your sleeves and diving into the annual reports and financial statements, you’ve begun to develop an edge by discerning if the company is efficiently priced by Mr. Market or not. Just by reading the past five years’ annual reports and the current annual reports of its competitors, you will have gained more insight into the company and its industry than most people who buy and sell the stock on a daily basis.

Assume the house next door to you is being sold by the county at a public auction. Since you have lived in your house for the past 30 years, you have a very good idea of its value and that of the one next door. The auction draws a nice crowd of locals as well as out-of-towners. Since you know the neighborhood, the condition of the house, how it was maintained, etc., you have clear edge over most of the other bidders.

The bidding starts at $100,000 and quickly goes up to $225,000 before stalling out. The auctioneer says,“Going once, going twice…,”and before he is about to bang the gavel, you raise your hand and bid $250,000…and win the auction. Why did you bid more than everyone else and win? Simply because you knew that homes on your block are selling for over $500,000. In fact, your next-door neighbor on the other side just rented his home for $25,000 a year to two college professors while he went on a year-long cruise.

In other words, the price wasn’t as important to you as it was to most of the bargain hunters; you saw an opportunity to buy $1 worth of assets for 50 cents. Your downside risk was minimal and you did not let the lack of other bids scare you into thinking, “How come I’m the only one left bidding?”Instead, you had confidence in making that bid because you were informed, had a very good idea of the value and were able to buy it at a significant discount to your valuation. That’s the type of confidence I’m talking about.

Conviction

Why is it so important to do your own research and have a high level of confidence in the value of a company? Sometimes Mr. Market is erratic, in that he will offer a stock price that is down 20 percent or more from the previous day’s closing price because of an analyst downgrade or perhaps the company missed their earnings target by a penny.

An owner of the stock who bought it because of a tip from a friend will be shaken and sell into the downdraft. But since you know the value of the company, you view times like these as opportunities and take advantage of them. In hindsight, these purchases will make all the sense in the world and will become so obvious to so any. However, during the panic very few investors are willing to step up to the plate, because they lack conviction.

Watching their stock account drop 40 percent or more over a short period of time is a very painful experience for most investors. In order to stop the pain, they sell at any price. Value gurus fight this instinct of fear and let the confidence of their research and the conviction of their thesis win the day. This is not as easy as it sounds. It is very hard to keep your head when everyone around you is losing theirs, but that is what separates the great investors from the mediocre ones.

Conclusion

What do value gurus have that most investors don’t?

As demonstrated by their purchases of stocks that have been vilified in the press and seen their prices plunge, value gurus have confidence in their valuations and the conviction to act.

If you can keep your head while all around are losing theirs, then you have a very good chance to become a value guru.

Limited Time Offer: Try My

Hidden Values Alert FREE for 30 Days!

This simple “lesson” in value investing is really just a start.

I’d like to help you take things to the next level – and really get started as a Successful Value Investor.

I’d like to show you – FREE of charge – a handful of financially strong companies that are priced at a discount and simple to understand.

Each month – in my Hidden Values Alert advisory letter – I provide two thoroughly researched “extreme value” recommendations.

But rather than just tell you about my Hidden Values Alert – I’d rather let you see for yourself…with a FREE ISSUE.

So right now – for a limited time – I’m offering you a no-risk, FREE trial to Hidden Values Alert …my highly successful advisory service that serves as the Ultimate Insider’s Guide to Value Investing.

Click on the link below to claim your FREE 30-Day PREVIEW of Hidden Values Alert. Then you can decide if the service is right for you before you ever pay so much as a dime.

No gimmicks…no catches…and no tricks.

Just click here now to claim your 100% RISK-FREE trial subscription to Hidden Values Alert-and get immediate access to my complete list of open recommendations.

Sincerely,

Charles Mizrahi, Editor

Hidden Values Alert

P.S. The only companies who make it into my Hidden Values Alert portfolio are great businesses trading at deep discounts – think of them as the “Black Friday” specials of the stock market. I’d like you to try my wealth-building service RISK-FREE with this special 30-day FREE preview. Click here to begin your journey right now!

Eastman Communications Inc.

PO Box 290708 · Brooklyn, NY 11229

Hidden Values Alert, a general interest newsletter is not liable for the suitability or future investment performance of any securities or strategies discussed. Hidden Values Alert is published by Eastman Communications, Inc. As a publisher of a financial newsletter of general and regular circulation, we cannot tender individual investment advice. Only a registered broker or investment advisor may advise you individually on the suitability and performance of your portfolio or specific investments.

Historical investment return examples given are hypothetical, and not to be taken as representative of any individual’s actual trading experience. Eastman Communications, Inc. is the publisher of Hidden Values Alert.

Copyright © 2009 Hidden Values Alert. All Rights Reserved.

Warren Buffett: “We didn’t do anything really
dumb” …and neither should you

Dear Friend,

You know the old saying – sometimes the best investments are the ones you don’t make.

Think about it. How many times have you been tempted to jump on the latest investing “fad” – or chase a seemingly “hot” company – only to find out later that if you’d gotten in you’d have been wiped out?

Many times in your investing career – and especially in turbulent markets – the best thing you can do is avoid mistakes.

This isn’t just true for you and I – it applies to everyone…even a legendary investor like Warren Buffett.

Here’s what Buffett had to say about this important lesson in Saturday’s Wall Street Journal.

“I bought my first stock in 1942, and this roller coaster surpassed anything that I’ve seen,” says the 79-year-old investor. “We didn’t do all the smartest things. We didn’t do anything really dumb.”

Now – as you might expect…Warren Buffett didn’t avoid making “dumb” mistakes just by accident.

Instead, he used a simple – yet incredibly powerful – tool that has helped him avoid disastrous mistakes time and time again.

Later in the WSJ story, Buffett casually revealed this “tool” – and I’m happy to share it with you today because I agree that it’s vitally important to making sound investment decisions.

It’s a tool that everyone has access to – yet few take the time to put it to use.

Maybe it’s because this tool isn’t “sexy” enough – or maybe because it just seems like so much common sense.

But either way – if it’s good enough for Buffett…it’s good enough for me.

What is this powerful tool?

Here’s how the WSJ article describes it…

On March 28, 2008, Mr. Buffett, Berkshire’s chairman, took a call from Richard Fuld, then head of Lehman Brothers Holdings Inc. Mr. Fuld wanted to know whether Mr. Buffett would inject about $4 billion into the investment bank to stanch losses.

That night, in his offices in Omaha, Neb., Mr. Buffett pored over Lehman’s annual financial report. On the cover, he jotted down the numbers of pages where he found troubling information. When he was done, the cover was dotted with numbers. He didn’t bite. Six months later, Lehman filed for bankruptcy protection.

Annual Reports: The Powerful – Yet Overlooked –Investment Tool that Can Help You Identify Great Opportunities…and Avoid Mistakes!

So there you have it…

Warren Buffett uses annual reports. I think you should too.

And the beauty of it is…you can use annual reports to not only avoid making “dumb” mistakes…but also to identify great opportunities.

In 1951, after Buffett graduated from Columbia Business School, he used to leaf through Moody’s industrial, banks and finance, and public utilities manuals in order to find investment opportunities.

That’s where he read about an insurance company with earnings per share of $21 in 1949 and $29 in 1950. The funny thing about this company was that with earnings that good it still only traded between $4 and $13.

In other words the stock was trading at less than half the earnings per share.

In 2002 Buffett invested $455 million into a company called PetroChina – Asia’s largest oil company — how did he decide to invest close to half a billion dollars? Buffett said,

I sat there in my office and read the annual report, which fortunately was in English, and I decided it was a very good company. I sat there and said to myself this company is worth about $100 billion and is trading for about $35 billion.

Reading that annual report resulted in $3.5 billion in profit by the time Buffett sold his stake in PetroChina in 2007.

You’ll be light years ahead of other investors if you take time to read the annual reports hitting your mailbox right now.

I’ll bet you dollars to doughnuts you can’t find two investing friends who’ve actually read the annual reports of the stocks they own.

Most investors decide to buy a stock based on the headlines in the media. They’re playing a game of what’s hot and what’s not with their lifesavings and letting journalists decide what is worth investing in.

It’s no wonder so many people lose money in the stock market over the long term.

What Buffett Looks for in Annual Reports That You Should Too

Not everything in an annual report is worth reading. Like Buffett, you should focus on two areas:

FIRST, read the letter to shareholders. Simply put, the CEO’s annual report letter is written to you the shareholder to inform you of what’s happened in the past year.

• Does management keep it simple? You should never put your money into a business you can’t understand so it’s critical that the management explains their business to you clearly and simply.

Be wary of complicated financial models or a tendency to be vague about fundamental business issues.

• Is management honest? Everyone makes mistakes but you wouldn’t believe it if you read a lot of letters to shareholders. Great leaders and managers admit and take responsibility for the mistakes they make with the business.

Personally, I like to count how many times a CEO gives praise to others and if he uses self-effacing humor, as those are each hallmarks of good leadership.

• Does the company want to build value, or build an empire? Expansion for the sake of expansion is a dangerous game. You want to know your money is invested with managers who are interested in increasing profits and the fundamental value of the business.

Beware any CEO obsessed with expansion for the sake of expansion – let him play with someone else’s money.

• Is management focused on its teammates? If a CEO constantly takes credit for everything good that happened over the past year take it as a warning sign. You don’t want your money behind a CEO who needs to be the bride at every wedding or the corpse at every funeral. CEO’s should be focused on building value not personal glorification.

• Is management focused on serving customers? Customers are the business and a good sign the company as a whole is focused on the customer is if the CEO frames his decisions based on how it will serve the customer.

SECOND, read the financials to make sure no one is pulling the wool over your eyes. Too many annual reports start out like advertisements as the company tries to put a great spin on what they’re doing. They read more like marketing materials than honest reports of the business.

The real story of what actually happening in a business is in their numbers at the back of the report – the 10-K.

The 10-K is a report filed by the company at the end of their fiscal year with the Securities and Exchange Commission. It goes into much greater detail about the business…the risk factors it faces…legal proceedings…and executive compensation.

If I ever have trouble understanding what the company does after reading about the business…I know this company is outside my field of competence. And – as Buffett demonstrated with his notations of “troubling information” – you can easily see just how many red flags are associated with a company when reading about it.

You can learn a tremendous amount about a company – without ever leaving the comfort of your living room – simply by examining its annual report.

How You Can Put Warren Buffett’s Most Valuable Tools to

Work For Yourself…FREE of Charge!

Each month – in my Hidden Values Alert advisory letter – I provide two thoroughly researched “extreme value” recommendations that are based on the principles used by Warren Buffett himself.

But rather than just tell you about my Hidden Values Alert – I’d rather show you…with a FREE ISSUE.

I’d like to show you – FREE of charge – a handful of financially strong companies that are priced at a discount and simple to understand.

Each month – in my Hidden Values Alert advisory letter – I provide two thoroughly researched “extreme value” recommendations.

But rather than just tell you about my Hidden Values Alert – I’d rather let you see for yourself…with a FREE ISSUE.

So right now – for a limited time – I’m offering you a no-risk, FREE trial to Hidden Values Alert …my highly successful advisory service that serves as the Ultimate Insider’s Guide to Value Investing.

Click on the link below to claim your FREE 30-Day PREVIEW of Hidden Values Alert. Then you can decide if the service is right for you before you ever pay so much as a dime.

No gimmicks…no catches…and no tricks.

Just click here now to claim your 100% RISK-FREE trial subscription to Hidden Values Alert-and get immediate access to my complete list of open recommendations.

Sincerely,

Charles Mizrahi, Editor
Hidden Values Alert

P.S. The only companies who make it into my Hidden Values Alert portfolio are great businesses trading at deep discounts – companies whose annual reports I’ve examined thoroughly. I’d like you to try my wealth-building service RISK-FREE with this special 30-day FREE preview.Click here to begin your journey right now!

Eastman Communications Inc.

PO Box 290708 · Brooklyn, NY 11229

Hidden Values Alert, a general interest newsletter is not liable for the suitability or future investment performance of any securities or strategies discussed. Hidden Values Alert is published by Eastman Communications, Inc. As a publisher of a financial newsletter of general and regular circulation, we cannot tender individual investment advice. Only a registered broker or investment advisor may advise you individually on the suitability and performance of your portfolio or specific investments.

Historical investment return examples given are hypothetical, and not to be taken as representative of any individual’s actual trading experience. Eastman Communications, Inc. is the publisher of Hidden Values Alert.

Copyright © 2009 Hidden Values Alert. All Rights Reserved.

Staying the Course:
What You Can Learn From Don Yacktman…and
Where He Has His Money Right Now!

Dear Friend,

If you ask the average person what it takes to be a successful investor, I am sure these two traits would be among the most frequent responses: hard work and intelligence.

I, too, have had the image in my mind of a successful investor – someone who wakes up at the crack of dawn to check the overseas markets…and who juggles a desk filled with computer screens tracking every wiggle in the markets.

But over the past several years, that image has changed. I have read about and have met many successful value investors, and they are a far cry from the image most people have in their heads.

Sure, hard work and intelligence are very important to becoming a success. But there are several other traits that one needs to possess as well, the most important of which is the discipline to stay the course no matter how bad things look over the short term.

Discipline Rewarded – The Rise…Fall…
and then Rise Again of Don Yacktman

I don’t think any value manager was more out of favor than Don Yacktman, president and CIO of Yacktman Asset Management Co. and co-manager of the Yacktman Fund (YACKX), in 1999. Don was named Morningstar Inc.’s Portfolio Manager of the Year in 1991, but a few years later, in 1999, his fund was one of the worst performers in its category, falling close to 17 percent while the S&P was up 19.5 percent – a difference of more than 36%!

His board of directors disagreed with his value strategy so strongly that new directors were installed in the fourth quarter of 1998.

Don is a very disciplined man. Even though he saw assets in his funds plummet – and was mocked in the media for holding onto stocks that kept going lower – he did not stray from a philosophy of buying stocks trading at a discount to their underlying value.

His discipline was rewarded as the dot-com bubble burst and the stocks in his portfolio began to soar. In fact, all of the fund’s 10-year rolling performance has exceeded the S&P 500 index.

And just last month, Don was recognized for his great work once again as he was nominated by Morningstar as one of the finalists for their Fund Manager of the Decade award.

As Don’s discipline has shown, value investors are truly a breed apart.

A few months ago, I had the opportunity to interview Don Yacktman – and in light of his nomination for the Fund Manager of the Decade award, I wanted to share with you some of his valuable insight…and some examples of his most successful long-term holdings.

Enjoy…

What Don Yacktman Looks For in His Long-Term Holdings

Charles Mizrahi: One of the types of companies you like to invest in are businesses that are high quality and annuity like, that continue to generate huge amounts of cash flow and rack up earnings year after year. Could you give us a few examples of some of your long-term holdings?

Donald Yacktman: Sure. Coca-Cola (NYSE:KO) would be a classic because it’s one of our top holdings. And here’s a company where our purchase cost is less than half of where it once sold. It sold as high as $89 a share back in 1998 and almost every year they have had rising earnings and raising their dividends. Our average cost on Coke in the Yacktman Fund is about $41 and about $42 in the Yacktman Focus Fund (YAFFX).

The stock is currently trading at our purchase price now (Editor’s Note: This interview was conducted in March 2009…since then Coca-Cola shares have risen to more than $56 per share as of 12/18/09), but when you look at where it’s been and what this company is capable of over a long period of time, it’s almost like a press that prints out money simply because they have very high margins. 80% of their earnings are outside of the United States and they continue to have unit growth. Ther are really a very attractive business.

Charles Mizrahi: So on one hand you have high quality businesses like Coca-Cola and on the other hand, looking at your portfolio, you have a nice position in AmeriCredit (NYSE: ACF)…

Donald Yacktman: Yes. AmeriCredit’s a totally different concept. It’s similar but you get there a lot differently. In the case of AmeriCredit, it’s a financial and rarely do we put a lot of money in financials because they tend to be black boxes –we don’t know what’s in them. In other words you don’t know what the quality of the assets are, and you don’t know what kind of problems they have. While Americredit  sounds incredibly risky because they make subprime auto loans on used cars, is not nearly as risky as first perceived. There are several reasons for that.

For one thing the average loan amount is probably $15,000. And keep in mind they are lending to people that tend to live in apartments, so they don’t have houses and huge mortgage obligations. In today’s market you really need a car to get around and you can’t very well drive your house to work. They changed the bankruptcy laws making it much more difficult to default on an auto loan. Plus about 40% of the loan is paid back in the first year, which reduces principal and pays off interest.

It’s much better than a credit card company for instance. In a credit card company when the credit card holder gets into financial trouble they tend to run up their balance. In the case of AmeriCredit they doing the opposite — they’re running down their balance. Also the company has the car as collateral and typically they’ll get back 40% to 45% when an automobile is repossessed.

So it’s a lot different than most financial companies. In addition, AmeriCredit is giving enormous amounts of data [to shareholders]. But the other thing, from a valuation standpoint, is this company has something in the neighborhood of a $15 book value. What’s happening now is because they can’t securitize loans, they’re really in a kind of a runoff position. But even at a worst case scenario the company is at least worth their book value.

In addition to that, you’ve got two major holders who own 50% of the company–Leucadia National Corp. (NYSE:LUK) and Fairholme Funds (FAIRX). Leucadia has been in the business before – their cost basis on Americredit when they bought the stock last year is around $12 to $13 a share. We’ve actually owned AmeriCredit for a period of time over the years when we bought it low and sold it high. Back in ‘03 we bought it at about $2 a share and sold out a lot of it when it got into the $30s. Our average cost now when we repurchased it is about $7 per share.

(Editor’s Note: Since this interview was conducted back in March, shares of AmeriCredit have soared to more than $18!)

Charles Mizrahi: One of your long-term holdings is Proctor & Gamble (NYSE:PG)…

Donald Yacktman: P&G, again is very much like Coke or PepsiCo (NYSE:PEP). You get a great business that has high market share, high return on assets, and is still growing units while selling more products internationally. Again it’s another one of those “printing press” type of businesses. If the Fed isn’t able to reverse gears fast enough on all the money that’s coming into the system, the economy could be facing a lot of inflation. And it will be the Coke, Pepsi, and P&Gs of the world that will benefit by having the ability to raise prices and do very well in almost any type of economic environment.

Where Don Yacktman Has His Money Right Now

I’ll have more of my interview with Don Yacktman in next week’s issue – including how he’s used Benjamin Graham’s approach to achieve success…and how he rebounded from his 1999 performance to again be recognized as one of the top fund managers in the business.

It’s important for all value investors to learn as much as possible from the true “masters” of the industry…and Don Yacktman is certainly a master, as Morningstar’s recent accolade has confirmed.

But as a final value lesson for this week, I’ll leave you with The Yacktman Fund’s Top 10 Holdings as of 9/30/09.

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