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I am still having a hard time seeing when an index fund is helpful. Most of the points for an index fund, people don't have the time, inclination or insight appear to be surmountable. If you don't have time to investigate the stock market with your hard earned $ then you should invest in a money market fund. I think many folks who are coupon shoppers and bargain shoppers can at least understand value investing. That is all it takes. For these folks, index funds are a cop out. There may be an information overload issue for investing but value investing provides the appropriate filiters. I find it ironic that Jason Zwieg is counseling folks to buy index funds in a book on value investing. For most people who read the Intelligent Investor (and by inference understand or are curious about value investing), the advice in my mind is silly. Packer

Index funds are momentum based stock funds with low expense ratios. The only thing they have going for them is low expenses. I think another distinction folks forget is that most stock mutual funds are trading/speculation funds. If you filter out the low turnover value oriented funds (the real investment funds) I think they can beat the stuffing out of index funds. Why as value investor (you understand the concept) would you recommend index funds?? I think the value concept is widely used and accepted when folks fo shopping for other items. Why can't the folks that understand that concept apply it to stocks/funds as well? Would you recommend a momentum based fund with low expenses to them? Packer

FUR is Withrop Realty Trust ran by a real estate investor named Michael Ashner and SUR is CNA Surety, a surety bond insurer that is majority owned by CNA and selling at a discount to book and has had a great underwriting record. Thank Harry Long for bringing this gem ot our attention. SUR is an example of a post artibtrage situation where 50% or more of a firm is purchased by another firm and subsequnetly trades a discount. Packer

I think what Graham has stated is that if you know you can't deal with picking your own stocks then at least understand the value philiosophy and chose an advisor that can (low turnover value funds or RIAs that invest with such managers). In my mind, index funds are buying into the Efficient Market Hypothesis (which I disagree with). The effects of index investing over the past 10 years have been a disaster to which I am suprised no one has commented (other than not investing in stocks). Packer

I can't attest to 50% returns but 20%s returns can be found in post-bankruptcies, cheap (3 to 5x FCF) out of favor moderately levered firms (radio companies), firms that are mis- categorized (SURW - broadband/cable co miscategorized as a telco), micro-cap asset conversion cos (ACME - liquidating television company), commodity asset conversion firms (oil sands co, SSW, SD) and smart capital allocator holding cos (FUR, FFH, SUR). Many on this board are experts in doing well with the last category. In addition, mispriced call LEAPs can be used in the later category. Joel Greenblat (a guy with a 50% plus track record) names the above plus spinoffs. Packer

I was re-reading the new version of The Intelligent Investor and could not disagree more with Jason Zweig's comments on stock selection for the lay investor. He states that for most people an index fund is the best investment and just because that was not available when Graham wrote the book he did not recommend it. He seems to totally dismisss the value framework that Graham is espoising. Do you guys have the same impression.? In my book, it can be harder to pick a good mutual fund (outside of low turnover value funds) as a good stock (as mutual funds have more moving parts than stocks). Joel Greenblatt says as much in his second book (The Little Book that Beats the Market) also versus his first book (You Can Be a Stock Market Genius) was just the opposite. Given most folks here use some type of value approach would it make sense to develop a composite of our preformance, send it to Jason and show him what a group of primarily lay investors can do using Grahama and Dodd's principals. Another metric would be how many hours per week do we spend looking for and eveluating stock. I think this would be an interesting exercise that I would be willing to put together if you guys can pull the data together. Thx. Packer

My point was the firm does not have excess cash without equity dilution. I wish you well but this type of investment has too much uncertainty unless I could see that the firm will be profitable without the subsidies. I was talking to my dad the other day and he was saying that in some cases businesses could get these solar cells for free or very little cost but these subsidies are being reduced. If they are reduced or eliminated (I see spending $ on education as being more important to subsidizing solar installations) how would ENER be effected? This the key issue at least in my mind. Packer

I was looking at 2 cheap school suppliers/publishers (SCHS and PEDH). Both of these firm are selling at an FCF yeilds in excess of 20% and FCF yields of 41% and 77% respectively. PEDH is closely-held so that may explain some of the discount and both are in an unloved sector education publishing? Is anyone else looking at these? TIA Packer

ENER has debt that is greater than cash level, so in essance it is trading at it market cap plus net debt premium to cash. Yes cash can be used to fund about $16 million/Q cash burn for another 12 Qs assuming the solar market comes back and the revenues don't fall if subsidies decline (as has happened in Germany). Do you know how much of the revenue is subsidy related and what would happen if subsidies went away? That I think is a key risk here. Packer

Thanks for your thoughts everyone. To calrify. My idea was to go through Ben Graham's Intelligent Investor with the kids for 6 to 8 weeks then have them chose stocks based upon the concept therein. My only concern is given the age group potential interest. I agree without a framework these stock club/picking exercises can become gambling. Does anyone know of any "starter" material out there that would be of high school age investors? The other alternative (which some of you pointed out) is to run a school store. Where the kids can choose some the inventory, sell at athletic events, track what sells and develop the promotions and possibly develop a web site/store. In the store case, has anyone seen how are the kids typically compensated? Class trip ??? TIA Packer

Has anyone been invoved in a high school based investment club? If so, how did it get started? To what level was the instruction/rules? My kids go to a small school and I was thinking of starting a club with donated money to run a small portfolio with teacher/student interest and provide the students some opportunity to invest, talk to other finance professionals and gain some extra-cuirrcular activity time. TIA Packer

Sone more questions from your responses. Are the numbers you have quoted for minimum or maximum obligations? If so, it does not seem be consistent with the 10-K statement of a minimum of 10% increase per year. If we increase the 29.5% of sales consessions are in 2009 by lets say on average 20% per year, if the revenue is flat then after 3 years concesssions with represent and adddtional 21.5% of sales and after 5 years 43.9% of sales reducing profitability considerably. If we use the minimum of 10% per year we get reductions of 8.6% and 18%, respectively. Am I missing something with the math? How did you get comfortable that the contracts will be enforcable? If there is a dispute, to whom can foreign shareholders appeal? Surely, the folks in China will hose the foreign shareholders first. How did you get comfortable that management is on the foreign shareholders versus being out for themselves or for the interest of China? Does management have a sizable portion of its net worth in the foreign avaialable shares? Packer

The FCF numbers are on an equity basis and include $310 million in synergies. Without synergies the FCF yield is 16%. On an EV basis the FCF to enterprise yield is 14%. This is FCF + Int Exp / (debt plus equity). I think the combined debt will be closer to $7.8 billion. See Investor Relations breifing (slides 18 & 19) on FTR site for the details. Packer

One potential danger appears to be the exclusive right they have of providing advertising on buses. What is the impact if they loose the esclusivity? Wouldn't Focus Media, AirMedia and VisionMedia (that are providing advertising at other venues - airports, subways, etc.) just enter the market? These guys will also have the aggregating ability. Another potential risk is what has happened to AirMedia. The airports are charging more for rental space. Couldn't the bus cos do the same thing? It appears they have the upperhand in the relationship. In the latest 10-K it states the concession fees can increase anywhere from 10% to 30% per year. Given this is the largest cost, do you know how fast these are increasing currently and what CCME plans on doing to prevent these fee increase from collapsing margins? Do you know how different installing TVs on buses versus at subways or airports? Just some thoughts. Packer

I was reviewing the merger data and found that at its current price FTR is a 20% FCFY stock with a 10% dividend. This appears to be an interesting alternative to a bond other high yeilding stocks or a cigar but like USMO. Some other small telcos are interesting (esp. the ones with fibre rings where customers/services can be added on with a small investment). These include SURW, HCTO and SHEN. These remind me of the the "triple play" cable cos. If you look at HCTO and VMED (a triple-play provider in UK) cap-ex levels or SURW's own maintenance cap-ex level adds an addtional $24m to $40m to FCF. This reduces SURW's FCF multiples to 2.5x FCF. An interesting play with some good upside. Packer

I was looking for a cheap companies and came across Carmike (CKEC) and Reading Intl (RDI). Both are selling for less than 5x FCF (3.3x for CKEC and 4.5x for RDI). CKEC was brought out of bankruptcy by Leucadia a few years back and has more leverage than RDI @ 4.8x EBITDA. RDI is also interesting becasue they also do real estate development and have exposure to Australia and New Zealand. Both are at significant discount to the 2 largest chains Regal and Cinemark @ 10x FCF. The one thing that surprised me is the amount of FCF these firms are making with what I have observed are basically empty theatres at least around here. These firms have mid to low teens EBITDA margins and rising revenues. The revenue growth is due to popular movies and 3-D showings. CKEC has already upgraded all of its theatres to digital and many of its theatres to 3-D. RDI is about 50% digital and 3-D. Has anyone looked at these? TIA. Packer

I like the hotel option with an early start and maybe as Norm mentioned invite other investors if they want to mingle before the talk. I had a great conversation with Martin V. last year. We can set the admissions to subsidize those who have the interest but not the $. Packer

You do not need to borrow to generate more dollars you print more dollars to pay for tax cuts and spending. The Fed could double the money supply overnight. It just has not been done in the US so it may be unthinkable now but has been done in other places. That is all I am pointing out. This is the most common way to remove a large amount of soverign debt (per Reinhart and Rogoff) as they have studied this problem ove the past 3 to 4 centuries across the globe. This is common but not in the US since after the revolution and the Civil War in the South. We are in interesting times in that combining the deflation in the private sector with the printing press may allow the debt to be devalued with a modest amount of inflation versus hyper inflation in more normal times. Summing up I think the bottom line is how does this effect your investments. I think the corporate assets are a good hedge against both scenarios. I looked at security prices through the Depression and found as Sanj pointed out consumer prodcuts firms and gold mining firms did well. You can look at the data your self in Wigmore "The Crash and its Aftermath". The other alternative is to hold cash, gold or some other store of value. The problem with holding cash is devaluation which will hit $ denominated fixed payment asset the worse. Lets take an example. The Fed decieds to purchase alot of new gov't bonds issued for tax cuts and stimulus and other debt in the market. Then gov't decides to restructure this debt (lower principle and strech out payments), similar to what they did with mortages. Under this scenario, real assets would retain their value wihile $ denominated payemnts (cash) would suffer. There are smart people on bith sides of this iisue (Baupost - inflation, Fairfax (deflation)) but I think Fairfax is more of a hdege than an outright bet due its holdings of other real assets . It will be interesting to see the outcome. Packer

According to the study the decline is 50% for the depression so I don't know how to compare to a 69% number that may have a different source. Inflation does not require more debt just more dollars which will make debt smaller in proportion to other income producing assets. Given the deflationary bias in prices printing money may not cost as much inflation as in the past. If this scenario comes to pass then income producing assets will keep up with inflation and the debt holders will lose value (my most likely scenario). The idea that any Western country would allow a debt deflation to occur when the inflation alternative exists to exit the debt trap doesn't make any sense to me. That is why most debt crisis end in inflation not in a deflation according to Reinhast & Rogoff. You state cost cuts are unsustainable but firms appear to have done well over the past few years what is not to say they could do the same again if demand falters? Packer Packer

I think Graham would have purchased MSFT given the low yields of bonds. In reading his early writings, he looked at firm values first then values of the firms securities. For bonds the bogie was about a 10% yield, 12% for preferred stocks and 15% for stocks. MSFT has a high FCF yield (10%+) and its CF stability is very high when compared to most other firms. MSFT has a proven large moat. The biggest issue is re-invesmtent but given thier stock repurchases they have been at least partially right. The big risk is a large expensive acquisition. I you look at MSFT common stock as a bond or preferred, it boecomes quite attractive. Packer

I think you are missing a very important point. If the QE and all the other loose monetary policy was not followed, the stock market would be toast. This money has caused inflation in stock market and other productive and natural resource assets. The end game may be to inflate our way out of it over a long period of time to offset the deflation that is in the system. The interesting point brought up by the data is that real demand has declined by 25% already and profitibility of most firms is doing very well. The Great Depression had a decline of 50%. In think that data provides an interesting bullish signal given the amount of demand destruction. Packer

These are initial guidelines for investment (money going in) not guidelines for re-allocation once one of the winners becomes large. I think given Berkshire's exposure to many segments of end demand (even as a smaller firm via its portfolio) would be considred an A firm early on. These are conservative guidelines and with the Kelly fromula can reduce your risk of ruin. If you feel comfortable taking on more risk (you are just starting out and your dowside is limited comapred to your future income) then go for it but just like margins of safety this is diversifiaction margin of safety. I think most of the value investors we all sudy follow some form of this (I know of very few value investors who put going in 50%+ into one stock - as a result of appreciation this may be the case). Packer

I like Philip Fisher's guidelines. See pages 116-127 of Common Stocks and Uncommon Profits. He suggests you divide your stocks in three groups A, B and C. A firms are larger diversified firms who have many end users (e.g. BRK-A, IBM, LUK, L etc.). B firms have a expertise in one or two areas and C firms are the options (you are going to be right or you are going to lose all your money). He recommends less than 20% for A stocks, 10% for B stocks and 5% for C stocks. Of course firms have to meet your other criteria as well. This combined with a Kelly ratio can provide a good starting point. Packer

Y'all, Some of you stated you had set up funds with this type of arrangement. How did you do this (account set-ups etc. and what type of compensation do you charge? I may be in a similar spot shortly. Thx. Packer

What trades is a minority of the shares. This is common amonst some money managers (Pzena is another) where management owns the majority of the shares and a small minority is traded. The last annual report has a good discusion of this for Calamos. The fully diluted share count is 97 million, therefore valuing Calamos @ 2.1% of AUM and 4.8 x FCF. Packer