Invest Like the Best in 2008

By Jim Sinegal

Although our all-star fund managers found themselves against the ropes with the rest of the investment community at the close of 2007, you wouldn't know it from reading their shareholder letters.

Warren Buffett's advice to "be greedy when others are fearful" has become an investment cliché, but the 16 fund managers on our list have taken it to heart. Mason Hawkins and Staley Cates at Longleaf Partners (NASDAQ:LLPFX - News) see "tremendous opportunity" in the markets, while Christopher and William Browne at Tweedy, Browne Value Fund (NASDAQ:TWEBX - News) believe that "more attractive valuations" are forthcoming. Mario Gabelli of Gabelli Asset (NASDAQ:GABAX - News) believes "the most profitable investment opportunities come with blood in the streets." With Bear Stearns (NYSE:BSC - News) losing more than 90% of its market value in only a few days, there is certainly blood in the streets, but we think our expanding roster of 5-star stocks is evidence that this storm is set to help more than a few investment flowers bloom. The following table lists the fund managers whose holdings we surveyed at the end of 2007.

To see related chart, click here:

http://news.morningstar.com/articlenet/article.aspx?id=232128

Housing, Finance, and the Consumer
For almost an entire year, financial stocks have been making front-page news as the subprime housing fiasco spread to engulf global financial markets. Credit has become nearly impossible to come by, with the greed of the last several years being quickly replaced by fear. Despite--or perhaps as a result of--widespread hysteria, our all-star managers were buying financial stocks in the fourth quarter, with American International Group (NYSE:AIG - News), Ambac Financial Group (NYSE:ABK - News), MBIA (NYSE:MBI - News), Merrill Lynch (NYSE:MER - News), and Washington Mutual (NYSE:WM - News) on the list of stocks purchased by two or more managers, with AIG held by seven of the funds on our radar screen. Bill Miller of Legg Mason Value (NASDAQ:LMNVX - News) believes the markets are in for a period of "enantiodromia, the tendency of things to swing to the other side," and believes that stocks in the housing, financial, and consumer sectors are the cheapest he's seen since 1991, "an exceptionally propitious time to have bought them." Judging from the stocks other managers are buying, he does not seem to be alone in this opinion.

A Fourth-Quarter Shopping List
Marty Whitman at Third Avenue Value Fund (NASDAQ:TAVFX - News) continued to buy beleaguered insurers Ambac, MBIA, MGIC (NYSE:MTG - News), and Radian (NYSE:RDN - News) in the fourth quarter. While the sentiment toward these companies from the financial media, ratings agencies, and political establishment appears to be overwhelmingly negative, Whitman believes these companies have ample resources to pay out any likely claims. Selected American (NASDAQ:SLASX - News) managers Christopher Davis and Kenneth Feinberg also bought shares in MBIA at the end of the quarter. On the other hand, Davis and Feinberg placed Ambac in the "mistake" category in their year-end letter, admitting to misjudgments "in our assessment of the risk embedded in its portfolios, the possibility of the rating agencies removing its triple-A rating, and the likelihood of significant stock dilution." Whitman shared these fears, and a "sense of discomfort due to the dangers of Rating Agency subjective considerations and capricious regulators." Primarily due to their dependence on these factors, my colleague Jim Ryan currently maintains a "Not Rated" opinion on MBIA and Ambac.

Other stocks in the consumer and housing sectors made up the next largest portion of managers' fourth-quarter shopping list. Building materials company USG Corporation (NYSE:USG - News) suffered from the housing downturn, while Carmax's (NYSE:KMX - News) exposure to a slowing economy hurt the stock. Wally Weitz of Weitz Partners Value (NASDAQ:WPVLX - News) owns USG, explaining that "demographics suggest a positive long-term outlook" and that the time to buy cyclical companies is "when their businesses are weak and investors are fearful." Rounding out the managers' consumer stock buy list are the world's largest alcoholic beverage company, Diageo (NYSE:DEO - News), and drugstore chain Walgreen (NYSE:WAG - News). We believe both of these wide-moat companies deserve a close look when available at a fair price. The table below lists stocks bought by two or more managers in the last quarter of 2007.

To see related chart, click here:

http://news.morningstar.com/articlenet/article.aspx?id=232128

Finding Buys Among the Sells
Surprisingly, we think events during the last two months have created opportunities in some of the stocks sold by our all-star fund managers. Although high-quality stocks such as Berkshire Hathaway (brk.b.B), Yum Brands (NYSE:YUM - News), and Markel (NYSE:MKL - News) spent much of the fourth quarter in 3-star territory, recent market action has brought these stocks back onto our "Consider Buying" list. The Fairholme Fund's (NASDAQ:FAIRX - News) Bruce Berkowitz appears to expect further opportunities to arrive in 2008, holding shares in Berkshire, Leucadia (NYSE:LUK - News), and Sears Holdings (NasdaqGS:SHLD - News) as well as a sizable cash position. Finally, though Ariel (NASDAQ:ARGFX - News) and Oakmark Select (NASDAQ:OAKLX - News) reduced holdings in wide-moat tax preparer H&R Block (NYSE:HRB - News), my colleague Todd Young believes the stock is a potential buy at current prices. Also, because redemptions forced manager Bill Nygren to sell portions of several holdings in 2007, we're not reading too much into Oakmark's share reductions of H&R Block and other top positions. The table below lists the stocks sold by two or more funds in the final quarter of 2007.

To see related chart, click here:

http://news.morningstar.com/articlenet/article.aspx?id=232128

Although we're not sure when Mr. Market's mood will change, we share the belief that times like these create opportunities for the patient investor. With so many wide-moat, 5-star stocks available at discounts to our fair value estimates, we think the market is serving up numerous chances for individual investors to buy like the pros.


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