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BRIEFING BOOK

Data Information Knowledge WISDOM

BRUCE GREENWALD
Location: Forbes, New York, New York

About Bruce Greenwald ..................................................................... 2

Debriefing Greenwald ....................................................................... 3

Greenwald in Forbes

"Stop Fretting About Income Inequality,” 10/05/09…………… 8


"StreetTalk With Bob Lenzner," 02/21/06……………………… 10
“A Goldbug's Guide," 06/04/07………………………………….. 11

The Greenwald Interview ………………………………………………. 14

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ABOUT BRUCE GREENWALD
Intelligent Investing with Steve Forbes

Bruce Greenwald is the director of research at First Eagle Funds.


He is also the Robert Heilbrunn Professor of Finance and Asset
Management at the Columbia Business School.

Greenwald is also academic director of the Heilbrunn Center for


Graham & Dodd Investing. He received the Columbia University
Presidential Teaching Award. More than 650 students take his
courses every year in subjects including value investing, economics
of strategic behavior, globalization of markets and strategic
management of media.

Greenwald has written five books: Value Investing, Towards a New Paradigm in Monetary
Economics, Competition Demystified, Globalization and The Curse of the Mogul.

Greenwald received two master's degrees from Princeton and a PhD at MIT.

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DEBRIEFING GREENWALD
Intelligent Investing with Steve Forbes

Interview conducted by Alexandra Zendrian


April 15, 2010

Forbes: What do you think are some of the biggest lessons you learned while working on
the book Globalization?

Bruce Greenwald: The first thing is that, and I think this is, in a way, the most important:
whenever you think of one force dominating the world, it's never that simple. So when
people have talked about globalization, they've talked about it as if it's the only thing you
have to worry about. And there are many other forces out there that are going to mitigate
the effect of globalization.

So the first is the shift in demand to services, which are locally consumed and provided.
And that's been going on for a long time. So when you, for example, look at US typical
household budgets, in 1970, people spent 6% of their income buying clothes, and I think
about 2% getting those clothes cleaned. And now, today, they spend 3% of their income
buying clothes and about 2% getting them cleaned.

So that shift to services is enormous. And it's most obvious in the importance of things like
medical care and education. And the services, you know, the rental services that people
get from housing. But that's the first thing. And maybe in 50 years, they're going to get
offshore, but most of them are not going to get offshore.

Another factor is that as manufacturing productivity grows, just like what happened when
agricultural productivity grew, the manufacturers, which are the heart of globalization. It
was the agricultural products from the United States and Australia and Canada and
Argentina, that as the prices of those products sell, they became much less important in
world trade.

So the growth in productivity and manufacturing, coupled with the fairly limited demand for
manufacturers, because you can't have that many flat-screen TVs is also a big factor that's
going to mitigate the effect of globalization.

The second lesson that I think is maybe equally important is that local still matters much
more than global. And it shows up actually in two ways. The first is that if you look at any
country, it determines its own fate. So China, which has a very successful diaspora
population, doesn't develop until the dead hand of the Chinese government gets off the
back of the Chinese people. And then you see. And it's very rapid, from between 76 and
80, they go from really faking 4% productivity growth and output growth to 10% a year
output growth without faking it.

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And that is all due to developments in China. It's not globalization. And the same with
India. I mean, India just doesn't do much until 1990, when they decide to get the
government out of the way. And that's a change that takes place in India. Same with
Japan. Japan actually had barriers to trade. They took advantage of the ability to trade.
But it was things that happened in Japan with Japanese productivity. So the real lesson
there is that it is local conditions that determine what happens, not global conditions.

And the best evidence of that is that the example of global intervention to help people that
everybody brings up, when they think that globalization should be beneficial, is the
Marshall Plan. Now, the overwhelming evidence is the Marshall Plan had almost no effect.
Why? Who do you think got far and away the most Marshall Plan aid per capita in Europe
after the war? It was Great Britain. And who had the worst growth experience after the
war? Great Britain. And on the other side of the world, we give some food aid to the
Japanese, but we don't do anything for them. And we make them pay for the occupation.
So a third of the Japanese government budget after the war goes to supporting US
occupation forces. And yet they do just fine. So all the evidence on outside intervention
and sort of the history of what develops is that countries develop themselves.

The second part of it is that when you look at profitability, and the best example of this is
what's happened to John Deere in this cycle, that it is the local service businesses, that
where you can be dominant in a local market, that produce all the profits. So the big global
businesses making stuff, mining stuff, are seriously price competitive. And nobody makes
any money. And that's true, by the way, for the Chinese as much as anybody else.

If you look at the Chinese manufacturers, none of them are in the most valuable
companies. The companies that make all the money are either the traditional natural
resource companies, based on the resources they own, which are local, or the local
service companies like the power companies, which are immune to global competition.
The cellular companies that are immune to global competition. The local banks that
dominate the local markets in which they are.

So when you look at companies' success, and partly this is as services get most important,
but it's always also conditioned by the nature of competition, that the successful
companies and the successful strategies are all locally based. So Deere doesn't make
much money making tractors. Where they make their money is, and why they survived
sort of the downturn much better is in servicing tractors and providing parts for tractors.

And there, you know, you have to have a local infrastructure. And it's a fixed cost. And if
you've got the biggest local infrastructure that provides the best service, guess whose
tractors are going to get bought? So the second thing is that localization is still much more
important, both for economies and for businesses than globalization.

What bubbles do you see emerging?

The financial markets, I think, in the developed countries are almost certainly a bubble.
And the reason I say that is that their growth rates of profitability are, it's true, sort of higher

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than the developed market growth rates, although because margins are going up in the
developed markets. And you've seen this huge increase in productivity growth.

So the profits have held up extraordinarily well in places like the United States, despite the
downturn. Say profit growth in a developed economy on average. I mean, there are the
maybe star economies like China is say six to 7%. And say its profitability growth in
developed is two to three.

Well, you know, that's an extra. If you're in a competitive market of course, the growth
doesn't show up in profitability at all, because it gets competed away by new entrants, who
have to invest the capital. So it's only some fraction of that growth. And in the local
franchise businesses that, you know, enjoy the growth without the encroachment of more
competitors, because they have big local economies that scale a lot of customer captivity,
which keeps people out.

So first of all, it's only a limited part of the emerging markets where the growth story should
matter, because that's where the growth is profitable, as opposed to people just earning
the cost of capital and having to invest more. But you know, the difference between say
three in the franchise businesses in the west, like Microsoft and so on and maybe seven in
the developing economies is sort of four percent. And if you want an overall return of like
12, because especially and it goes up with higher risk. You probably want an earnings
return of five in the developing markets, which is 20 times earnings. And you probably,
because it's safer, want an earnings return of seven in the developed markets, which is 14
tons. So it's not that big a discrepancy when you look at the fact that not all growth is
profitable. And that the growing economies are inherently riskier economies. So I think a
lot of it is a bubble.

Are there any particular countries that you think are more prone to bubbles?

No, I don't think it's the countries that are. I mean, China, of course, is a black box. But on
the other hand, you know, they have a lot of central control and they can probably sustain
it for a long time. No, I think if you want to write for your investors, it's not to invest
indiscriminately in the emerging markets.

And the best example of that is things like Mittal Steel, where people just lost their shirts,
because that's a big competitive global market. And nobody's going to make much money
in that, whether they grow rapidly or not, because there are just going to be a lot of
entrants. So you want to look for businesses that have local monopolies without local
competition, where they get to enjoy the fruits of the growth.

And that's things like the cellular companies and so on. So I would discriminate on
business lines between franchise businesses, you know, in the Buffett sense, where the
gross does come down to the bottom line, as adding to value. I mean, look, if you invest a
billion dollars in growth, and you earn 10%, but you have to pay 10% to the people who
provided the billion dollars, because that's your cost of capital.

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The value of the growth is zero, for the, you know, existing equity holders. So you've got
to look for places where the growth is occurring, where those investments are going to
earn above cost of capital returns. And that's where markets are protected from
competition. And this usually these local monopolies. So if you want to steer, I think it's
less important country by country, where it's very hard to predict what's going to happen.
And usually in the bad countries like Venezuela, it's over-discounted in the market. Focus
some more on the kinds of companies that are going to benefit from growth, as opposed to
the ones that aren't.

Where do you think that the US economy stands right now and where do you think
that it's going through the end of this year?

I mean, that's the other, I think, part of the globalization story that is not sort of yet fully
appreciated. And I'll say where I think this leads the US. In the Depression, when you get
a very long-term period of substandard growth or high unemployment or significant
underemployment like the Depression in the United States or Japan, post-1990, it's almost
certainly not because of the financial crisis.

I mean, the Japanese banks and especially the Japanese corporations have been low-
debt. Most of them are huge net cash positions, for a long time. And yet they're still not
growing particularly rapidly. You know, there are a lot of businesses that are really well-
financed in the Depression. You know, the banks have all this cash they don't know what
to do with. And yet, you know, the economy still doesn't really grow that much.

And I think the reason that usually happens is that there is a huge sector of the economy
that dies. And it takes a very long time to move resources out of that sector to the vibrant
part of the economy now. In the Depression, the obvious example of that is agriculture,
because since the 1870s, agricultural productivity growth is like four to five percent a year.
And demand growth is maybe two to 3% a year, so prices are going down. Wages are
going down.

But it's very hard to move the people, especially when the crisis hits and prices finally
collapses, because their housing is all on the farms. That they have to finance the move
just when they're poorest. That because their demand for manufacturers collapses, and
it's not offset by the increase in demand from cheaper food by industrial workers.

The industrial sector is also in big trouble, so it's very hard to make the transition. And you
actually see this. The economies that suffer the most in the Depression are the big
agricultural producers, which is the US, Germany and Europe, Australia, Argentina and, to
some extent, Canada too. The reason World War II works so well to get us out of that
situation is not just that it raised demand and people saved a lot of money that they were
willing to spend, because ultimately, all that war demand went away.

And people were very worried about what was going to replace it. But inadvertently, you
got everybody off the farms. And you got them into the war plan, so they were already in

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Detroit. Or you got them into the Army. And when they came out of the Army, they just
wouldn't go back to the farms.

So you really did industrial policy inadvertently by forcibly shrinking that dying sector and
getting people into the locations where they could make money. And that's why the big
surprise about the war is, to all the contemporaries is, that the Depression doesn't start
again after it's over. Now, the comparable thing today is manufacturing is dying, because
productivity growth is again five to 6%. And there's just limited demand for manufacturers.

And here, it's because across countries, the manufacturing sectors are isolated. So Japan
has a huge manufacturing economy. And they've been in trouble for a very long time.
And the government gets, you know, just as they were attached to agriculture. And they
tried to keep everybody on the farms, misguidedly, but make them richer there, which was
a mug's game.

All these countries are trying to preserve their manufacturing bases. And the way they're
trying to do it is to export. And because they can't support it on domestic demand. But
there is an iron law of international economics, which is when you add up overall countries,
the surpluses and deficits have to sum to zero. So there are some people trying to export,
like the Germans, because they've got the fixed Euro parity. There are people whose
economies are being destroyed by the German products, which are Greece, Spain, Italy
and Portugal, who in the old days would just devalue their currencies, protect their
manufacturing sectors that way. And not be the victims of German export policy.

Well, the Chinese are also doing that, clearly, with the fixed parity with the United States.
And the problem is that if we've got a global problem where everybody's trying to
manufacture and the demand isn't there, which is why Japan has been, as I say in such
trouble for so long.

So, you know, the Chinese, if they want to grow, are going to try and raise their exports.
To the extent they succeed, US balance payments on current account deteriorates. All
that purchasing power comes out of the United States. And you have to basically, to
sustain demand, have zero savings rates, which you just can't have, because the top 20%
of the population which has, say, 40% of the average income saves about 10 to 15% of
their income. So that's 6% savings.

And when you get a zero savings rate, it means that the bottom 60, 80% of the population
that has 60% of the income, is just saving 6%, which means they're spending 110% of
their incomes. And that is not sustainable. I mean, you can only do that, and I think until
we fix that situation, you know, what everybody thinks of is stop gap government demand
measures that are going to, quote, "kick start the economy," are not going to do it. So I
think we're going to look a lot like globally the Japanese looked since 1990. And that's a
real global problem.

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GREENWALD IN FORBES
Intelligent Investing with Steve Forbes

Political Economy
Stop Fretting About Income Inequality
John Tamny, 10.05.09, 12:01 AM EDT
It's utterly pointless.

The great Canadian economist Reuven Brenner noted in his 1983 book, History: The Human Gamble,
that periods of massive income inequality frequently lead to economic innovation. Simply put, those
who are not yet wealthy see those who are, and they gamble on exciting ideas in hopes of joining the
existing rich at the top of the heap. As Brenner put it, "it is the perception of inequality that induces
people to take risks."

Along those lines, USA Today founder Al Neuharth wrote in 2007 about his own career path compared
to that of CNN's Larry King. Neuharth observed: "[King] was a poor Jewish kid from Brooklyn whose
father died when Larry was in grade school. I was a poor German-Russian kid from South Dakota. My
dad died when I was two. Larry and I both knew we'd have to take some big risks if we wanted to make
it big time. He gambled on a late-night radio talk show that he got syndicated nationally in 1978. It
ultimately developed into CNN's Larry King Live. I gambled on USA Today in 1982. It became 'The
Nation's Newspaper.'"

But even if we ignore the exciting innovations and advances wrought by what some term the "wealth
gap," there would still be no reason to fret about it. For one, the U.S. is, thankfully, to this day a magnet
for low-skilled immigrants. Immigrant additions to the work force naturally drive down average wages at
the lower end of the scale (thus increasing the gap), but they also increase economic productivity within
these 50 states.

Second, the income calculations that cause so much hand-wringing are notoriously flawed. Given the
limited range of jobs that factor into wage rates, the economic opportunity picture is highly limited.

Indeed, not only do income-inequality calculations ignore the various fringe benefits that drive up real
income, the actual definition of "wages" only includes the average hourly earnings of private,
nonsupervisory workers. As economists Bruce Greenwald and Judd Kahn pointed out in their 2009
book, Globalization, the wage calculations exclude "managers (supervisory) and professionals, people
who have done relatively well in the recent past and now make up the largest group of workers."

So while the calculated wages appear to have remained relatively flat over the last 30 years, they don't
take into account the greater truth that workers in the U.S. are highly mobile. No doubt the media will
continue to trot out workers displaced by overseas productivity or harmed by wage pressures from

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foreign laborers, but the wage picture for individuals over longer time periods tells us something quite
different.

Back in the mid-'90s, an Alexis de Tocqueville Institution study tracked workers over a 20-year period,
from 1975 to 1995. What it found is that 30% of the bottom fifth of earners in 1975 found themselves
among the top fifth by 1995, and another 30% of the bottom fifth were found among the second fifth of
highest-paid workers. More recently, in the 2007 edition of The Forbes 400, it was reported that only 32
of the original 400 from 1982 were still there 25 years later. The rich are a moving target, to say the
least.

Economist Gregory Clark asserted in his 2007 book, A Farewell to Alms, that when we look at how the
rich live, "their current lifestyle predicts powerfully how we will all eventually live if economic growth
continues." For readers who doubt Clark's reasoning, they need only reach into their pockets to look at
their cellphones or go home and watch television on their flat-screens. Formerly the trappings of the
rich, both are presently accessible to the vast majority of Americans. So while wealth-gap worriers
spend a lot of time on wealth disparities, they ignore the greater and more positive story--that the
lifestyle gap between the rich and poor continues to shrink.

When we consider the myriad items that we now enjoy that were formerly the baubles of the rich, those
at the top of the wealth heap are frequently there precisely because they served the needs of those not
rich. For those who doubt this, consider the computer on which you are reading this article. As recently
as 1990, the cost of the most primitive of computers ran into the thousands of dollars, while the most
powerful models (also primitive by today's standards) set buyers back more than $9,000.

But thanks to the brilliant doings of multi-billionaire Michael Dell, quality computers are there for the
taking for those whose budgets don't extend beyond three figures. Rather than bemoan the wealth gap,
we should embrace it for the hyper-wealthy getting to that point by virtue of fulfilling our myriad wants
and needs. Basically, the non-rich get to "vote" for the future obscenely rich with their own dollars.

So while economists will continue to debate how much or how little the wealth gap is growing or
shrinking, the rational among us should pay these debates no mind. Far from an example of plunder,
wealth is merely a way for those of us who can't claim 10-figure bank accounts to keep score: Those
who are the richest are most likely to be the very people who did the most to ease our unmet needs.

Rather than worry about it, we should celebrate wealth inequality as a sign that enterprise is being
rewarded, all the while knowing that the disparity has focused the minds of innovators eager to reduce
the gap in ways that will make us better off. In other words, income-inequality worries are utterly
pointless.

John Tamny is editor of RealClearMarkets, a senior economist with H.C. Wainwright Economics and a
senior economic adviser to Toreador Research and Trading. He writes a weekly column for Forbes.

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Money & Investing
StreetTalk With Bob Lenzner
Robert Lenzner and Rebecca Eskreis 02.21.06, 6:00 AM ET

NEW YORK -

Buy Coca-Cola and sell Google, says Columbia Business School professor Bruce Greenwald. A
renowned value-investing expert and award-winning teacher, Greenwald's classes are consistently
filled beyond capacity--especially when Warren Buffett visits to guest lecture. Greenwald is co-
author of several acclaimed books, including 2001's Value-Investing: From Graham to Buffett and
Beyond, and revered by Ph.D.s and portfolio managers alike for his expertise. Greenwald sat down
with StreetTalk in an exclusive, three-part interview to discuss why value-investing works and
where to find bargain opportunities in today's markets.

Part 1: Loving Low Multiples

Greenwald says value-investing produces the best long-term returns, and the proof lies in the
results. The value approach has consistently outperformed other investment styles and the broader
market in almost all extended periods since the 1920s. Greenwald says today's best value buys are
U.S. large-caps trading at low multiples and holdings in small Asian markets.

Part 2: Unpopular Is Your Friend

Ugly and boring stocks are a value investor's best friend, says Greenwald. Though these companies
are unpopular on Wall Street, Greenwald says Wal-Mart and newspaper giant Gannett are
positioned for good long-term returns because of their enormous economies of scale. Greenwald's
bullish on dividend-paying large-caps such as soft-drink maker Coca-Cola, which he says is a better
long-term buy than U.S. Treasury bonds .

Part 3: Don't Can Coca-Cola

Greenwald eschews the more glamorous technology sector, which he says presents lottery-ticket
odds of long-term success. He says search engines, e-retailers such as Amazon.com and even
market darling Apple Computer are not well-protected from future competition.

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Investment Guide
A Goldbug's Guide
Chana R. Schoenberger 06.04.07

For the truly fearful, owning the barbarous relic can give peace of mind. Some ways
are more bothersome or risky than others.

In the pantheon of commodities with nice price runs over the past several years, gold has a special
shine. Gold is what investors turn to when they're scared. If you want to make money, buy stocks. If
you're afraid of losing all your money, buy gold. Not a lot of gold--even the most bearish portfolio
managers recommend putting only 10% of your money into commodities--but enough to give
assurance that you won't be destitute if the U.S. economy falls over dead.

That's because gold's price isn't correlated, positively or negatively, with stock market averages. It's
more closely tied to how investors think the economy, inflation and the dollar are doing. Since the
dollar has been weak recently, gold prices are up. Worries about international instability and oil
shortages add to its allure.

The price of a troy ounce, $666 in early May, is considerably up from last year's average $606.
That's not as high as the alltime peak of $850 in 1980, when double-digit inflation was rampant and
oil was, it seemed, headed to $100 a barrel. But that $850 in today's dollars is $2,275. So by this
yardstick, gold now has some catching up to do.

Jeffrey Christian of CPM Group, a New York commodities research firm, is a gold bull. His case:
"The things that caused investors to buy record amounts of gold have not gone away and will not go
away anytime soon."

More than a physical commodity, gold is a symbol, harking back to the times when the world's
monetary systems were based on it. Universally recognized as a store of value, gold can be bought
and sold in any country. There are 4 billion ounces of gold in people's hands, enough to fill a cube
60 feet on a side. Of this, investors own 1 billion and central banks another billion, with the
remainder in jewelry and other baubles. Last year 79 million ounces were extracted. Two-thirds
went to jewelry makers and the rest to bullion.

The uneasiness that has prompted higher gold prices can be found everywhere, but especially in the
developed world. Since 2003, Christian notes, investors have been hoarding gold in Australia,
Malaysia and Thailand, all places with no political risk--that is, their governments have historically
not frozen private assets. If some economic disaster arises that prevents these investors from getting
at their cash or getting value from it, they still have their gold.

If you want to own gold that you can touch, you can buy bullion, but you'll pay a pretty price. There
will be a markup when you buy it, a markdown when you sell it and fees to store and insure it.
FideliTrade in Wilmington, Del. sells gold in lots ranging on average from $5,000 to $40,000, at a
price between 2% and 7% above the wholesale value. Half the states, including Illinois, Georgia

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and Michigan, don't collect sales tax on gold bars or coins. If you live in the other half, or certain
cities, you'll have to pay tax.

You can also get one-ounce gold coins from dealers. The most popular are the American Eagle, the
Canadian Maple Leaf and the South African Krugerrand. They all trade at a premium to their metal
content. When gold was at $666, FideliTrade was buying small quantities of Eagles at $675 and
selling at $689.

Whether it's in bar or coin form, you'll need insurance for your gold, both while it's in transit from
the dealer and when it's in your storage container. FideliTrade offers insured storage for 0.75%
yearly of your hoard's value; Monex of Newport Beach, Calif. sells the same for 25 cents per ounce
per month.

If you choose to keep it in your basement, be aware that your homeowner's insurance probably
won't cover it. Allstate, which insures one out of every eight homes, covers up to $600 under a
version of its standard policies. Above that you'll have to pay for a special rider. The cost of your
gold insurance can be a miscellaneous itemized deduction--if you take those. Gains on collectibles,
such as gold coins, are generally taxed at 25%.

But do you need to touch your assets? Bruce Greenwald, a professor who heads Columbia Business
School's value-investing program, says it's dumb for individual investors to own commodities
directly. One idea is to buy an intangible that tracks gold--such as an exchange-traded fund.

The first gold bullion ETF StreetTracks Gold Shares, started trading on the Big Board in 2004. At
25 million shares traded per week and backed by 500 tons ($10 billion) of metal, this has the
deepest liquidity of the gold-related ETFs. It and its twin, iShares Comex Gold Trust, which trades
on the American Stock Exchange, run up annual expenses of 0.4% of assets. Both trade within 1%
of their net asset value.

Another ETF is the Powershares DB Gold Fund, with net assets of $22 million and a 0.54% annual
expense burden. This fund owns gold futures, not bullion. Because you simply own ETF shares, you
are taxed in both cases on gains.

Or you could buy gold futures on your own. A 100-ounce contract on the New York Mercantile
Exchange's Comex gives you the same exposure to the metal as a $67,500 investment in
Powershares DB Gold. You can buy a contract with only 10% or 15% down, but it's not a good
idea. Plunk down the whole $67,500 in your futures account and invest most of the collateral in
Treasury bills.

Advantage to direct purchase: saving that 0.54% annual expense burden the ETF charges.
Disadvantage: getting nicked by floor traders on the futures exchange. A retail customer confronts a
bid/ask spread of perhaps 10 to 40 cents, says Comex trader Stephen Spivak. How far out should the
future go? You've got a tradeoff here between the deeper liquidity found in the nearer-term
contracts and the lower trading costs of buying far-out futures that don't have to be rolled over so
often. Spivak recommends going out one month, known as the front month.

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You'll pay capital gains rates on your futures gains, and your interest income from the Treasurys as
your collateral will be taxed at ordinary income rates. Long-term capital gains are taxed at 15% and
short term at your regular marginal tax rate.

There's yet another way to get gold exposure: via mining stocks. These shares rise and fall as the
price of gold does, but they tend to be three times as volatile. If the price of gold rises (or falls) by
10%, a miner's shares might rise (or fall) by 30%. The main reason for volatility: operating
leverage. If it costs a mine $400 to get an ounce, then a 10% move in the price of gold from $600 to
$660 increases the gross profit by 30%.

An exchange-traded fund exists for mining stocks, too: Market Vectors Gold Miners. The $609
million fund has 36 stocks and runs up a 0.55% expense tab.

Among open-end funds, one of the hottest is the $175 million Midas Fund, with a 30% annual
return over the last five years. Annual expenses (not counting interest) are 1.96%. Holdings include
Golden Cycle Gold, BHP Billiton (with just a dash of gold in its operations) and Freeport-
McMoran Copper & Gold. Two of the cheaper gold funds are American Century Global Gold
Fund and Fidelity Select Gold Portfolio.

If you want a piece of the gold business downstream, you always can buy stock in the nation's
largest gold merchant: Wal-Mart.

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THE GREENWALD INTERVIEW
Intelligent Investing with Steve Forbes

True Value Investing

Steve Forbes: Well, Bruce, good to have you with us.

Bruce Greenwald: It's a pleasure to be back.

Forbes: You are a classic value investor, but as you've pointed out in the past, no one
says they're a non-value investor. And just like everyone says they're disciplined, until the
market changes, everyone says, "Well, at heart, I'm a value investor." What's your
definition of a true value investor?

Greenwald: Okay, I think there are really two elements, or maybe three, to be honest,
that distinguish a true value investor. The first is where you look for opportunities. It's just
what your orientation is towards finding securities that are likely to do better than the
market. Because I think the fundamental fact about investing that nobody can ever forget
is that whenever you buy a stock thinking it's going to do to well, somebody else is selling
it, thinking it's going to do badly, and one of you is always wrong. Only in Lake Woebegone
can all the managers outperform the market. So you always have to ask the question,
"Why am I on the right side of this trade?" And this is a value approach to being on the
right side of the trade. And it is now rooted in a lot of work on individual investor
psychology. And it is, first, you want to stay away from the lottery ticket stocks.

People in every country have always paid for lottery tickets. They've always been crappy
investments and they're paying for the hope and the dream. So you want to stay away
from that. Second thing is in life, as in investing, people are overly averse to what's ugly,
disappointing, cheap and you really want to go there, which is the corollary to staying away
from the big upside stocks. And I think the third thing that really value investors are aware
of is that human beings are constituted not to think in terms of uncertainty. If they think
there are weapons of mass destruction in Iraq, they're sure there are weapons of mass
destruction in Iraq. Nobody thinks it's a 60% chance. If they think it's a good stock, they
think it's 100% chance that it's good stock. If they think it's a bad stock, they think it's
100% chance it's a bad stock. What that means is that the good stocks are overbought,
and the bad stocks are oversold.

Forbes: So a value investor is not just being squishy by saying 70% chance of rain?

Greenwald: Unfortunately, he's being accurate because there is never 100% chance of
anything. So you want to go where all those factors lead you, which is, you want to look
for ugly, disappointing, diseased securities where you have a sense that the disease is
more than built into the price, which ultimately means cheap. And that's the first thing that
distinguishes a value investor. The second thing is --

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Diseased Vs. Diseased

Forbes: So, in essence, you're saying emotions are your enemy.

Greenwald: Emotions are absolutely your enemy. You want to be a certain kind of
mutant who is just completely different in their orientation to what's an attractive
investment for the rest of the market. The second thing is that you want to have even
then, when you come to look at these securities, because some of them are terminally ill.

Forbes: Some of them are really diseased.

Greenwald: Right, really diseased. And those you want to avoid. So what you want is,
you want a better methodology for figuring out what this security is worth, and that's where
you go back to Ben Graham and David Dodd. So all of the MBAs who are taught to do
discounted cash flows, or what is a shorthand for that ratio, or multiple valuations, have
been taught what may be a proper thing in theory, but is for three basic reasons a terrible
way to value securities in practice. And the first and most fundamental is that when you do
a discounted cash flow, you take weighted averages of near term cash flows, which are
projections, which are very good information, and distant cash flow projections, which is
very bad information, and you add it together. And when you add bad information to good
information, you wind up with bad information.

Secondly, they ignore balance sheets. It's all projected earnings and multiples of earnings.
And balance sheets are the most reliable, solid information you have about a company.
And the third thing is that if you look at the assumptions that go into a discounted cash flow
model, they are profit margins, growth rates far out into the future, costs of capital.
Nobody knows what those are for a company like Ford. But there are things you do know
about Ford. Is this company going to be economically viable? Probably not. Is this
company going to have --

Forbes: Do you short Ford?

Greenwald: No, nobody is ever going to short something that's as highly leveraged as
Ford and still keep their shirt. Because all it takes is a little bit of optimism and you're
going to get killed. But it's a typical stock that's in the much too tough to call column. Does
Ford have any competitive advantage over the other big, global car companies? And the
answer is no. So you'd like a methodology that incorporates those kind of assumptions
into your valuation. And that's what Graham and Dodd developed. Always start with the
assets. Then look at the earnings power and see if it's protected by the assets. And only
then, and this is what Buffett taught people to do, look to pay something for growth,
because growth is only valuable if the investment in growth earns more than the cost of
capital. And if it doesn't, growth can destroy value. Growth is not a valuable thing as a
rule. So, and if you're going to buy that, you better be very sure of the franchise. So that's
what really constitutes a value investor.

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Growth Invites Competition

Forbes: Before getting into what you look for, like barriers of entry, you just mentioned
something, growth invites competition. Can you elaborate on that?

Greenwald: Oh absolutely. I mean, opportunity invites competition. If you find something


new or something old that is attractive, that earns huge returns on invested capital,
everybody is going to see it. You can't hide things in a market economy. And if you're not
protected by economies of scale, by captive customers or by patents and technology that's
not available to the rest of the world, you're going to get copied. And that's especially true
in rapidly growing markets with a lot of new consumers.

Forbes: Which, by the way, is an argument against antitrust, because if somebody has a
monopoly that's not legally protected, people are going to kill you on it.

Greenwald: I think that's absolutely right. Antitrust is completely, and has been for years,
incoherent. That where you don't have a natural monopoly, competition will take of it.
Where you do have a natural monopoly, having, breaking those up and trying to regulate
them is more trouble than it's worth.

Forbes: Now, you started to mention some of the things that truly constitute a company
that won't be quickly done in by competition. Barriers to entry, you have three others,
supply, demand, economies to scale. Can you quickly go through those?

Greenwald: Okay. Barriers to entry are exactly the same thing as incumbent competitive
advantages. Because if you're, the newest guy has the competitive advantage. It's just
hyper competition. So it's got to be an incumbent competitive advantage. What can the
incumbent do that entrants can't do? And the first thing is, they can have access to
demand that entrants can't replicate. And that's called customer captivity, they own their
customers.

Forbes: For example?

Greenwald: Second -- oh, for example, your doctor. If you're satisfied with your doctor,
you're not going to leave. If you're satisfied with your health insurance company, and most
people are, it's, they're very reluctant to change, it's a complicated process, there are big
switching costs.

Forbes: Your IT systems.

Greenwald: Your IT systems, Coca Cola, you have a repeat taste. I mean, when you go
to a Mexican restaurant, you may order Mexican beer, but you don't order Mexican Coke
because you have a taste for uniformity and that constitutes customer captivity. Second
thing is you can have technology they can't replicate. Patents, or some sort of process
factor, that they can't replicate, or some particular very specific asset, like a terrific mind
that they can't replicate. And the third thing, and in a way, the most important thing is, you

- 16 -
can have a scale of operation, usually locally, that they can't replicate. So when Wal-Mart
dominates a regional market, it builds an infrastructure.

If somebody wants to compete with them in that regional market, they've got to duplicate
that infrastructure. To make it pay, they've got to get a share comparable to Wal-Mart's.
And given habit formation in local shopping, that's going to be essentially impossible to do.

And those are the three basic competitive advantages. If you don't have those, and
information is also an advantage in financial markets. But in most markets, if you don't
have those three, you make a bad mistake to pay for growth.

Wall Street's Success

Forbes: So why did Wall Street do so well? Huge profits and a lot of bright people
around.

Greenwald: Right. And the question is, did Wall Street do that well? If you take the
losses, what Wall Street does is, and I think a good example is AIG. AIG makes a lot of
money while they're writing these derivative contracts that are essentially insurance. If I'm
an insurance company, and I write an insurance policy on your house, I have to reserve
against the losses.

Forbes: Sure.

Greenwald: If I'm a financial company, and I write a policy against your portfolio, so I
write a credit default swap, the market falls apart, is going to go way up and protect your
portfolio, I don't have to reserve against the losses on that. I write the whole premium as
profit. Well, if insurance companies did that in the good years, they would make
unbelievable amounts of money. And then they'd go bankrupt in the bad years. And
guess what happened to Wall Street?

Forbes: So doesn't that argue that like rules of the road, I mean, when cars came along,
you had to put in, you know, rules. You don't drive when you're drunk, speeds limits and
the like. When derivatives, like credit default swaps, they're, in essence, like futures, we've
had them forever, put margin requirements on them, things like that.

Greenwald: You can do that. You can do accounting reporting, so they have to basically
establish a reserve for losses.

Forbes: Yeah.

Greenwald: I mean, they had, there are a lot of things. But mostly, and this is, again,
getting back to value investing. People are predisposed to do stupid things. That when
they think markets are going well, they're sure, like long-term capital management was,
that risk has gone away. It's not just, by the way, in housing markets. If you look at credit

- 17 -
default swaps on sovereign debt in 2007, Dubai sovereign debt was trading at four basis
points.

That is, you could buy insurance against a default on Dubai sovereign debt for four one-
hundredths of a percent. That means you were betting that there was less than a chance,
if you wrote that insurance, in 2,500 years that a country like Dubai, in the most unstable
region of the Earth, based on the most unstable commodity at a peak price, had a less,
had a one chance in 2,500 years of defaulting. I'd love to know who wrote that contract.
And I think they wrote it because nothing bad had happened for a long time. People
extrapolated and they forgot that there are probabilities. And, you know, subsequently,
Dubai sovereign debt trades at, you know, the CDS, the credit default swaps trade at 600
to 1,000 basis points.

Forbes: So I'd have been better off with Indonesia.

Greenwald: Of course. And I don't know how you stop that. I mean, I think that you want
to arrange the people who make those mistakes pay the price.

Future Of The Media

Forbes: One thing on that, talking about barriers to entry being obliterated, media
companies. You've never been a big fan of them anyway because --

Greenwald: I think that is not necessarily true. I think it's like all things. There are media
companies with extraordinary monopolies.

Forbes: You point out that a lot of them haven't done very well.

Greenwald: Right. And then there are media companies that everybody thinks should
have monopolies, like content companies.

Forbes: So, Bloomberg versus --

Greenwald: Well, or Comcast, which has a monopoly cable. It's only competitive with the
phone company. And if they can get along, it's a duopoly, versus the movie business
where everybody can get into it, and you can see it in the movie business. This ought not
to be a surprise. So everything that could go well for the movies goes well for the movies.
They get DVD distribution. They get cable distribution. They get foreign rights in a serious
way.

Revenues grow at eight and a half percent a year for a very long time. Costs grow at 11%,
because they bid for the stars, they produce more movies and the entry eliminates the
profitability. And content is king? I don't think so. Unless there are barriers to entry in
producing that content, so you've got to get a scale like Bloomberg and the kind of
customer captivity that Bloomberg has.

- 18 -
Forbes: So looking at the media landscape today, what do you see unfolding?

Greenwald: Okay, first thing is that you've got to break it up into parts. So the first part is
just content production.

One-off content production, where every little thing like records, or movies or books is an
individual production, has no barriers to entry, it's going to be a crappy business.
Fortunately, it's always been a crappy business. Now, it's worse a little bit because of
piracy.

Forbes: So if it wasn't for hobbies, that would have dried up a long time ago.

Greenwald: Right. Specialized continuous information content, where you're probably


going to have one provider, providing bond prices for the Turkish market, say, are going to
do really well, because for a long time, they're going to be able to keep people out.
They're going to be the only provider, they're going to have local economies of scale, and
people are going to depend on them.

In wholesaling, again, people who put together specialized content, like the Sci-Fi
Channel, are going to do much better than people who do generalized content and are
competing with eight or nine channels. Finally, on the distribution end, the people are
going to make money there are, of course, not the old physical distribution people, but the
people who own the electronic wire, and that's the telcos, to the extent they do it, and
Comcast. And those are going to be hugely valuable monopolies. When we all live in
caves for global warming or whatever reason, that wire is going to be our lifeline. And if
those two guys can cooperate, a large share of our income is going to go to that.

Telecoms Of The Future

Forbes: So do companies like Verizon and AT&T have a future?

Greenwald: If two things happen. One is they have the infrastructure to provide fast
Internet accesses essentially. And that will be a cost-free infrastructure, it'll be a fiber
backbone, and it'll be over the air transmission, so it will never break, and will be
completely software defined. So nobody will work there, and it will be hugely valuable,
because it's a huge fixed cost. That's the first thing. If they can get that infrastructure in
place, they'll do really well.

Second thing is they have to be able to get along with the cable companies. Because
that's a shared monopoly, and if those guys are testosterone-crazed jackasses, and
compete with each other, they will convert it into an unprofitable, competitive business. If
they can get along, implicitly, they will make a ton of money.

Forbes: So, what areas do you like right now, as a value investor?

- 19 -
Greenwald: Well, I mean, I think cable is much despised. Telcos are much despised all
over the world.

Forbes: Right.

Greenwald: And you want to do the work to see which are the telcos that are likely to,
first, be in a position with this basic infrastructure, which is going to be universal. And I
think there are foreign telcos that look like they're able to do that. I mean, France Telecom
may eventually get there. Turkey Telecom has got a lot of fiber infrastructure and cable
infrastructure, and may get there. So you want cheap telcos with a future, because the
future is essentially, they're essentially trading it, like, eight to 10% dividend yields, as if
they're dying, and some of them are not. And the other one is the cable companies. I
think Comcast is –

Forbes: So, if you're on the highway, collect the tolls.

Greenwald: Of course. Exactly. And if you're on the highway at a really low price,
because everybody else thinks the highway is going to fall apart and be really expensive,
that's a lovely place to be.

Apple And Amazon Bubbles

Forbes: So what bubbles do you see out there in the financial market?

Greenwald: I mean, aright, I'll do the one that I've been wrong on for years. I've always
thought Amazon is a bubble. They have no customer captivity. They don't have enough
scale that it's hard to replicate. They occupy a really big market. They're not specialized
at all.

Forbes: So how have they done so well for so long?

Greenwald: Well, first of all, they're, I think if you actually look at their reported profits,
they haven't done that well.

Forbes: Okay.

Greenwald: What they're selling is this idea that they're going to continue to grow and
they're going to have negative working capital. Negative working capital's an invitation to
competition, right? So why they think that ultimately is not going to be competed away is
beyond me. So that, I think, is a bubble.

I mean, I've been semi wrong about Apple, which I think is a bubble, because we have a
lot of experience with consumer electronics companies. We have a lot of experience with
cell phone companies. And that experience says that there are no barriers to entry to
consumer devices. Now, in the computer market, they may do much better for longer,
because brand names are more persistent there. That Dell, for example, has had a

- 20 -
dominant position in the corporate market, and direct sales to that market for years. But
ultimately, I think that's an area where competition is going to tell. And paying the multiples
people are paying for Apple is absurd.

The other one I think, and this is along the lines of growth not always being valuable,
people are paying a lot of money for companies in Brazil and in China that are subject to
competition.

Chinese manufacturers have to compete with other Chinese manufacturers. And the
growth just gets competed away by entry, like it did for the movie business. So I think you
would be well advised, especially given the political uncertainties, and everything else in
the fundamental economics, not to pay a ton of money for China. And I think there's
something else that is going to kill China too, which is that if you remember, if we had been
sitting here in 1989, everybody thought the United States was going to consist of people
who flipped burgers at Disneyland for Japanese tourists.

Forbes: I didn't, but others did.

Greenwald: Others did and they were wrong. And they were wrong, because the
Japanese were in manufacturing. And manufacturing is an area where productivity growth
is much higher than demand growth, and it means, like agriculture.

Forbes: Make a quick point on that. Caterpillar, Deere and others, make the money not
selling moving equipment so much as servicing it, which is local markets.

Greenwald: Exactly. Which is local markets that they can dominate. Global making
markets are subject to what happened to agriculture in the 1920s and '30s, which is,
everybody left it. Everybody could do it. Productivity growth was enormous, and it died.

And I think Japan has basically had this very long period of malaise because they have
decided they're going to be the preeminent manufacturer in the world. It's like in 1940, the
United States deciding they're going to dominate the world by being the preeminent
agricultural producer. And that would've led no place. And I think China's in the same
game. So, I think you're going to have real trouble in China.

China Hindered By Education

Forbes: Elaborate just on that one minute on China. Authoritarian government, huge
success so far. Are you saying they don't have the kind of flexibility and the true, free
market that allows the economies to like we've done over time?

Greenwald: I think it's not so much that, although I think there's an element of that to it.
First of all, on the huge success, they still have an output per capita that's probably a third
to a half of Taiwan's. So the direction is good, but the level is still nothing to write home
about.

- 21 -
Forbes: Right.

Greenwald: Secondly, I think that they have done it by specializing in industries which are
manufacturing industries and it's a manufacturing, export-driven economy that are going to
get automated. If you go into a Japanese factory today, I mean, and this is the problem
with Japan. There are more people on the loading dock than there are in the factory. And
the loading dock is this service function that you talked about with Caterpillar, and so on.
There is no evidence yet that they've moved into developing a vibrant, innovative service
sector.

And there is equally, I think, little evidence that they've actually developed leading edge
manufacturing compared to the Japanese. They've done better at the low end than
anybody expected, but they're not the star manufacturing companies that the Japanese
are. And a lot of good that's done the Japanese. And I think the third and most important
thing is what you're talking about. That ultimately to support a standard of living that's high
in this environment, you not only have to have a service infrastructure, but you have to
produce intellectual capital. And the striking thing about the Japanese is they did not
produce great universities. And I don't see any evidence that the Chinese are producing
great universities either because the truth is, and this is related, I think, to the political
system, that the very best graduates who come to the United States, and a lot of them
come, all want to stay here.

Forbes: Still?

Greenwald: Of course. Wouldn't you? And you talk to them, and you say, "You want to
go back to China?" And they say, "Not if I can help it."

Forbes: So does that mean India has an advantage over China that they are more mind-
oriented and not to mention the rule of law?

Greenwald: I think there are two reasons. I mean, we're, first is, that they are much more
service oriented. And I think that's going to help them.

They're not committed to doing the kind of, sort of mindless manufacturing that the
Chinese are doing, or blindly pursuing that alley. And secondly, I think that, yes, the
politically vibrant culture that's there is going to make a big difference. On the other hand,
if you look back 70 to 80 years, the dominant universities in the world today are the
dominant universities then. So I think India is not going to necessarily succeed in
displacing the great American and the few great European universities. But the Indians
ultimately want to go back in a way that the Chinese don't necessarily want to.

Western Europe's Lagging

Forbes: And talking about Europe, why has Western Europe been such a laggard? I
mean, they should've been at the forefront.

- 22 -
Greenwald: Again, I think that there are two reasons for that. And they're exactly the
reasons we've talked about. I mean, that in a sense, the future is services, which are
locally produced and consumed, and production of intellectual capital. And those are both
state-dominated sectors. And they have not produced successful universities because they
have egalitarian overlays on things that mitigate against the kind of excellence that you
have at Oxford and Cambridge and in the U.S. universities.

So they haven't been producing the kind of intellectual capital they need to produce. And
it's not so clear that they're going to be good at that. And the second thing is that services,
and the big services are, of course, education, medical care and housing, are government
dominated. Either run with very tight zoning restrictions, or they're directly run by the
government, and I don't think that helps you.

Forbes: So, quickly looking at the U.S., if we want to continue to be a real leader,
shouldn't we be going to opposite direction on health care? Opening it up to entrepreneurs
and get a real rip in innovation and production and like we do everywhere else?

Greenwald: I mean, I, of course, I think that's true. I mean, and if I can say something
about the United States, because I think it's important. There are in the world two basic
ways you control human behavior and have societies function. One is material incentives.
And that includes, obviously, not just money but, you know, all sorts of material sanctions.
And the other is social incentives. And the U.S. is an economy that has been selected for
not having social incentives because if you were an Italian, and you didn't like the social
restrictions in your village, you came to the United States to do well. And what that's done
is created a culture because you don't have to enforce more obedience in the schools the
way they do in Europe, that is a wonderful culture.

I mean, in the United States, you can screw up till you're 35-years-old. And if you're hard-
working enough and smart enough at that point, you'll do well. In France, or in Germany,
or in England, or in Japan, or in China, if you screw up by 19, and in France, don't get into
a grand ecole, you're finished for life. And there is no equivalent of Animal House or the
huge literature on high school and college experience in the United States both in films
and books in Europe. I mean, school is a grim experience in Europe. And I think that it is
that attribute of U.S. society that we don't want to kill in any dimension.

Forbes: So even though a lot of our especially inner city schools mess up, if the kids are
playing games, their mind develops?

Greenwald: It's not just that. I mean, there, look, there are people who develop at 15, I
mean, there are people, there's a famous investor called Seth Klarman, I knew him when
he was an MBA student at Harvard. He was the same then, he was as capable then, he
was as brilliant then as he is today. He developed very early in life. But there are other
people who develop much later in life. They develop not at 15, but at 20, at 25, at 30, at
35. And I think trying to force everybody into a European mold, where if you aren't doing
well by 19, we're going to write you off, is crazy. I mean, I would let those people out of
school, and let them come back to school later. It's funny, I talked to somebody here who

- 23 -
started out, she left home at 16, to be a rock star. And she tried that for four years and
then she went to NYU and obviously did well and she works for you now as a journalist.

That is not possible in Europe. And I think that's one of the glories of the United States
that you want to make sure is not eliminated by trying to pursue a European model of
service and welfare provision. I mean, there's a downside to it, but I think there's a
wonderful upside to it.

Forbes: Bruce, thank you very much.

Greenwald: Thank you.

- 24 -

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