BRIEFING BOOK

Data Information Knowledge WISDOM

RONALD MUHLENKAMP

is founder and president of Muhlenkamp & Company, established in 1977. He is the author of two books; most recently, Ron’s Road to Wealth: Insights for the

Curious Investor.

Location: Forbes Townhouse-- New York, New York

About Ronald Muhlenkamp................................................................

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Debriefing Muhlenkamp..................................................................

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Forbes on Muhlenkamp “Stock Tips from Four Pros”...................................................... “Drifting into Better Returns” …………………………………….. “Meet The Go-Anywhere Gang”………………………………….

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The Muhlenkamp Interview................................................................. 14

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ABOUT RONALD MUHLENKAMP Intelligent Investing with Steve Forbes

Ronald H. Muhlenkamp is founder and president of Muhlenkamp & Company, established in 1977. In 1988, Muhlenkamp launched a mutual fund and the firm also handles private accounts.

He is the author of two books; most recently, Ron’s Road to Wealth: Insights for the Curious Investor. Muhlenkamp had a seven-year stretch on the Forbes Honor Roll, ending in 2008. Muhlenkamp blames his slump on holding onto housing stocks for too long. Currently, the fund is investing in American exporters like IBM, Cisco and Caterpillar.

His fund stands apart from the bulk of actively managed funds, which mostly stay inside defined categories like "large-cap growth" or "small-cap value."

In addition to his book, Muhlenkamp also publishes a quarterly newsletter, Muhlenkamp Memorandum. Muhlenkamp, 64, grew up as one of seven children on an Ohio farm with no indoor plumbing. Today he and his wife, Connie, live on their own 95-acre farm near Pittsburgh, where they grows corn, oats, soybeans and hay. Part of the joy of this is his collection of six old tractors, similar to the ones he grew up on in the 1940s and 1950s.

Muhlenkamp received a Bachelor of Science degree in Engineering from M.I.T. in 1966, and a M.B.A. from the Harvard Business School in 1968. He holds a Chartered Financial Analyst (CFA) designation.

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MUHLENKAMP PRE-INTERVIEW Intelligent Investing with Steve Forbes

Ronald Muhlenkamp: September 9, 2008 Interviewed by David Serchuk

“Wall Street broke itself.” –Ron Muhlenkamp. What is one misplaced assumption in the business world? That it matters whether or not we have a recession. I would argue it doesn't matter, and I made the mistake two years ago, of saying we'd have a soft landing. It doesn't matter, and didn't matter. Until people feared a recession they didn't change their behavior anyway. And that includes the Fed. Until they had a fear of a recession they didn't change their pattern. A couple of years ago, people said how high will gas go? I said, I don't know, but it will go up until it makes you change your daily habits. And what I'm saying is, in the past when had recession, The Fed squeezed until someone went broke. This time they squeezed 2/3, and stopped, we had 5 ¼ interest rates this time and stopped. This time they did not squeeze until someone went broke. Wall St. squeezed until they went broke. The Carlyle Group said to make a deal happen they had to go to a 30:1 leverage. And when you have to do that it's not a good deal to start with. So, in my phrase, is Wall St. broke itself. What Wall St. should've been doing is saying if a spread is that thin we should've been backing off; what they did was leverage up more. For instance: Bear Stearns went broke. Some people at Bear wished the Fed stepped in two days earlier. The Fed wouldn't have had the political cover to step in earlier. You have to have someone go broke to have the Fed go in. Then we did another round, this time centered on Fannie Mae and Freddie Mac. Both of those things are independent of whether we end up with a recession or not. Are we in a recession? We did a seminar, titled "Recession" what we are saying is that there are 2-3 definitions out there. Most of us know the Economist definition. A second definition would look at GDP per capita. Maybe instead of the GDP down two quarters, it's GDP down 1%. (Editor’s note: Because the population grows by 1% annually.)

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For instance, if GDP and employment are flat unemployment goes up by 1%, just because the denominator goes up by 1%. However, we believe the public will always think you are in a recession until you beat the old highs. The public doesn't believe its summer time until temperatures exceed last July. That's a different definition. We went through last 50 years, all of this is on our website, and said what looks familiar this time around? The aggregate numbers are familiar, the details are different. Which recession is this one most like? The crunch in financials and credit markets looks like 1990 when the S&Ls and banks went out of business. This time around, food prices and energy prices tripled. That looks a whole lot '73-74. Grains all tripled in '73-74. What's different from the prior few recessions is that the dollar is weak. On the plus side, we are much more heavily a service economy than we used to be. Corporate balance sheets are in great shape. There is more international growth in Asia and a lot more international liquidity. One surprise is how Citi and Merrill Lynch got money from other folks, in the Mideast and Asia so quickly. The fact that the dollar is weak is tough on consumers, but it helps American businesses. Notice our exports are doing very well. What is the most important financial lesson you've ever learned? One came from Milton Friedman and Paul Volcker, and that is: inflation is monetary. Milton said inflation is a monetary phenomenon. I was taught in school that growth caused inflation. If that was true we should not have had the stagflation of the 1970s, but we did. Recessions are somewhat self correcting. Inflation is not, it requires a change of policy. It requires printing less money. That's a decision from the Federal Reserve. In recessions people work harder and spend less. In the '70s, my farmer cousins thought the way to get ahead was to buy more land. That by itself doesn't cure the problem. It feeds the problem. The second lesson, I learned from Ronald Reagan. Once food, shelter and clothing are covered economics is all about incentives.

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Meaning, if the incentives aren't right, I won't work. If taxes are too high, if I don't see more discretionary reward, I won't do the discretionary work. People now in a union shop, use their seniority to decline more overtime rather than work overtime. That's different than what they did a generation ago. What is your bold prediction for the future? This too will pass. What's different this time, is the focus on velocity. We have good ways of measuring money supply, no good way to measure velocity. Irving Fisher came up with this equation: MV=PQ. M=money. V=velocity. P=prices. Q=quantity. Most of the time velocity is stable. If the money grows faster than the change in quantity, what you get is price inflation. What happened this time around, the Fed quit printing money, but the velocity, the rate money turns over … if in securitized mortgages, velocity goes up, or if it's used to finance a hedge fund, versus a non-hedge fund that doesn't leverage, velocity goes up. Velocity is hard to measure. It grew strongly from mid '03-07. Since then that de-leveraging is just as if the Fed cut the money supply. M and V are interchangeable, as people de-leverage … Steve did a better time than I did this time around … He's been saying, we've been printing money, causing the dollar to drop. Last month the dollar started swinging other way. I want to pick his brain on that topic. What I missed this time was how much velocity was changing. Which means, that while the de-leveraging was going on, it means the Fed is squeezing the money supply. Your fund bought into housing stocks when they were cheap, but you held them too long. What finally got you to sell housing stocks, and when? We held them too long. Partly because we believed the backlog numbers, it looked like they had six months. In fact the backlogs collapsed. Belatedly we said the trend has changed. We probably sold the last of them in early '07, we knew we were not going to get good data until Springtime. What happened was that people had overbought in housing, speculators bought more houses than they planned to live in. We made a lot of money in housing, just not as much as we should have. We bought then in Feb. 2000. We made 6-10 times the money in some of them. What about now?

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We're not yet in a hurry. Housing is discretionary, everybody already lives someplace. After 2000, it was similar with tech stocks. At our seminar, someone always asked, when are tech stocks coming back? It took me a year to come to a proper response, which was, not until you quit asking. Last April '07, in our first seminar, people stopped asking about tech stocks. Now we own more tech than we ever have. Now we keep getting asked about housing, which means people haven't stopped selling yet. You have more tech than ever. Such as? We have good companies, with nice earnings, and great cash flows that are selling cheaper than rest of the market. Cisco at 14 times earnings? Yes, we're interested. It's always been a good company. Also IBM and Oracle. Now you own firms that largely export, like IBM, Cisco and Caterpillar. Could they be hurt if the dollar rallies? We own them because relative to 4-5 years ago the dollar is cheaper. An easy comparison, is Boeing. Boeing has one competitor, Airbus, whose cost is in euros. Relative to the euro over the past 6-7 years the dollar is down 30-40%. As the dollar strengthens it starts to negate some of that. In this case we have 6-7 years of dollar declining before it neutralizes. If the dollar strengthens that edge will disappoint; now we think it's a pretty good edge. What is the next long play to ride? It's hard to say U.S. automakers are in a class by themselves. It's easy to say U.S. tech companies are in a class by themselves. I did a seminar a while back. As a percentage of income, in the U.S., in various industries that are growing faster than average, what are people spending less on than in past decades? Food, clothing. What's grown is healthcare, tech and finances. We made a lot of money in finances last time around. They are looking for help this time around. Coming out of 1990, when the S&Ls went broke, the remaining S&Ls didn't pick up the business, Merrill Lynch did. This time around people will be looking for financial advice, but I don't know whether they will go to Merrill Lynch to get it. We own Legg Mason. Legg is selling at book value, a good business. We think there is room in tech, health care-although maybe not big pharma-and financials. Those are secular, long term trends. Until we identify individual companies, I'm not in that big a hurry.

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FORBES ON MUHLENKAMP Intelligent Investing with Steve Forbes

Digital Rules Blog Stock Tips from Four Pros Rich Karlgaard 11.11.08

Today’s blog distills the current wisdom of Vahan Janjigian, Ron Muhlenkamp, the astonishingly prescient (and still bearish) Gary Shilling and Joe Battipaglia. All four presented in the final days of the recently completed Forbes investor cruise.

Ron Muhlenkamp Founder of Muhlenkamp & Co.

Muhlenkamp mixes top-down and bottom-up analysis. He particularly looks at the relationship of inflation and interest rates to stock values. “I like to buy Pontiacs and Buicks at Chevy prices,” he says.

With today’s low valuations and low interest rates, Muhlenkamp is bullish, as he spots plenty of Cadillacs selling at Chevy prices. More quotes:

“As an investor, I no longer care that we’re going into a recession. Consumer confidence was down for three years after the 1990 recession, and I expect it to be the same this time.”

“Stocks are cheap, but I can’t tell you that stocks won’t get cheaper.”

“If you get a P/E below an ROE, you might have a good deal. Just to be safe, take 30% off the projected earnings.”

Muhlenkamp likes banks such as: -- BankAmerica (BAC) -- Wells Fargo (WFC) -- JP Morgan Chase (JPM)

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Fund Watch Drifting Into Better Returns Joshua Lipton 10.05.07, 12:23 PM ET

So you’ve hunted down the portfolio manager, read over his prospectus and pushed your hard-earned money into his able hands. He’s pledged to adhere to a very specific investing style or sector: He’ll only put your cash to work, he says, in a portfolio of small-capitalization value stocks.

But then, in the months ahead, you notice that the stocks in the fund’s holdings begin to change. The price earnings multiples begin to get higher, large-capitalization growth stocks begin creeping into the portfolio. Why, you wonder, do I have money invested in Google when I thought I was investing in small-cap value?

Legg Mason Value Trust (LMVTX), for example, has a stellar long-term record of beating the S&P 500 for 15 consecutive years until 2006. Famed value stock manager, Bill Miller’s strategy was clear, buy beaten down undervalued stocks, turnarounds and contrarian plays. But a few years ago, he began buying what would normally be considered technology growth stocks like Google, eBay, Yahoo and Amazon.com because he believed they were undervalued.

In 2006, his fund’s streak was broken with a total return of only 5.85% vs .15.85% for the S&P, and so far in 2007, Legg Mason Value Trust, now classified as a large cap growth fund by Morningstar, is lagging again.

It’s hard to criticize Bill Miller given his long-term record, and many believe that now is a great time to buy into his mutual fund. However, when funds stray from their trademark or stated investment approaches and asset classifications, it is called “style drift.” This phenomenon can send financial advisers and pension managers into a panic. How do you explain to a client, for example, that the value portfolio you swore by is actually a growth stock fund now?

No doubt, there are penalties fund managers face when they stray from their benchmark strategies--not the least of which could be getting fired. But while classifying funds into neat little style boxes has been a great business for Morningstar, there is strong evidence suggesting that high-drift managers actually produce better returns over time.

Russ Wermers, associate professor of finance at the University of Maryland’s Smith School of Business, compiled and studied data about funds and their holdings over the 15-year period from 1985 to 2000. He found that managers with higher levels of style drift produce better performance (alpha) on average than their more style-true counterparts. Wermers’ research indicates that high

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style-drift managers outperform low style-drift managers by as much as 300 basis points per year.

“The common wisdom is that you should constrain your manager, that guys who stick with their supposed expertise will outperform,” Wermers said. “So this surprised me. It does look like constraining these guys hurts them. Their talents might be more general.”

Wermers says the findings, while perhaps surprising, don’t indicate that it’s always a safe bet to tolerate style drift for just any manager. You have to look a bit deeper into the record.

“The point is not that every manager should be allowed to go wild,” Wermers says. “We have to look at how managers did over the long term. Has he been able to duck and weave at the right moment? And pick the right stocks? If so, then there is good evidence to let him follow his instincts.”

Jason Browne, portfolio manager of DAL Investment Company and Fund*X Upgrader Funds, which offer fund-of-funds mutual funds, argues that investors shouldn’t place too much emphasis on whether their managers bounce from one style to another. Instead, he says, stay focused on net performance.

“If what’s driving net performance happens to be a certain strategy, then funds in that strategy are what we’ll own,” Browne said. “If they deviated from that strategy, I would still rather be in that fund than a fund that is underperforming but has a specific style.”

Examples of successful style drifters, Browne pointed out, include Janus Contrarian (JSVAX). Over the past five years, it has produced an annualized return of 26.9%, 11.7% percentage points a year better than the S&P 500.

Browne points out that this fund has gone from 100% domestic to having 40% of assets overseas, part of which is invested in emerging markets.

“The managers migrate to the best opportunities,” says Browne. “In order to outperform the benchmark, you have to do something different than the benchmark. If investors want just one style, buy an index fund.”

Another successful style drifter, Browne, appreciates: Muhlenkamp (MUHLX). Over the past five years, manager Ronald Muhlenkamp has pumped out an annualized return of 17.1%, or 1.9% percentage points a year, better than the S&P 500. Mulenkamp Fund is classified by Morningstar as a large cap value fund, however in practice it is a “go anywhere” fund. A few years ago Mulenkamp was buying home builders, but today the fund has a concentration in financial stocks and energy shares.

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“The more you confine yourself to a specific style, the less you give the manager the opportunity to say, ‘If this was my money, this is what I would do with it,' ” says Browne.

Others aren’t so sure. Andrew Clark, head of research for the Americas at fund analytics firm Lipper, argues that an investor might get a bit nervous if what he wanted out of his portfolio was diversification and the portfolio began to drift and become more concentrated.

“If you just want something to beat the index and have good diversification, you may have some questions,” Clark said.

Another source of potential worry: The manager drifts right into an area he knows too little about.

“He can be out of his skill area,” said Thurman Smith, editor of Equity Fund Outlook. “He might not know how to avoid value traps, which is when a stock is at a low price in terms of metrics, but it will stay that way for various reasons. Or a growth guy might not be as good at realizing that a company, in fact, doesn’t have anything going for it fundamentally.”

Christine Benz, director of mutual fund analysis at Morningstar, echoes that concern: “He might be a good researcher of small cap stocks, but now he’s buying Microsoft. Will he still be able to add value in that area?”

Benz points out that Uncle Sam provides some protection. If a fund makes any mention of market cap in its name, then a U.S. Securities and Exchange Commission rule demands that it keep 85% of its assets in those types of stocks.

In the end, most agree that if you are making your investors rich with market-beating returns few will bother to look under the hood and even fewer will complain.

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Money & Investing Meet The Go-Anywhere Gang Michael Maiello Megan Johnston, 02.27.06

Most funds work within well-defined areas. Not these guys, who roam over the investment map, to good result.

Those rigid morningstar style boxes don't do justice to a merry band of iconoclastic fund managers who hunt stocks in every corner of the forest. Lately the bulk of Ronald Muhlenkamp's assets are in large caps (66%); in 2003 he had most of his bets in midcaps (41%). Muhlenkamp has shown a gift for finding winners all over the place. His Muhlenkamp Fund boasts an 11.7% annual return over five years, way ahead of the S&P 500's 0.5%. Muhlenkamp's free-ranging fraternity goes by various names: "all-cap," "multicap" or "go-anywhere" funds. They stand apart from the bulk of actively managed funds, which mostly stay inside defined categories like "large-cap growth" or "small-cap value." We've culled the best-performing all-cap funds over five years, which takes in the horrid tech-bust bear market and the subsequent erratic recovery.

According to none other than Warren Buffett, the best investors pay no attention to market cap, especially since some large caps don't deserve to be large caps. In a 1984 speech at Columbia Business School, which he has referred back to many times, the überinvestor termed it folly to buy something that "had been marked up substantially last week." For 17 years the value-oriented Muhlenkamp Fund has been able to show strong performance amid little turnover, just 7% annually. This fund, headquartered in Wexford, Pa., north of Pittsburgh, charges a not bad 1.14% of assets per year. It has a commendable resilience and earns a FORBES grade of A in up markets and B in down markets. With an engineering degree from MIT and a Harvard M.B.A., Muhlenkamp started out in the investing world as a stock analyst at brokerage Berkley Dean in 1968. He likes to say that, up to then, he was a tabula rasa on the market, never having owned a stock or bond. He'd taken classes in corporate finance but not on the market. In 1970 Muhlenkamp turned to managing the pension fund for Integon, an insurance holding company, where he put together his investment philosophy. In 1977 he founded his own investment firm, Muhlenkamp & Co., and in 1988 launched his mutual fund, which currently has $3 billion in assets.

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The now gray-bearded Muhlenkamp, 62, grew up as one of seven children on an Ohio farm with no indoor plumbing. Today he lives on his own 95-acre farm, where he grows corn, oats, soybeans and hay. Part of the joy of this is his collection of six old tractors, similar to the ones he grew up on in the 1940s and 1950s. To Muhlenkamp, stocks should be like tractors: sturdy and reliable. So he wants companies with a return onequity above 14%, revenue growth of at least 10% a year. He'll have no truck with exotic asset allocation theories, saying, "Academic theories are good as academic theories, but my job is to make money." The maverick Muhlenkamp is guided by a peculiar mix of bottom-up stock picking and macroeconomic forecasts. He foresees a fairly steady economy in 2006, with 2% inflation and 4.5% short-term interest rates. Thus he concludes that the bottom won't fall out on his eclectic collection of holdings. He owns midcap home builder NVR, despite widespread worries that there's a housing bubble about to burst. NVR, which builds in the mid-Atlantic states and the southern coastal areas down to South Carolina, shouldn't suffer if a slowdown occurs, by his reckoning. Reason: Construction remains a fragmented business and larger outfits like NVR have the heft to take market share away from the little guys when orders flag. Muhlenkamp also likes drugmaker Pfizer, even though it got slammed last year by the April withdrawal of its painkiller Bextra amid safety concerns. He stayed patient as the stock slid from $29 to $21 in December, then was vindicated by year-end court victories on patent challenges to Pfizer's blockbuster cholesterol remedy, Lipitor; this let the company maintain exclusivity until 2011. The stock moved back up to $26. Another offbeat all-cap on our list is the Hodges Fund, managed by Don W. and Craig Hodges. Don, 71, debuted the Dallas fund in 1992 and his son Craig, 42, joined in 1999. Their strategy is to find robustly growing companies in overlooked areas, often in small- and midcap stocks, and that sometimes has led to volatile results. In 2002 they suffered a painful 26.3% dip, 4.2 percentage points worse than the S&P 500's loss that year. Overall, for those with strong stomachs, Hodges has been rewarding. Despite the 2002 wipeout, the fund clocked a 16.6% five-year annual return. You pay for that privilege, with high-end fees of 1.7%. One winner for them is Home Solutions of America, which provides remodeling and restoration for houses. It broke into the black in 2004, then saw a huge surge in late 2005 because of the Hurricane Katrina cleanup, which will be ongoing for some time. Hodges also has done well with Charles & Colvard, maker of artificial jewels

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called Moissanite. These have proved very popular among female buyers in particular. The stock has doubled over the past year. Stratton Growth Fund likes to make sector bets and right now is heavily into energy. Manager James W. Stratton, 69, avoids the large names like ExxonMobil and BP, though. "They're too big and bulky," says Stratton, and they lack the earnings growth he'd get from a "more focused company." That means a small-fry coal outfit like Penn Virginia, whose earnings shot up 21% to $35 million last year through Sept. 30. The stock rose 43% over that period. And there's 81-year-old Martin Whitman's storied Third Avenue Value Fund. He likes Toyota Industries, the partsmaker, which owns a chunk of the Japanese car giant. Factoring out profits gleaned from Toyota Motors, the parts concern is cheap at 11 times trailing earnings. And get this: Nine percent of his assets are in bonds.

All-Cap All-Stars

These mutual funds defy the standard categories. They can charge into large caps, then shift into small caps. Here are the ones with the best five-year records.

Annualized Return

Fund 1-year 3-year 5-year Assets ($mil)

Annual expenses per $100

Heartland Select Value

13.5% 21.7% 12.6% $155 $1.33

Hodges 17.3 38.0 16.6 265 1.68

Muhlenkamp 7.9 25.8 11.7 3,100 1.14

Stratton Growth

14.5 26.2 11.7 173 1.15

T Rowe Price Capital Appreciation

6.9 15.6 11.4 7,400 0.78

Third Avenue Value

16.5 29.0 11.8 6,891 1.10

S&P 500 Daily Reinv IX

4.9 14.4 0.5 - -

Figures as of Dec. 31. Source: Lipper.

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THE MUHLENKAMP INTERVIEW Intelligent Investing with Steve Forbes

[00:08] Steve: Paulson's Last Chance Welcome, I’m Steve Forbes. It’s a pleasure and privilege to introduce you to our featured guest, Ronald Muhlenkamp, founder and president of the Muhlenkamp fund. Ron is also an active farmer. He’ll tell us which stocks he says this economic environment makes ripe for the picking. But first.... Henry Paulson is the worst treasury secretary in living memory. But even though he's miserably mishandled this financial crisis there's still time for him to turn things around. He can-- somewhat-- repair his reputation. He simply needs to back away from the disastrous policies and practices that have defined his tenure. His first mistake was to support the weak dollar policy that sparked and fed the crisis. Then he continued to enforce mark-to-market accounting rules. Mark to market destroyed bank balance sheets. Now insurance firms are faltering under its weight. But there's still time for common sense. We've taken over Fannie Mae and Freddie Mac. Those two companies have the enormous ability to affect mortgage rates. Mortgage rates are too high. Why not give Fannie and Freddie explicit guarantees so we get fixed-rate, 30-year mortgages under five percent? That would rapidly revive the housing market. And while mark to market is fine for publicly traded stocks, it makes no sense when you don't have a market, as with packages of subprime loans and it also makes no sense for long-term insurance reserves. Paulson and the SEC can suspend this inane rule in a heartbeat yet they refuse. Adhering to one position without regard to consequences and expecting a different result is the definition of insanity. It's time for Paulson to follow the path of reason. The Europeans have backed off from mark to market but we haven't. It's inexplicable. It's destroying our financial system. And if Fannie and Freddie made mortgages cheap it would spur housing, banks would get fees again and the system would stir to growth. Treasury Secretary Paulson, it's not too late. Make your last deeds your best ones. And now...my conversation with Ron Muhlenkamp. [02:21] Return on Equity

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STEVE FORBES: Well, Ron, it's good to have you with us. We're in one of these extraordinary periods in investing where a month seems like a decade. I first would like you to give our viewers and listeners a roundup of your investment philosophy, which is not the usual pigeonhole things we see. You've described it as sort go-anywhere, macro economics, and bottom fishing. RONALD MUHLENKAMP: We like to invest in good companies when the price is right. We prefer stocks to bonds because we want management working for us as opposed to against us. There's two ways you can put money into a company. You can loan them money, in which case the management's job is to minimize your return. Or you can actually be an owner of the business, in which case their job is to maximize return. We like management working for us. We think in terms of investing in companies as opposed to buying and selling stocks. Now, we're small enough that we can't really buy companies like Warren Buffet might do. But that's the philosophy we come with. So we always want to own good companies. And we start with our definition as return on shareholder equity. Actually, if you made a column and sorted companies by return on equity and sort them by reputation, you'd find that they pretty much marked with each other. The best companies by and large have the best reputation. But we don't know how to quantify reputation. We do know how to quantify return on equity. Historically, we tell the general public that we're trying to buy Pontiacs and Buicks when they go on sale. You know some folks who say the only thing you want to buy is the best companies. And the trouble is the best companies don't very often go on sale. This happens to be a time when the Cadillacs are on sale, not just the Pontiacs and the Buicks but the Cadillacs are on sale, to the extent that, in fact, what we own today, our average return on equal is 18 percent. Corporate average throughout America is about 13 and, frankly, has been between 12 and 15 since World War II. It's an amazingly stable number. The best companies run around 20 or maybe a little above that. So at 18 we think we've got at least Buicks. And in today's economy, which interest rates are five or six percent, inflation's on the order of two, although those numbers are moving around a little bit. But if interest rates are five or six percent, if we can get eight or nine percent return on our equity, we think that's worth book value or, in this case, it would be about an 11 or 12 multiple. Well, in today's economy we can get 18 to 20 percent return on equity at PEs below ten. So today we can buy Cadillacs below Chevy prices. The difficulty is, of course, that two months ago you could buy Cadillacs at Pontiac prices. They keep getting cheaper. We think what's going on is that there's people out there who are forced to sell. And as you know, the markets are auctioned markets.

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What I tell folks is if they want understand markets, go to auctions. If you go to an auction, the auctioneer, if it's a $100 item, he'll start off asking for a $100 opening bid. And he'll from $90 to $80 to $70 to $60. And if you're there and you're interested, there's no point in making an opening bid until he gets maybe at $20. You say, "Okay, I'll open a bid." Now, if you're lucky and you're the only person there, you may but $100 item for $20. More often than not, everybody else has been playing the same game and it sells for $85 or $90 or maybe $110 or $120. But the point is there's been no reason for anybody to step up and make an opening bid. So prices just keep falling based on the folks who have to sell. [05:35] Turnaround Stocks STEVE FORBES: Now, you talk about return on equity. You like to buy companies that are out of favor. That often means they've taken a loss where they have zero return on equity. How do you try to take a long-term view? RON MUHLENKAMP: Well, not really. I learned a long time ago that somehow the turnarounds, if something has been profitable and it isn't today, turnarounds take about three times as long as they're supposed to. So, frankly, what we find in many cases, you can find companies that are quite profitable and really haven't lost their profitability but get cheap for whatever reason. And so some people think that cheap companies mean a low price to book or something like that. We think that's not true unless they're rather profitable. So it's the combination of the profitability and not always this year. Sometimes there are things who had written down. But more often than not we found companies that were quite profitable, but for some reason it was a different phase in the business cycle, if the dotcoms were running in '99 and the small non-tech firms were not. But there's usually something out there that is cheap just because people think that the times were worse than reality. Where you make money is the difference between perception and reality. So if we could convince ourselves that we're seeing reality a little different than somebody else. [06:53] Reality vs. Perception STEVE FORBES: Can you give a couple of quick examples from the past where reality diverged from perceptions? RON MUHLENKAMP: Well, in 2000 I was on a fairly popular TV show in January of 2000. Everybody wanted to talk about dotcoms. I said my message this morning is there's things out there besides tech stocks. You might take a look at housing. Housing stocks at the time were four times earnings. Now, this is early January/February 2000. We fully thought that the economy was going

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into a slowdown, probably a recession. I mean, very few of these had been a surprise. And then we fully expected that the earnings would get cut in half in housing during that slowdown. So effectively we're saying we think we're paying eight times earnings. The great surprise was earnings did not fall. And they turned out to be great stuff for us. But at the time when everybody loved dotcoms, they didn't like housing stocks or consumer kinds of stocks. Once upon a time, I started in the business as a trucking analyst. At that time, the trucking industry was very tightly regulated. And the way it worked was the Teamsters were on a three-year labor cycle, or contract cycle. And they would get a wage increase, and the truckers would go to the ICC [Interstate Commerce Commission] and get rate increases. And in some cases, two years into that, the ICC rescinded rate increases they'd given the year before to get the truckers hungry for this contract cycle coming up again with contracts that would come up. So while the negotiations were going on, of course all you read was the terrible things. You might have a strike and all this. It gave you a great chance to buy trucking stocks. But what you knew is that the industry wasn't going out of business. And the ICC would keep them in business. And if they end up with higher wages, they would also end up... so there was literally a three-year cycle in trucking stocks. At that time, the economy tended to be a three-year cycle. But what you could count on was the labor cycle. And that worked as long as trucking was regulated. Then they changed the rules. It became deregulated. I had to go find something else to make a reputation on. [08:56] When To Sell STEVE FORBES: Now, how do you know when to get out? RON MUHLENKAMP: Buying is a science. Selling is an art. The rules say that when the stock isn't acting as well as it should it's time to sell it. And this time we've done much less well at that than we had several times in the past. One of the things that threw us a curve this time around... STEVE FORBES: Especially in housing? RON MUHLENKAMP: Housing we held a little longer but we're out of it. We relied more on the backlogs than we should have. Those backlogs disappeared. STEVE FORBES: Right.

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RON MUHLENKAMP: You know, today the obvious example is how good is Boeing's backlog, okay? STEVE FORBES: Right. RON MUHLENKAMP: And there are oil service companies. Transocean comes to mind, which has contracts for deep drilling rigs that are suited for, for instance, drilling off of Brazil when they found oil in deep water. And the question is simply how good is the backlog? Will they stretch it out and all these kinds of things? We relied a little more on the backlogs than we should have. A major mistake we made this time around, for 30 or 40 years you could kind of monitor the Federal Reserve. Every recession we've had since World War II has been triggered by, not necessarily caused by, but triggered by, the Fed raising interest rates on purpose to slow things down, usually to get inflation under control. Actually, our seminar six months ago we titled "Recessions." And we put a booklet out with that. And if folks want to see us, they call us, we'll send them one. But this time around, what happened, of course, the Fed was squeezing. And each time they did this, the Fed would usually squeeze until they broke something, until somebody went bankrupt. At the bottom of each, you know, there's Penn Central and Continental Illinois Bank [in 1984, its $40 billion bank failure was the largest ever, a record broken recently by Washington Mutual]. At the bottom of each one of these, somebody went bankrupt. This time around, and my dates may be a little bit off, in '04, '05, '06, the Fed was squeezing a bit. But they only went to five-and-a-quarter percent interest rates. We said, "Oh, they're not squeezing until they break something. They're squeezing about two thirds and waiting." And I believe Wall Street should have gotten the message that the spreads are narrower. We should back off. The message Wall Street got was the spreads are narrower. We have to double our leverage. In fact, was it Carlyle Capital [Corporation] said they had to go to a 32-to-1 leverage to make the deal look good? STEVE FORBES: Right. RON MUHLENKAMP: Well, if you have to go to 30-to-1 to make the deal look good, it ain't a good deal. So what we got surprised by this time was, as you know, the Fed can create money. They deposit it in banks and it creates money, and some people now call it the shadow banking system. But what the markets have done this time, they overwhelmed what the Fed was doing. When you go from writing 30-year mortgages to securitizing them and writing another, all of a sudden you've gotten twice the velocity out of the same equity

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dollar. When you draw your money out of a mutual fund and put it into a hedge fund that borrows five or ten to one, you're getting more bang out of the same equity dollar. So while the Fed was trying to shrink the money supply a little bit, the shadow banking system and Wall Street was expanding the velocity and overwhelming what the Fed was doing. Now, we have pretty good measures on money supply. We have no good measures on velocity. But the best estimates we've been able to get or do shows that velocity kept expanding until about July of '07 and then fell off a cliff and rebounded a little bit after Bear Sterns and fell off a cliff again. And then what the Fed and the Treasury have been doing this year has been cranking money supply into the system, we believe, to offset the velocity that's collapsing within the system. And how we come out of this, we're not quite sure. But the point is that if you took your signals from the Fed in the last five years, they've essentially been backwards. The markets were overwhelming what the Fed was doing. The velocity was overwhelming what was happening on the money supply. And as you know, money times velocity equals price times quantity. And, of course, what they're trying to do is keep quantity from collapsing, which would be a serious recession, or prices from collapsing too fast. Whereas on the upside, when they started drawing in the money supply, velocity kept the product of the two growing. And literally July of '07 became kind of the magic date. And since then velocity has just collapsed. And now that we're deleveraging and de-securitizing, if you will, we're trying to correct all that what occurred over a decade and expanded rapidly over four or five years, we're trying to cure all that in a year. And it's having -- between forced selling by the people who must de-leverage and mark to market – it’s having disastrous effects. [13:27] Analyzing Bank Stocks STEVE FORBES: Now, this gets to the strange market that we're in. I mean, even in the Great Depression where you had bank failures, they were small banks. Most of the large banks survived. Most of the large insurers survived. No big bank failure in Canada. No big bank failure in Britain. This one, it's the big ones that are going down like bowling pins. What is happening here? Did suddenly companies like AIG become totally insolvent or Bear and Lehman? I mean, in many cases, they were cash flow positive to the end. What's happening here? RON MUHLENKAMP: I should be asking you this rather than you asking me. But since you asked me, I'll attempt to give it a shot anyway. I talked to my local banker. I deal with a little bank out of Mars, Pennsylvania. And I said, "How does all this affect you?" He said, "It hasn't affected us at all. We take deposits to local people. We make loans to local people. It's been no effect."

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The small banks weren't playing with the derivatives. They weren't financing Wall Street. They weren't financing the credit expansion where all this has settled into. We believe that if we'd have had mark to market in '89/'90, you recall that '89/'90 about a third of S&L’s went bankrupt and a fair number of banks went bankrupt. And it did threaten some of the big ones. I didn't have the guts to buy Citigroup until two years later because it was not apparent in '89/'90 that Citigroup would survive. We did buy bank stocks in '89/'90. We said the job of the Federal Reserve is not to let the whole industry go down even if a number of banks do. So if we could identify a group of the strongest balance sheets, we figured we were in pretty good shape. STEVE FORBES: Right. RON MUHLENKAMP: Now, this time around Paulson said a month or so ago that these nine banks he wasn't going to let fade. Even that hasn't helped him too much because we think, again, there's a number of people out there who are having to sell. If you're a mutual fund manager... [15:15] Forced Selling STEVE FORBES: Well, walk through that briefly and then we'll get to mark to market. RON MUHLENKAMP: If you're a mutual fund manager and you get redemptions, you have to sell something. Now, you'd like to sell what you want to. But if you can't, you have to sell what you can. STEVE FORBES: Which is usually your best stuff. RON MUHLENKAMP: Yes. But the point is you have to sell something. If you're a hedge fund manager and you've just gotten the word from your bank that they've been carrying you at a ten to one leverage but going forward they're only going to do five to one, you have to sell half what you own. And, again, you'd like to sell your bad stuff but you have to sell something. We think what happened, and the trouble is we don't have good numbers on the amount of dollars in hedge funds or what their leverage is or any of this kind of stuff. We have pretty good numbers on mutual funds. But just as when the money went from mutual funds to hedge funds, it upped the leverage big time. When it goes from hedge funds back to cash or just plain when it comes out of hedge funds because almost all of them have been told to cut their leverage down. And I'm going to use let's say from ten to five. But whatever the number is, they have to sell something.

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They are getting redemptions. And they're having to de-leverage. In many cases, the rules say that if you have money in the hedge fund and you want to draw it out at your end, you have to let them know by the end of September. We think they got major redemption notices at the end of September, resulting in straight selling in the first two weeks of October. Some of them give you six weeks, so the year-end redemption notice had to be in by November 15th. It seemed to be either there was a smaller amount or they had anticipated it better. But at least the first couple of days after November 15th wasn't anywhere near the kind of things. But the first two weeks of October looked to us like, man, they were just selling wild. For instance, going back to after the dotcom era, there was a period of time where we knew that Janus Funds, Janus was big in the dotcoms, were getting redemptions. And they had owned a bunch of the dotcoms, but they also owned a lot of other stuff. And there were days when we were offered, as managers, we were offered big blocks of stock that we knew they owned. Now, I can't tell you that they were the source, but I can tell you that they owned this stuff and they were getting redemptions. And if you couldn't get a good bid on the dotcoms, you’d see what kind of bid you could get on the other kinds of stuff. So forced selling is just that because there's never forced buying. STEVE FORBES: Right. RON MUHLENKAMP: I mean, the reason you and I go to estate auctions is because we know that it must sell. But no one makes us buy. And buying always requires not only you think you're getting value, but there's something that says I want to buy today instead of waiting for tomorrow. So far the buyers have paid them to wait for tomorrow and next week and next month. So we think the forced selling has been doing that. And then we think it's compounded with mark to market. [18:03] Mark to Market Madness STEVE FORBES: Explain mark to market. RON MUHLENKAMP: Okay. We've been asked by a group of folks to do that. And it took me a while to come up with the proper explanation. But I have to walk you through a bit of a story. Most people are familiar with fixed rate 30-year mortgages. I’ve got a house that sits on a farm, but I’ve got a 30-year fixed rate mortgage. And most people in the country are familiar with that. The great thing about a fixed rate mortgage is that I know what my payment is this month and next month and next year and five years from now. It's a contract and it's in the deal. Two years ago we were concerned about adjustable rate mortgages. The problem

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with an adjustable rate mortgage, which incidentally I had five years ago and rolled it over about three or four years ago. But an adjustable rate mortgage, the fear was that your six percent goes to eight percent. Now, the hope is that the six percent goes to four. But the fear is, and this was the major fear two years ago, the six percent would go to eight. And as a consequence, your monthly payments might jump by $200 or $300 a month, which is $2,000 or $3,000 a year, which is scary to people. Let me posit something that you probably haven't thought about, that is an adjustable principle mortgage. And the way that works is on a one-year term, the amount, the principle amount of your mortgage, is up for renewal on an annual basis. Let's say mine's due in April. And the rules are that as of April the maximum the bank will loan me on my mortgage is 80% of what a similar property in my neighborhood sold for recently. So if mine is due next April and next January a neighbor of mine passes away and in March there's an estate sale. And his house, which is similar to mine and we both think is worth $300,000, but on the estate sale sells for $250,000, when my mortgage comes up in April and I've been carrying $240,000, the bank says, "Your house isn't worth $300,000. Your neighbors just sold for $250,000. The most we're going to lend you is $200,000. You have to come up with $40,000." Think of what that does to your planning and your budgeting. If I'm faced with that, I'm going to spend between now and April trying to gather every dollar I can in case I have to come up with $40,000 next April. That's called mark to market. They're marking the value of my house and my mortgage to what happened in the neighborhood. That's what every bank and every insurance company in the country is faced with since last November. And at this point, I don't even want to argue which is a better system. My argument is that if you go from one system to the other, it changes what people have to do. If you like another way of looking at this, insurance companies by and large own mortgages and bonds. STEVE FORBES: Right. RON MUHLENKAMP: They lend money. We did this again in the seminar on Tuesday. Most people who own a car carry collision insurance on the car. I don't. I carry liability so that if I hurt someone else, I'm covered. But if I wreck my own car, it's on my own hook. Most people do carry collision insurance. I asked the people, and there were a couple hundred people in the room, 300 in the afternoon. I said, "How many of you have collision insurance on your car?" Most of them did.

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I said, "How many of you expect during your lifetime to collect more in payments, in damages, than you pay in premiums?" Nobody expects to make money off the insurance company, collect more in damages than they pay in premiums. I said, "If I told you I used to work for Property Casualty Company. If you look at the books of Property Casualty Companies, nearly all of them pay out less than 50 percent in claims, relative to the premiums they take in.” “So if you're anywhere near average during your lifetime, you'll pay twice as much in premium as you receive in claims. Does that surprise anybody?” It didn't surprise anybody. I said, “So you know, going in, that in your lifetime you'll pay twice as much in premiums as you accept in claims. Why do you do it?” And it might make sense. I think the reason people do it is if they wreck their car and it's a $20,000 bill, instead of paying that today, they could spread it out over five or ten years. They expect their premiums to go up. They know they're going to pay for it. But it allows [them] to spread it out over time. I believe the reason it allows it to spread it out over time is their insurance company is carrying their mortgages and their bonds at amortized value. They paid 100 cents on the dollar or they wrote the mortgage. They set aside some money in reserves, whatever the number is. But as long as you and I are making the payments or people are making the payments on the mortgage or the bonds, they can carry them pretty well at par, regardless of what happens with interest rates. STEVE FORBES: So what we have unfolding here is in the past, regulators would say if the mortgage is not impaired, the bond is not impaired, you carry it. RON MUHLENKAMP: You carried it at par. STEVE FORBES: Now, if there's a mortgage distress sale that goes, say, for 70 cents on the dollar, even though the mortgage payments are being made, even though the bond is being services, they have to write it down. Which means they have to raise more capital. Which means the rating agencies now will knock them down. And so it goes in a death spiral. RON MUHLENKAMP: You got it. STEVE FORBES: Why in Washington have they [not] called a timeout to a principle that was not in until recently that is clearly going against every established banking and insurance principle of the past, which is you don't treat reserves, you don't treat capital as you would, say, a common stock and a mutual fund? RON MUHLENKAMP: I don't know. The only thing I can think of is after debating it for a decade, Financial Accounting Standards Board don't want to reverse themselves in a year. Now, the only rationale for mark to market is that

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market prices are always fair. We think on average they're fair. But at any given time they may not be. STEVE FORBES: But as you well know, if you were told sell your car in the next ten minutes, you'd get a very different price than if you could sell it over ten days or ten weeks. As Bernanke in testimony has pointed out, there's a difference between a distressed price and one held to maturity. RON MUHLENKAMP: Yes. STEVE FORBES: How long will this play out? And how is it affecting your investing decisions? As you know these otherwise solvent companies are being run into the ground with the short selling because of forced selling, mark to market? Where does this end? RON MUHLENKAMP: Well, they could change us overnight. Specifically in the TARP law, the SEC, which in this case is Chris Cox, can suspend it. He can't rescind the FASB 157. But he can suspend it. STEVE FORBES: Right. RON MUHLENKAMP: But I suspect politically, it's kind of hard for him, I don't know if he lives in Washington, but he works there, to suspend something that was done by the accountants after debating it for a long time. All I know is that that's what's driving this. STEVE FORBES: So it's like you see the iceberg ahead. Well, I don't want to hurt the captain's feelings. Let's go in the iceberg. RON MUHLENKAMP: Right. And it's not on the charts. So it isn't really there. And either one of those can get you in deep trouble. We made over the years a lot of money on financials. Last November, a year ago, we sold them out. We were asked when we were going to get back in. I said I want to see audited financial statements first because I knew that this was going to hurt the financial statements of the financial companies. And you may recall that AIG said, “We’re going to take a billion dollar write-off.” And the auditor says, "Oh, no, you're going to take $11 billion write-off." There's a difference between $1 billion and $11 billion. And by the time all this had clarified, it was February of this year. He said, "Well, maybe we have to wait for March." And as you know, there were more write-offs in March and then more in June and more in September. We've been told twice now FASB has, quote, "clarified" their rule. And reading between the lines it kind of says, "Guys, you may have been overdoing it." And I've been told by a couple

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people I respect that they may, in fact, be backing off on how tightly they're regulating this. So we called a few of the banks we've talked to and said, "No, they haven't." But they also said, "Even if they had, we couldn't tell you that unless they announced it publicly." So hopefully at this year end, again, year-end audited statements are a little tighter than non-audited statements. Hopefully by this year end we'll at least know what the rules are. We think what's been going is even during those periods when we thought what the rules are, everyone says the banks don't have any confidence. Well, they don't have any confidence in what? They don't have any confidence in the price on which their assets will be valued at year end. And, therefore they have no confidence in what the corresponding banks' assets will be priced at year end. We thought we knew some of the rules. One of the rules is Paulson had said with the $700 billion, "I'm going to buy distressed assets. Troubled Asset Relief Program.” And we thought that this means he would be buying tranches of things. You're familiar with the ABX Indices on securitized. Well, if you take a look at the triple A's or the double A's. I'll give you a plot of triple A's from '07. When he said we're going to buy distressed assets, those, quote, "started moving up." And then when he put money into the banks, they started moving back down. And then a week or so ago, when he said, “We're not going to put any in, they collapsed to new lows.” The triple A's that I was looking at went from 42 to 52. They're now at 36. In my terms, what he had said is, “We're going to make opening bids on some of this stuff. We're at the auction. We're going to make opening bids, and we're going to start the bidding.” Well, I don't know, if you're Pimco or CalPERS or an insurance company or something, say, "Well, if he tells me he's going to be in the bidding, I'll make an opening bid of my own." And they started to trickle up a little bit. I think he should have put some money there if only because he said he would. If it was only $10 billion, if he said he was going to do it, he should do it. Now, I think what he's planning on doing is by putting the money in the banks he gets more leverage. But nevertheless, he said he was going to make an opening bid. He should have made an opening bid. So not only all through here we haven't known what the prices would be, right now we don't know what the rules are. [28:08] Wait Out The Bear STEVE FORBES: So in this kind of environment, you’re a money manager, what do you do?

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RON MUHLENKAMP: You wait. STEVE FORBES: So you're waiting now? RON MUHLENKAMP: We sold out a fair amount of our energy in May/June. We've been 20 and 30 percent cash since. Every time I've put my toe in the water, I've gotten my foot chopped off. What surprised us in all this, we think the government has put a wall any place that looked like the credit market problems are going to overflow into Main Street. I find it fascinating that the public is told they're bailing out Wall Street. If you look at the stock prices on Wall Street, if they are, they've done a lousy job. And Paulson actually said publicly that the wolf pack was getting the weakest member of the herd. The shorts went up on Bear Sterns and it's out of business. And it drove up Lehman and then Merrill. He said we tried to stop that, which they did. But they've guaranteed deposits. They've guaranteed money market funds. The telling thing to us was Fannie Mae and Freddie Mac. They guaranteed the bonds, which is why you and I can still get a mortgage and anybody else looking for a mortgage. The shareholders went from 60 to less than one. But they also took a senior preferred. Now, as you know, most of the preferreds are owned by banks. And the job of the Treasury is to keep the banking industry in business, even though individual banks don't have to. Well, in Pittsburgh, PNC had avoided the whole problem mortgage stuff. They'd avoided the whole derivative stuff, but they had owned a bunch of preferreds in Fannie Mae. And when the Fed step took a senior preferred, they got marked down. And the word came down from PNC, the top stuff is we have to cut back on lending because we have to mark down our Fannie Mae preferreds on a mark to market, which, of course, lowers our assets and lowers our equity. And as you know, in the banking and insurance business, the amount of business you can write is governed by a multiple of your assets and your equity. So here's a company that did it right and still got bagged because Paulson stepped ahead of the preferreds, took a senior preferred as opposed to maybe a participating or a junior preferred. So it looks to us like they've stepped in place anytime it looked like it was going to flow over into Main Street. And what's absolutely fascinating, six months ago what the average consumer was worried about, as reflected... a local congressman came out for a meeting and there were 60 people in the room. The biggest question is what's going to happen to energy prices? Well, earlier this years, as you know, energy prices had tripled from a year or two ago. Grain prices had tripled from a year or two ago. Corn, soybeans, wheat, rice had all tripled.

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Since mid-summer they've all given it back. So if you're a consumer, food and fuel and shelter, food is back to where it was a couple years ago. Energy is back to where it was a couple years ago. Actually, natural gas prices are below where they were a couple years ago. Mortgage rates are flat. So the things that we worried about six months ago that affect the consumer directly like food and fuel prices have now neutralized. So unless you lose your job, and even in a serious recession 95, 96 percent don't lose their job, the direct stuff is no worse than it was two or three years ago. The indirect stuff coming through the credit markets is where the problem remains. I found a -- I forget the source of it -- Minneapolis Fed a month or so ago did a working paper, Working Paper Number 666, very easy to remember, titled "Four Myths of the Credit Crisis," M-Y-T-H, myths. And I forget a couple of them. I'd encourage you to get the paper and read it. But one of the things they looked at was what happened to commercial paper among financial firms and among non-financial firms. And what they found out is commercial paper outstanding among non-financial firms has held up. Commercial paper among financial firms, again, has fallen off the cliff. Well, I don't think that General Motors or Caterpillar has to write down the value of their inventory at year end based on the latest bid. But the banks and the insurance companies do. And I believe that the forced selling and the mark to market has given us the spiral. And the trouble is I don't know where it ends. We're seeing great companies at dirt cheap prices. And the one thing I've learned in four years, if you can buy a great value at cheap price, just go do it. [32:37] What To Buy STEVE FORBES: So what kind of companies are you buying now? RON MUHLENKAMP: We own Berkshire Hathaway for the first time ever because Warren Buffet started with $40 billion. He understands credit markets. And he can write his own terms. I can't go to GE or Goldman Sachs and say, "I'd like to put money in..." STEVE FORBES: That stock has plummeted, right? RON MUHLENKAMP: Well, yes, it has. And he has another $20 billion left to invest. It was interesting to me that when Paulson said he was going to buy distressed assets, Warren said, "I'd like a one percent piece of that deal. It looks like a pretty good deal." We think that IBM's a Cadillac. We think Cisco's a Cadillac. What we did in our earlier thing on recessions, we're trying to look for what's different this time versus last time. And in '01 the dollar was quite strong. As you

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know, when the dollar's strong, it benefits the American consumer and squeezes the American producer. Now, even though the dollar has strengthened in the last few months, we're still well below where we were six or seven years relative, for instance, to the euro. Let's say you're Boeing. You've got one major competitor -- Airbus. The flaw in my argument is that Airbus is subsidized. But if it's only Boeing versus Airbus and it's a dollar versus a euro and you're trying to sell planes to China, the fact that the dollar's still 20 percent below where the it was relative to the euro six or seven years ago means that, all else being equal, Boeing's cost, because their costs are in dollars, are 20 percent less than Airbus's. So we think they're benefiting from the cheaper dollar. So this time around we want to own American producers who are selling to the rest of the world. And we think things like an IBM and a Cisco, number one, a lot of their business goes elsewhere, that they're certainly Cadillac companies. They provide a useful service at a reasonable price to folks throughout the world. And we think that's the direction you want to move. But there has been no reason to be in a hurry. STEVE FORBES: So you just hang tough. RON MUHLENKAMP: Well, when they said these nine banks aren't going bankrupt, we bought some Bank of America. Bank of America basically said, "We don't need our piece of $125 billion." The guy at Wells Fargo said, "We not only don't need it, we don't want it." They were told you'll take it anyway. STEVE FORBES: It's amazing. Take it or else. RON MUHLENKAMP: Yes. And so we think two or three years from now we'll say, man, this stuff was obvious. But in the meantime, there's still some people are having to sell it. We bought some Triple M. I'd have to check quite when it was. But there was a period when it dropped 20 or 30 percent. Triple M has, as you know, a broad range of stuff that's pretty stable. We think it's a Cadillac company. And we got a chance to buy it cheap. And it's probably cheaper now. [35:24] Detroit's Future STEVE FORBES: Well, one final question. You keep using the word "Cadillac." That means you think GM has a future? RON MUHLENKAMP: No. Well, now, Cadillac might. GM, Ford, and Chrysler have been run for the benefit of their employees, past and present, for at least a decade, maybe two decades. Somehow the assumption is that if they go out of business that the 50 percent of the market they represent, nobody will buy those

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cars. And I suspect that, for instance, Cadillac would be a division that would be bought by somebody. Hyundai? I mean, you know, there are folks who would like a top end, who have been waiting to break into that business. I suspect that in America we would buy the same number of cars, probably built in the same plants, probably by the same people. But whether Cadillac is owned by GM or owned by Hyundai or… Toyota, Nissan and Honda have a premium division, but there's a number of other firms out there that aspire to it. Who owns that division, I'm not sure is all that relevant. Back when Chrysler was lent money, I believe that their success at the time was called the K Car. Well, that would have been bought up either by probably GM, Ford, or Chrysler or by Volvo or by Volkswagen. Somebody out there would have said, “Here's a product line that meshes with our product line and it's worth something to us.” Outside of Pittsburgh there's a plant that Chrysler built and never produced a car in. They sold the plant to Volkswagen and Volkswagen built Volkswagens there for a period of time and then sold the plant to Sony. And now that plant that was made to build Chrysler automobiles now makes Sony TVs. So the assets and, of course, the people who work there are people from the general region. So the fact that they now work for Sony after working for Volkswagen, after never working for Chrysler, the jobs are there. And what I'm saying is the same number of cars will be bought. Those emblems, I believe Cadillac now has a useful franchise and they, in fact, make good cars these days. Ten, 20 years ago they made junk. But these days they make pretty good cars. But the valuable parts of that will be taken over by someone else. The less valuable parts would be supplanted. I think there's something in the auto assembly plants in this country, roughly there's 30 plants by the Big Three. There's another 17 by the non-Big Three. And, you know, Honda in Ohio has done well for a very long time. STEVE FORBES: So you're saying that auto life will go on and even some of the same names will go on? RON MUHLENKAMP: Yes. I haven't found anybody who had difficulty finding a car. I don't think there's a shortage of cars, new, used, or otherwise. And there's no shortage of name plates. Nevertheless, they haven't asked me. You've asked me, but no one else has. So I'm not sure that my opinion's going to matter very much. STEVE FORBES: Well, Ron, thank you. Your opinion does matter, and we appreciate you sharing it with us. RON MUHLENKAMP: It's been a pleasure.

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STEVE FORBES: Thank you.