What the Smartest Money is Doing Now

The market continues to slide. It seems like the whole world is running to safety.

Three month T-bills yield 0.18%. Retail mutual fund holders are pulling out money at a record pace. Mutual funds experienced a net outflow of $23 billion in July and $6 billion in August. Investor continued to cash up in September as well. Total equity mutual fund outflows excluding ETF’s totaled $75 billion for the last three months according to AMG Data Services.

Other indicators are proving bearish sentiment is at or near an all-time high. The CBOE Volatility Index (VIX) surged to an all-time high of 76.94 on Friday. That’s well past the 46 mark which marked the bottom in 2002. That’s well past its previous all-time high of 56 when the Russian government defaulted on its debt in 1998.

On top of that, almost every closed-end fund is selling at a very steep discount to NAV. ETFConnenct.com tracks 654 closed-end funds. Of those, 636 of them are selling at a discount. Only 18 are fetching a premium. The discounts run deep too. Some high income funds that are loaded with junk bonds and real estate funds are trading at discounts as high as 55%.

It seems like a lot of people are just waiting on the sidelines for a rebound. Not too many people are buying anything. Clearly confidence has been shattered and almost no investor has made it through this market unscathed. Even the all-time greats are licking their wounds. But despite it all, they’re continuing to buy.

Warren Buffett

Warren Buffett has been one of the most notable buyers. After cutting an amazing deal with Goldman Sachs and watching shares of Berkshire Hathaway (BRK-A) fall about 30% in the last month, he’s making plenty of other moves. Berkshire was perfectly positioned as it entered September with a $40 billion cash.

The bid to take over Constellation Energy Group (CEG) still stands. Berkshire has also agreed to put $3 billion into 10% preferred shares of General Electric (GE). Also, $6.5 of Berkshire’s dollars were committed as part of the Wrigley (WWY) LBO led by Mars.

His latest move is probably the timeliest. In order to capitalize on the Bull Market in Volatility, Berkshire is starting to write put options more aggressively. This week Berkshire disclosed it has written put options on Burlington Northern Sante Fe (BNI).

Berkshire sold put options that will force it to purchase 1.95 million BNI shares between $77 and $80 per share. The contracts were sold for a total value of $12.76 million and will just defray the costs of buying more BNI…which they were probably going to buy anyway. Berkshire also sold put options for 1.3 million shares of BNI earlier in the week.

Bruce Berkowitz

Bruce Berkowitz started the Fairholme Fund [FAIRX] in December 1999. The fund has crushed the competition, achieving five-year annualized returns of 16.51%. Fairholme has dropped 31% since the start of the year.

Berkowitz is still buying though. While the markets started the first stages of the initial decline, Berkowitz was spotting some values he found appealing. The Fairholme Fund has opened sizable positions in Pfizer (PFE), United Healthcare (UNH), and generic drug maker Forest Labs (FRX).

Ken Heebner

Ken Heebner manages the CGM Focus Fund [CGMFX]. The CGM Focus fund has chalked up astounding historical average returns of 25% a year. But in May Heebner received a veritable kiss of death from Fortune magazine. Fortune declared Heebner America’s Hottest Investor. But this market has cooled a lot of hot investors. Heebner has been one of them. The CGM Focus Fund is off 43% for the year.

Despite the fall-off, Heebner’s still looking for values. On Wednesday Heebner appeared on CNBC to provide his thoughts on the market sell-off.

Always one to keep his cards close to his chest, Heebner wasn’t about to reveal all his ideas. He did, however, mention he was spotting a lot of great values and specifically mentioned battered fertilizer producer Mosaic (MOS) is trading for 3 times forward earnings. Heebner also told the New York Times that Chesapeake Energy (CHK) is a tremendous value.

Martin Whitman

Martin Whitman manages the Third Avenue Value Fund [TAVFX]. From inception in November 1990 through October 2007, his fund has returned an annualized average of 16.83%. Whitman is a true “buy and hold” value investor. The Third Avenue Value Fund has also caught up in the downward spiral with a decline of 46% for the year.

In a recent interview, Whitman stated, “This is the opportunity of a lifetime. The most important securities are being given away.”

“Absolutely given away” – that’s a powerful statement from someone who has been in the markets for 50 years.

As late as July, Whitman was buying Sycamore Networks (SCMR), a technology company focused on bandwidth management. He also opened up a new position in Tokio Marine [TKOMY]. Tokio Marine is a Japanese insurance company that has operations in all parts of the world. It recently announced it will be buying out $4.4 billion for Philadelphia Consolidated Holding (PHLY). While an insurer like AIG blows up, it looks like Tokio Marine will be one of the survivors in the insurance industry.

Bill Miller

Bill Miller made his mark by beating the S&P 500 index for 15 consecutive years. His Legg Mason Value Trust [LMVTX] has attracted billions of dollars of capital every market beating year. This year, however, hit Miller very hard.

When the markets went haywire, Miller’s strategy that worked so well for so long just didn’t work anymore. The Value Trust is off 53% for this year. Publicly-documented investments in Countrywide Financial, MBIA (NYSE) and Fannie Mae (FNM) have cost the Value Fund a lot of percentage points.

Battered and bruised, Miller’s still looking for values. His valuation principles worked for 15 years and only didn’t work when everyone else’s quit working too. Miller has recently legged into Crocs (CROX) after its dot-com-like run-up and meltdown.

It’s certainly advisable to follow Buffett’s advice and “be greedy when others are fearful.” But you’ve got to get greedy at the right time.

These gurus are long-term investors. They’re patient. Most importantly, after years of consistent success, they’ve all built sizable fortunes. They have the wealth to stick to their guns and ride out any further downswings.

Although I recommend keeping an eye on these guys, it’s best for most individual investors to take a much more conservative investing strategy. One that will allow you to start buying today, have you positioned to enjoy the inevitable and likely sharp rallies, and benefit from the further sell-offs.

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