Value to me often derives from competitively strong companies in structurally attractive industries supported by secular growth.

In financial terms it's easy to describe a high-quality business. They generate high returns on unlevered capital and high returns on equity on an after-tax basis. They produce free cash flow or have attractive enough reinvestment opportunities to invest cash flow at high returns. Great businesses are worth more, so I would rather own that type of company at a reasonable price than a mediocre company at a really cheap price. But I've also learned the hard way never to disregard valuationyou can easily overpay for even the best business. Morris Mark, Mark Asset Management ______________ If you're looking, as we are, for extraordinary returnsfrom companies whose stocks can go up 10 rather than 2it's far more likely to happen because the company's earnings turn out to be so much better than anyone expected than because you found a temporary 50-cent dollar. John Burbank, Passport Capital ________________ The keys to our investing approach are the symmetrical opposite of that: humility, flexibility, and patience. We like to plant seeds and then watch the trees grow, and our portfolio is often kind of a portrait of inactivity. That's kept us from making sharp and sometimes emotional moves that we eventually come to regret. Matthew McLennan, First Eagle Funds _____________________ I like to say that changing investment styles to the latest fad produces the same results as changing lanes during rush-hour traffic jams: You increase the risk of an accident with little chance of achieving better results. The psychological pain of sticking to your guns, though, is tough. Robert Olstein, Olstein Capital Management ------------------------------------We often see value in holding companies, where there are several disparate businesses and a single earnings multiple doesn't capture the true value. Or in companies that own a significant asset that may not currently be earning anything but is quite valuable. Jon Jacobson, Highfields Capital __________________ We find opportunity in looking at the different values ascribed to a company's different asset classes. If the debt markets would provide 100 percent financing of a company's total market value, that usually means the equity is undervalued. Whether

Facebook is worth 15 sales or 10 sales is not something we'll take a position on. But if the debt market is telling us that a company's equity appears to be undervalued, that's something we're interested in. Steven Tananbaum, GoldenTree Asset Management ________________ Often spin-off opportunities are bond-like in nature, generating a lot of cash, with a great base of assets and excellent incentives in place for the right things to be done with the cash generated. But the numbers generally don't look so great at the beginning, because it's in management's interest to underpromise and overdeliver. Coupled with the fact that the shareholder base is usually in flux at the beginning many holders of the parent-company stock don't want to or, because of their charters, can't own the spinoffinefficiencies arise. Mitchell Julis, Canyon Capital _______________________ Management changes can help a lot with timing. If a board of directors is serious about restructuring, they'll often hire someone from a best-in-class company to make it happen. Those people aren't cheap, which shows the board is serious, and the fact that the person is willing to come indicates they think they can add value. An executive from a first-class company taking over a laggard can mean an opportunity is ripe for the picking. Philip Tasho, TAMRO Capital _____________________ What will get me excited is when one of our analysts comes into me with a story like this: Preston, I've been following this stock for two years but haven't found a good reason to write it up. It used to be kind of a high-flier, but the stock chart now looks like death warmed over. The shares were at $40, had a big drop and have been trading between $15 and $18 for months and nobody cares. The company is likely to have some big writeoffs this year to clean up the balance sheet. And, by the way, two months ago the board fired the CEO and the new guy is someone I know from a previous company where he did a great job. He's not even talking to the Street for six months as he gets a handle on things. Preston Athey, T. Rowe Price ____________________ We don't do turnarounds. What attracts us to the whole concept of value investing is the idea of having a margin of safety, in terms of value over price. That margin of safety only exists if values are stable and it only improves if value increases. With turnarounds, you're making a betmaybe a very intelligent one, but still a betthat something broken can be fixed. Even in the best case, you may be looking at years when value declines or stagnates. Our experience is that we're better off investing in a good business that is constantly compounding value from the beginning of our ownership, without what to us is the unacceptable risk that the turnaround doesn't work. We just don't think we need to take that kind of risk to earn strong returns. C.T. Fitzpatrick, Vulcan Value Partners _________________________

One of our best screens looks for companies that are earning higher and higher returns on invested capital, but are trading at a reasonable price based on free cash flow. These companies are becoming incrementally better businesses, but the market has not caught up with the fact that they're incrementally better. Zeke Ashton, Centaur Capital _____________________________ We consider ourselves first and foremost value investors, but we don't start by looking for cheap stocks. We spend our time following outstanding businesses that we would want to own should they ever become cheap. They're rarely inexpensive when we start trying to understand them, but we follow them closely so that on the rare occasion they become discounted, we can act right away. Coming at it this way also means we're not wasting our time chasing statistically cheap companies that we will have no interest in owning. Time is precious in this business. C.T. Fitzpatrick, Vulcan Value Partners ___________________ With the market as volatile as it has been, we've been more diligent about maintaining watch lists to catch companies whose stocks trade off sharply for reasons that may be more overall-market related. We're not looking for short-term trades but, as we learned in late 2008 and early 2009, stocks of even the high-quality companies we want to own can get remarkably cheap quite fast. We want to be prepared for that. David Nierenberg, D3 Family Funds ___________ I've concluded that if you find yourself going back to the well with the same idea a third time, you're not generating enough ideas and are likely to get killed. You're not as vigilant as you should be because you think you know it already. When I find myself doing that, I tell myself I'm just not working hard enough. Jeffrey Ubben, ValueAct Capital ___________ Our ideas typically have more to do with the trends in a particular industry than whether XYZ stock looks very cheap. We want to invest in good businesses with industry or company-specific tailwinds behind them, and which happen to be cheap. That's a different mindset from finding something that's cheap and constructing a story about why the negative issues should go away. Brian Barish, Cambiar Investors ---------------------------For the last 40 years I've been reading things like Variety and Automotive News and Farm Journal that give you an idea of what's going on around the world. A story that has always stuck in my mind since I first heard about it in high school is that in World War II, an Allied intelligence analyst was reading the social papers and wondered why all these German generals were going to a particular location in the middle of nowhere. He figured out that it was the location of a factory making German V-1 bombs and sending them to England. The hard part is connecting all the dots, but you have to assemble plenty of dots to connect in the first place. Mario Gabelli, GAMCO Investors ______________

We follow 13D and 13F filings of other people we respect. We read publications like yours. I'd much rather steal a good idea than generate a bad one myself. Steve Morrow, NewSouth Capital --------------------We use a lot of grapevine ideas, asking people what they have finished buying that might be interesting. Why wouldn't you look at what other great investors have found? Bruce Berkowitz, Fairholme Capital _________________ As much as I'd like to be able to control the outcomes, I can't. The only thing I can do is maximize the probability of getting a good outcome by following what I've defined as the right process. A good process doesn't negate bad outcomes or bad judgments, it just tries to mitigate them. James Montier, GMO __________________ Just as the best and most rigorously followed process will at times yield bad outcomes, the most arbitrary and slipshod process can periodically produce a good outcome as well. But if you're looking for a way to bet, the manager with the superior process is far more likely to win out over time. __________________ First-level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority). All the first-level thinker needs is an opinion about the future, as in The outlook for the company is favorable, meaning the stock will go up. The second-level thinker takes many things into account: What is the range of likely future outcomes? Which outcome do I think will occur? What's the probability I'm right? What does the consensus think? How does my expectation differ from the consensus? How does the current price for the asset comport with the consensus view of the future and with mine? Is the consensus psychology incorporated in the price too bullish or bearish? What will happen to the asset's price if the consensus turns out to be right, and what if I'm right? The difference in workload between first-level and second-level thinking is clearly massive, and the number of people capable of the latter is tiny compared to the number of people capable of the former. Howard Marks, Oaktree Capital ____________________ If you find a stock that you think is undervalued but you're unable to identify how your insights into the company differ from those the market is using to price the stock, it's probably not really undervalued. Steve Morrow, NewSouth Capital _______________ Most of the time [investing with less regard for macroeconomic forecasts] is the right approach, but in my experience there have been times when one or a handful of major factorssuch as large waves of liquidity going in and going outoverwhelm traditional metrics of value to set market prices. In such times, ignoring those factors has proven to be dangerous.

Mohamed El-Erian, PIMCO _______________ I do fall in the camp of investors who now believe that blissfully ignoring macroeconomic trends is a mistake. Paying attention to macro issues is still probably a waste of effort 95 percent of the time, but that other 5 percent can be very important. One of my efforts in this regard is to better understand what's going on in credit markets and to figure out what those markets might be signaling that the equity markets aren't. Zeke Ashton, Centaur Capital ______________ While it is always tempting to try to time the market and wait for the bottom to be reached (as if it would be obvious when it arrived), such a strategy has proven over the years to be deeply flawed. Historically, little volume transacts at the bottom or on the way back up and competition from other buyers will be much greater when the markets settle down and the economy begins to recover. Moreover, the price recovery from a bottom can be very swift. Therefore, an investor should put money to work amidst the throes of a bear market, appreciating that things will likely get worse before they get better. Seth Klarman, The Baupost Group _______________ High-return businesses have something special which allows them to earn above average rates on employed capital. That may be intellectual property, scale economies, a regulatory advantage, high customer switching costs, or some sort of network effect. We want to see evidence the business model produces unusual returns, to understand why and to believe that's likely to continue. Part of that is a function of the opportunity yet to be realizedwe're always asking, How wide and how long is the runway? Chuck Akre, Akre Capital Management __________________ We tell management that the idea is not for them to get investors to buy their stock, but to give them reasons never to sell it. When they get that, we're interested. James Rooney, Avenir Corp. ___________ I think I've been in the top five percent of my age cohort almost all my adult life in understanding the power of incentives, and yet I've always underestimated that power. Charlie Munger, Poor Charlie's Almanack _______________ Earnings are basically a negotiated number between management and the auditors, subject to considerable manipulation. Cash flowearnings before depreciation and amortization and after working-capital changes and either maintenance or total capital spendingis much less subject to manipulation and just a much better measure of corporate profitability. At the same time, free cash flow is what allows companies to increase the value of the businessfrom making capital investments, to making acquisitions, to paying down debt, to buying back stock or paying dividends. Companies that produce free

cash flow also attract potential buyers, either financial or strategic. John Osterweis, Osterweis Capital Management ______________________ We're not P/E buyers. We're not P/E-to-growth-rate buyers. And we're not EV/EBITDA buyers because we think over time that the D and A in EBITDA are real expenses you need to account for. We look at current operating income divided by enterprise value as our cap rate, and we want to buy when that's 15 percent or more and sell when it goes to 7 to 8 percent. I'm trying not to buy hopes and dreams, but the here and now. The layman's way to think about it is if you could buy the whole company andbefore financing and paying taxesearn 15 cents on a dollar invested, that's a pretty good deal. If the hopes and dreams come true, all the better. Jay Kaplan, Royce & Associates ________________