The 2012 Barron's Roundtable - Barrons.com ‘hitp://online. barrons.com/article/SB50001 42405274870353590457, ow Jones Reprints: This copy is for your personal, non-commercial use See @ sample reprint in POF format ‘only, To order presentation-ready copies for distribution to your colleagues, Order a reprint of ths article now Glents or customers, use the Order Reprinis tod on any atice or visit \waurjreprints.com sp | SATURDAY, JANUARY 14, 2012 BARRON'S Cov Listen Up, Class: Here's How to Profit By LAUREN R. RUBLIN The Barron's Roundtable sees trouble in Europe, but bargains in the U.S. and emerging markets. Mare Faber and Oscar Schafer share their 2012 investment picks. Inflation. Deflation. Rehypothecation. Bad rap lyries, or the poetry of finanee? You ean judge for yourself when you finish this first installment of Barron's 2012 Roundtable, a verbal free-for-all that features high-falutin’ words, scary predictions and, yes, some sound advice on how to prosper in the year ahead. After a year of political turmoil in the U.S. and debt-fueled chaos in Europe, it's no wonder the 10 investment experts whom Barron's assembled last Monday at the Harvard Club of New York were eager to dissect the big picture: how the U.S. should gets its house in order (the Senate, too), whether Greece will get booted from the euro, why central bankers might print money until the world’s ink supply runs dry, and, not least, when World War ILI will erupt (sooner than you think). To a one, these leading lights of Wall Street agreed that the world is a lot more dangerous than it was 10 or 20 or 30 years ago, when investors worried more about return on their capital than return of it That said, most Roundtable members also think pessimism equates with opportunity -- in this, case, the opportunity for gains in 2012 in relatively undervalued U.S. stocks. Fred Hickey, our resident expert in all things tech, even allowed that the 12-year bear market in technology shares could be ending, which really would be something to celebrate. You'll note a new face at this year's Roundtable, that of Brian Rogers, chairman and chief investment officer of Baltimore money-management powerhouse T. Rowe Price. He takes the seat long occupied by Archie MacAllaster, who sadly passed away in 2011. Archie likely would be pleased to know that Brian too is an optimistic sort; he lives by several upbeat maxims, including that the world doesn't end often. Try to remember that when you read the downbeat, stuffin the pages that follow. Mare Faber, who describes himself as the world's No. 1 pessimist, is responsible for much, though not all, of it. He lives in Thailand but roams the globe, and starts off the stock-picking portion of this year’s Roundtable. Not surprisingly, perhaps, he remains a fan of emerging 1/15/2012 3:18 PMThe 2012 Barron's Roundtable - Barrons.com ‘hitp://online. barrons.com/article/SB50001 42405274870353590457, markets and thinks they will offer ample rewards to long-term investors, especially after their shellacking in 2011. Most of all, he believes in diversification -- into equities and fixed income, real estate and gold -- in a world where it is hard to fathom what policymakers might do next. Hedge-fund manager Oscar Schafer, of New Our Panelists 7 a ae ee York's O.SS. Capital, also takes his star turn in er eet Se ee ee sreee this first of three Roundtable issues, making pone pacer the case for a quartet of misunderstood Serorimert Sharman companies with deceptively bright prospects halts, Few Pca for the new year, His attention to industry sane ranen vere wre dynamics, capital-allocation strategies and Fondisom/tonm'§ 000m opie Capasl ares, valuations helps explain why he has not merely Enacge mage None survived but thrived for decades on the Street. ‘Want the details? Please read on. Barron's: Let's not dwell on last year’s mistakes, because all of you have taken vows to pick nothing but winners now. So we'll start with the economy and interest rates, and even Europe, which called so much of the tune in 2011. Oscar, what's ahead? Schafer: The U.S. economy will continue to bumble along. The stock market will do all right if we avoid the “fat tail” outcomes of either hyperinflation or deflation that Bill Gross recently wrote about. Joe Rosenberg [chief investment strategist of Loews] said in a Barron's interview last month that you can't have good news and cheap stocks at the same time. We might have not-so-great news but cheap stocks, so I'm pretty optimistic. Last year was strange, with the Standard & Poor's 500 ending exactly where it started, Within the year there was huge volatility, however, which is hurtful to individual investors. Leveraged ETFs [exchange-traded funds], which deliver two or three times the market's return, could be to blame for the huge upswings and downswings at the end of the day, as they need to rebalance their positions by buying or selling more stock before the close. But leveraged ETFs are just a small part of the market. Gabelli: There are many inter-related dynamies that account for the volatility: the elimination of the uptick rule [which forbade short-selling of shares unless they were rising], arbitrage between markets, high-frequency trading, flash trading Faber: But why is there leverage? Itis a symptom of artificially low interest rates —- essentially zero interest rates -- that force everybody to be a speculator because you're not earning anything on your money. This volatility won't disappear anytime soon, because it has little to do with the problems in 1/15/2012 3:18 PMThe 2012 Barron's Roundtable - Barrons.com ‘hitp://online. barrons.com/article/SB50001 42405274870353590457, Europe and everything to do with excessive liquidity that is being created in the system. Unless there isa general collapse of liquidity -- in other words, a credit-market collapse -- the volatility will continue, perhaps for five or 10 years. It drives the small investor away from the market. He doesn't understand it. He doesn't trust Wall Street, and rightly so, and he finds the whole system corrupt and dominated by people with inside information. Enlarge mage Jennifer Akman for Barron's ‘The consensusat the Roundtable was that one or ‘more counties wil have exted the euro by this time next year, Gross: It isn't just the small investor but the big investor. When the headlines hit about MF Global's collapse, along with the realization that a financial firm could take money from one pocket and put it in the other, I quickly diversified my own brokerage accounts to avoid such a thing, Large savers are diversifying against the risk of leverage and the misappropriation of that leverage. Schafer: The stock market's volatility is hurting the country's role as a eapital-raiser. Hickey: We have seen a big decline in venture-capital activity and IPO [initial public offering] activity. Gabelli: Unstable markets impact the cost of capital for corporations. The enactment of the Sarbanes-Oxley Act has dulled enthusiasm for the U.S. market. Cohen: Volatility also can be attributed to worry about economic activity. There is a strong correlation. One reason IPO activity has been less than robust is that the price the seller can achieve might not be what the seller would like. The equity market's valuation looks to be quite low right now, and many people would rather hold on to what they have, whether we're talking about harvesting investments made over the years or taking companies public. ‘Schafer: If valuations are so low, why did 70% of last year's IPOs end the year down? Cohen: There has been extraordinary divergence sector. Technology-related IPOs traded well and are selling at higher valuations than a lot of other new is es. Hickey: China had a lot of IPOs last year and they were a huge bust. Cohen: Transparency of data isa big issue with Chinese stocks. It is something that concerns the Securities and Exchange Commission, which, in a time of constrained resources and staffing, is shifting resources to look at publicly traded Chinese companies and companies with subsidiaries in China, Gabelli: We started with a 30-second observation by Oscar on the economy, and we went into a long-winded discussion of volatility. How did we get here? 1/15/2012 3:18 PM