March 22, 2005                                              Notes I took at a Ron Muhlenkamp presentation:

I had the great pleasure of attending a conference, where Ron Muhlenkamp of Muhlenkamp Funds spoke. He was quite interesting. After the 1 hour discussion, he stayed and chatted with a few of us for a little more than an hour. His discussion was thought provoking and interesting. I will certainly refer to his views and this page for a long time. Here are my notes.

1. Long Term bonds have generally returned 3% over inflation. Ron claims that is all you need to know. This is shown on this chart:

Here are a few other charts he presented:

Here is a graph he showed of inflation from 1952 – 2003.

Here is the inverse of the inflation chart, which really shows how money has deflated over this period.

He showed this chart, which plotted mortgage rates and inverse inflation from 1952 – 2003.

As I was reading from his site, I found this document, which really is where he seems to have gotten his excellent presentation from.

2. He had an excellent definition of risk. He called risk, “the probability of losing purchasing power”. He mentioned that Wall Street calls risk, “volatility”. Inflation is the risk which will cause lost purchasing power.

3. He stated to know your investment climate. Changes in climate seem to happen during recessions.

4. Claimed that short term rates are typically 0.7% greater than inflation.

5. He mentions that when determining to invest in stocks, one should use “inflation + 3%”. The following are my thoughts on this, ( This result becomes your discount rate. Hence, you can model from that rate.)

6. After inflation and taxes, here is what Muhlenkamp suggested investment returns actually equate to.

Notice how before taxes stocks return 8% annually, and 6.8% after taxes, whereas bonds return 5% annually, and 3.2% after taxes.

7. He had a cool quote, “Nobody wants to buy stocks at the bottom, but everyone wants to have bought stocks at the bottom”.

8. Value investors tend to be early. He feels that it often takes upwards of 3 years for a stock price to revert to its true business mean.

9. Watch the Money Supply. If the Fed creates money at a greater rate than the economy is growing, you will have inflation.

10. He uses ROE (Return on Equity). He likes to see P/E ratios below ROE. He stated that he currently looks for ROE’s of > 14. He presented a formula, which I need to both verify and interpret:

ROE/ required return > Premium or (Discount) to Book Value.

11. Claims that over 78 years, stock have beat inflation by 5%.

12. Claims he is buying Citigroup. He mentioned that buying AIG (57.90) is like buying a new Cadillac at Chevy prices.

13. There is such a great wealth of information at Muhlenkamp’s site.