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Time To Get Greedy: Buy Problem Solvers Like Apple And Google

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Michael Holland, Chairman, Holland and Company.

Michael Holland: Where we are right now in the markets is where we are in the world. It's a bit of a mess. The lack of leadership around the world has, over the last several years, caused a breach of confidence that is evident everywhere – including in the markets. It reminds me of the 1970s in terms of people's psychology. What I can take away from that is that we will see better days and we will see higher prices. If we haven't seen the lows in a lot of areas, we probably are very close to them -- including in the U.S. stock market.

I think it's possible that we may be looking back on this period several years from now and saying things were reflective of the negative psychology – extremely reasonably priced. I think that fear and lack of confidence were the two dominant emotions reflected in a lot of things, and that greed was a very scarce commodity.

Wallace Forbes: Well, that's hopeful.

Holland: And it actually may be right. Makes you wonder what the world is coming to!

Forbes: I don't think the world's coming to an end, and I'm glad you don't either! Yet, anyway.

Holland: Although if you look at the British Embassy in Iran being sacked by students last week, you'd say, "Where is the world going?" But I seem to remember that happened in the 1970s to another embassy in Iran.

The echoes of the 1970s continue.

Forbes: Well, we had some nice results in the market subsequent to 1970. So that's hopefully going to be the recurrence.

Holland: Yes. I hope so.

One of the outcomes of where we are right now is that there's very little interest in the marketplace because of this lack of confidence. Therefore, liquidity is quite low. In the stock market, for example, one looks at large percentage moves on a daily, weekly and monthly basis as becoming the norm, which is a function of lack of liquidity.

The average investor has very little interest in the stock market. As a result, the dominant forces in the stock market continue to be high frequency traders, program trading and exchange traded funds (ETFs). When these are the main factors, you end up with a market that has a very high correlation. In other words, stocks tend to move as a group, rather than companies differentiating themselves because of their superior or inferior performance.

Forbes: Yes, that certainly has changed the nature of the market and trading on the market.

Holland: Right. And as a result, I don't say, "Oh, woe is me," but rather I look at it as a potential opportunity. If the marketplace is pricing things and moving things in a group, lemming-like, it means that there's a potential that some of the highest quality merchandise is being priced at pedestrian prices. I believe that that is the case. I would look specifically at some of the problem solvers in the corporate world – the technology companies like Apple, Google and Microsoft.

Forbes: These are companies that you're favorable toward at the moment?

Holland: Yes.  Apple, Google, IBM, Microsoft, Intel.

Forbes: Boy, all majors.

Holland: All the majors are priced at prices that don't make sense, given the history you and I have, where growth companies grow their earnings and their cash flow and their franchise value on a regular basis. And many of them have dividends. Intel’s dividend is three times the yield of U.S. Treasury bonds and grows much faster than the inflation being created by the government.

Forbes: Do you think they're all relatively under-valued in this market?

Holland: Yes, as a group. The market has priced these as part of the overall market as a group. And it's pricing them at franchise values, I think, at well underneath their private market values. I think this is a reason Warren Buffett bought IBM. Even a value investor like Warren Buffett is looking for the first time at technology companies.

I think that that's a good signpost. I don't think these are the only things that are attractive in the market, but I think they're a good signpost of how attractive things are. I own Berkshire Hathaway and have owned it for a long time. I believe this is Warren Buffett’s first significant investment in the technology area.

Forbes: That is very encouraging indeed. As you say, we have one of the icons going in that direction also.

Holland: Right.

Forbes: Are there any other things you wanted to comment on?

Holland: I think there's a distinct possibility, looking out several years from now, that Milton Friedman might once again be correct, having predicted the crisis in the European Union at its birth by saying that at the first sign of financial crisis there would be a potential dissolution of the European Union. He was right there.

Something else, among the other things he prophesied, was the inexorable move that when governments spend a lot of money there's a lot of money chasing a smaller set amount of goods, and we usually end up with some inflation as a result of that. If, sometime in our lifetime, we get inflation again, Treasury bonds yielding 1% and 2% will go down in price. They could go down dramatically.

So, I think over the next several years one should be mindful of the potential risk in Treasury Bonds. The potential risk, and the potential capital destruction, is a risk that I don't think is worth taking.

Forbes: Very cogent point. And the low returns that we've been seeing are certainly weird relative to any historic norm.

Holland: It's a function of the extreme fear gauge that we have. It's understandable. It doesn't mean that it isn't creating a major risk position for people, particularly those who own bond funds. If you own a three year Treasury and interest rates go up, you still get your principle back in three years. If you own a bond fund, you don't get your money back.

No maturity. That's not a good deal.

Forbes: Indeed. Mike, a great pleasure as always and thank you very much.

Holland: Thank you. It's always nice talking with you.