COURSE CONNECTOR

 ARTICLE SUMMARIES AND QUESTIONS

"C-Suite Strategies: The Colvin Interview: Mohamed El-Erian," pp. 17-22: Mohamed El-Erian is something of a rock star in the investment world. After a 15-year career with the International Monetary Fund, he joined Pimco 10 years ago, left briefly to manage Harvard University's mammoth $30 billion endowment, and returned to the company in 2007, just before the global recession took hold. Now the firm's CEO and co-chief investment officer, alongside Pimco founder Bill Gross, El-Erian has perspective on the 2008 financial meltdown, the recovery, and the future that few others have. What he sees is a "new normal" in America. Cautious consumers, still traumatized by the recession and spooked by rampant and persistent unemployment, will continue to save more and spend less. With easy credit no longer available, demand will pick up and supply will come down, more than likely leading to a return of inflation, something for which most Americans are simply not prepared. El-Erian's advice to the average investor is to clearly identify investment goals; think globally in terms of asset allocation; invest in TIPS, inflation-protected Treasury bonds; and above all, develop more realistic expectations about returns. Virtually no portfolio can produce double-digit returns on a sustainable basis.

This article profiles Mohamed El-Erian — CEO of Pimco and Harvard's former endowment manager — who sees rough times ahead for individual investors.

Discussion Questions:

1. Why does Mohamed El-Erian believe it will be difficult for the U.S. economy to sustain growth in 2010? What does he indicate must happen for growth to occur?

2. What must individual investors do differently now, according to El-Erian? What are the three elements of his big-picture approach to investing?

3. Give an example of an illiquid market. How are illiquid markets potentially more profitable than liquid markets? Why are illiquid markets generally not accessible to the average investor?

"Stock Picks from the Expert Roundtable," pp. 40-50: High anxiety rules the day in the U.S., as the global economic order shifts and investors struggle to adapt to the changing landscape. To get some calming perspective, Fortune convened investing pros Susan Kempler, a portfolio manager for TIAA-CREF; Ron Muhlenkamp, who runs his own fund firm; Barry Ritholtz, chief executive of Fusion IQ; Steve Romick, manager of the Crescent fund for First Pacific Advisors; and Jason Trennert, who guides investing strategy at Strategas Research Partners. During the roundtable discussion, participants expressed mutual respect for large-cap quality names, thanks to their strong balance sheets, access to foreign markets, and recognizable brands. Who are they recommending? Some stocks aren't too surprising — Pfizer, IBM, Coca-Cola, AT&T. Others break the mold a little, but were selected because they show improving fundamental trends. Take Halliburton, for example. Kempler likes Halliburton, despite its dubious reputation, because its management team has been able to transform the company by creating new technologies, expanding product offerings, and winning more business overseas. While all agree that the Great Recession ended last March, that seemingly positive development was driven by government stimulus. The point? It might be a while before we have a healthy organic economy again.

Students review the advice of five of the top market watchers, who predict when the struggling U.S. economy will pick up and recommend stocks to invest in now.

Discussion Questions:

1. Why does Ron Muhlenkamp's firm own shares of Bank of America? Why does Jason Trennert agree with Muhlenkamp about the importance of dividends?

2. Barry Ritholtz's firm has positions in Gannett News and the New York Times. Why? Do you think his reasoning is sound?

3. According to Steve Romick, what useful purposes can owning gold serve? How can you invest in gold without buying coins or mining stocks?

"Getting Back to Even Isn't Good Enough," pp. 68-73: With stocks up more than 60% since March, 401(k) account holders are breathing a collective sigh of relief. Balances for boomers who have worked 10 to 20 years at the same company are now down less than 3% on average, compared with pre-crash levels. Meanwhile, younger employees and 45- to 64-year-olds with less tenure are solidly back in the black. That's a pretty remarkable turnaround from the 25% or more losses of last spring. So why shouldn’t we celebrate? A few reasons. First of all, some of the lost ground was made up with new contributions and employer matches, not with pure gain. Second, most people were two or more years behind on their retirement savings even before the crash. So while getting back to even may feel like a victory, it’s still not where the majority of folks need to be. The good news is, getting to that goal should be less of a challenge now. Recent developments in the 401(k) world, including improved investment options and new tools that make it easier to rein in costs and adjust asset mix, will allow 401(k) account holders to better protect their portfolio against future market mayhem.

In this article, students read about four important moves 401(k) account holders should make to power their way to a comfortable retirement.

Discussion Questions:

1. According to the article, what is the most dangerous path to take for most 401(k) plan participants? How should they rebalance their 401(k) in response to this year's market surge?

2. Two investors of the same age could conceivably contribute the exact same amount to their 401(k) each year, and yet one could end up with a 20% smaller nest egg at retirement. How could this scenario occur? What is Congress doing to address the problem?

3. When is a 401(k) most vulnerable to a plunging market? During this "danger zone," what should investors do to maximize the value of their 401(k)s at retirement?

"Everyone in this Picture Still Has a Home, Thanks to Lewie Ranieri," pp. 88-99: Lewis "Lewie" Ranieri, the former Salomon Brothers all-star who coined the term "securitization" and invented mortgage-backed securities in the 1980s, never expected to be the bad guy. Though he blames Wall Street for blatantly misusing his brainchild to construct an immense bazaar for "affordability products" that homeowners really couldn’t afford, he feels responsible for his part in the mortgage implosion, and he's doing something about it. He created the Selene Residential Mortgage Opportunity Fund to help overextended Americans who've suffered a recession-related reduction in income to stay in their homes. Selene specifically targets "upside down" mortgages — those mortgages for which the outstanding balance far exceeds the value of the home. It buys these delinquent mortgages at a deep discount, works directly with the homeowners to get them back on their financial feet, and resells the stabilized loans for a profit. Selene isn't like most giant, automated mortgage companies, which mail out statements, process checks, make escrow payments, and foreclose as quickly as possible when things go south. Instead, Selene takes the radical step of substantially lowering mortgage balances, allowing homeowners to afford their mortgage payment again and giving them a welcome cushion of equity. Students take a closer look at Lewis Ranieri, the legendary financier who’s been accused of helping to create the mortgage mess and who's now working to clean it up.

Discussion Questions:

1. According to Lewis Ranieri, what is the most important factor in getting people to pay their mortgage? How does the Selene Residential Mortgage Opportunity Fund enable clients to do that?

2. Why did Selene's model of doing business require a major change in the tax code? How was Ranieri able to get a bill passed so quickly?

3. What is the typical profile of a Selene client? How can Selene absorb big principal write-downs and still make money?