Investment Strategies for aChanging World

The Ben Graham Centre’s 2013 Value Investing ConferenceToronto, Ontario

Dr. A. Gary ShillingApril 10, 2013

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1952 1958 1964 1970 1976 1982 1988 1994 2000 2006 20120%

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Nonfinancial CorporateHouseholdState and Local

Federal GovernmentFinancial

Sector Cumulative Debt and Equity Issuance to GDP

Last points: 4Q 2012

Source: The Federal Reserve

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Jan-59 Jan-67 Jan-75 Jan-83 Jan-91 Jan-99 Jan-070

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U.S. Personal Saving Rate(Seasonally Adjusted Annual Rate)

Last Point Jan. 2013: 2.4%

Source: Bureau of Economic Analysis

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1980 1985 1990 1995 2000 2005 2010-1600

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Federal Budget Balance$ Bil.

Source: Congressional Budget Office

Last Point 2012: -1089

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Jan-07 May-08 Sep-09 Feb-11 Jul-120%

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U.S. Fed. Funds Target RateECB Repo Rate

UK Bank RateBOJ Call Rate

Source: The Central Banks

Central Bank Rates

Last Points: 03/14/13

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Jan-07 Oct-07 Aug-08 May-09 Mar-10 Dec-10 Oct-11 Jul-12600

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S&P 500 and Quantitative Easing

Source: Thomson Reuters, A. Gary Shilling & Co.

Last Point 03/14/13: 1563

QE1+42%

QE2+24%

Op. Twist+20%

Greece 1

Greece 2 / Fed. Debt CeilingEuro Crisis /Fiscal Cliff

QE3

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Jan-08 Dec-08 Dec-09 Nov-10 Nov-11 Oct-120

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Required reserves of depository institutionsTotal reserves of depository institutions (excess + required)

Required and Total Reserves of Depository Institutions$ Bil, SA

Last Points 03/06/13: Required: 115.8, Total: 1764.0

Source: The Federal Reserve

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Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12 Nov-12282

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Average Real Weekly Earnings of Private Production and Nonsupervisory Employees ($1982-84)

Last Point February 2013: 294.29

Source: Bureau of Labor Statistics

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Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Nov-10 Aug-11 May-12 Feb-1375

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Japanese Yen per U.S. Dollar

Source: Thomson Reuters

Last Point 03/14/13: 96.09

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Dec-11 Mar-12 May-12 Jul-12 Oct-12 Dec-12 Feb-1375

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Yen per Dollar - left axisNIKKEI 225 Index - right axis

NIKKEI 225 and Yen Exchange Rate

Source: Thomson Reuters

Last Point 03/14/13 - Yen/$: 96.09, NIKKEI: 12,381

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Dec-02 Nov-04 Oct-06 Sep-08 Aug-10 Jul-12500

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Total factors supplying reserve funds ($bil.) - left axisS&P 500 Index Level - right axis

S&P 500 and Federal Reserve Assets

Source: Federal Reserve, Yahoo Finance

Last Point 03/13/13 - S&P: 1555, Fed Assets: 3209

Chart 12

Dec-11 Mar-12 May-12 Jul-12 Oct-12 Dec-12 Feb-1390

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S&P 500 (US)FTSE 100 (UK)

STOXX 600 (eurozone)NIKKEI 225 (Japan)

Global Stock Exchanges I

Source: Bloomberg

Last Points 03/14/13 - US: 124 UK: 117 EZ: 122 JP: 146

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Dec-11 Mar-12 May-12 Jul-12 Oct-12 Dec-12 Feb-1370

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Shanghai Composite (China)TSX Index (Canada)

ASE General Index (Greece)ASX 200 (Australia)

Global Stock Exchanges II

Source: Bloomberg

Last Points 03/14/13 - CN: 103 CA: 107 GR: 142 AU: 124

Chart 14

Jan-07 Oct-07 Aug-08 May-09 Mar-10 Jan-11 Oct-11 Aug-120%

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Junk Bond Spread vs 20 Yr TreasurysJunk Bond Yield

Source: Bianco Research, LLC, Bloomberg

Junk Bond Yields and Spread vs. Treasurys

Last Points 03/14/13 - Yield: 6.41, Spread: 3.54

Chart 15

Jan-95 Mar-99 May-03 Jul-07 Sep-111

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AA Rated Corporate Bond YieldS&P 500 Dividend Yield

Yield on Corporate Stocks and Bonds

Source: Haver Analytics, Bank of America Merrill Lynch

Last Point Feb. 2013 - Stocks: 2.21, Bonds: 2.07

Chart 16

2005 2006 2007 2008 2009 2010 2011 20125%

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Chinese Gross Domestic Productyear / year percentage change

Last Point 4Q 2012: 7.9%

Source: Chinese National Bureau of Statistics

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Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12100

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Reuters/Jefferies Commodity Research Bureau Index

Source: Jefferies and Company

Last Point 03/14/13: 296.3

Chart 18

1774 1814 1854 1894 1934 19740

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Real U.S. Commodity PricesCRB Index Deflated by CPI

Source: Bianco Research, Bureau of Labor Statistics, Historical Statistics of the United States

Last Point February 2013: 128.2

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1947-I 1959-III 1972-I 1984-III 1997-I 2009-III 56%

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Compensation of Employees - left axisCorp. Profits with IVA and CCAdj - right axis

Corporate Profits and Employee Compensationas a percentage of National Income

Source: Bureau of Economic Analysis

Last Points 3Q 2012 - Corp. Profits: 14.3%, Employee Comp: 61.6%

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1881 1901 1921 1941 1961 1981 20010

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Cyclically Adjusted Stock Price to Earnings RatioS&P 500 price /avg. earnings from previous 10 years

Source: Robert Shiller

Average:16.5

Chart 21

Jan-80 Mar-84 May-88 Jul-92 Sep-96 Nov-00 Jan-05 Mar-090

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Nominal S&P 500Real S&P 500 (deflated by CPI, 1982-84 prices)

Real and Nominal S&P 500

Source: Haver Analytics

Last Points February 2013 - Real: 650, Nominal: 1512

Chart 22

1871 1891 1911 1931 1951 1971 1991 201110

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Real S&P 500log scale, February 2013 prices

Source: Robert Shiller

Last Point February 2013: 1512

Bull BullBull

Bull

Bear Bear

Bear

Bear

Chart 23

Period Military Engagement No. of Years Annualized Wholesale Price Change1749-1755 Peacetime 6 -0.50%1756-1763 French-Indian War 8 2.27%1764-1774 Peacetime 11 -0.35%1775-1783 American Revolution 9 12.31%1784-1811 Peacetime 28 -1.91%1812-1815 War of 1812 4 7.78%1816-1845 Peacetime 30 -2.36%1846-1848 Mexican-American War 3 -0.40%1849-1860 Peacetime 12 1.05%1861-1865 Civil War 5 14.75%1866-1916 Peacetime 51 -0.74%1917-1918 World War I 2 23.92%1919-1940 Peacetime 22 -2.31%1941-1945 World War II 5 6.12%1946-1992 Cold War 47 4.20%1993-2000 Peacetime 8 1.43%2001-2012 War on Terror 12 2.90%

No. of Years Avg. Price ChangeWartime: 95 5.72%

Peacetime: 168 -1.16%Years Total: 263 1.25%

Historic Inflation and Deflation

Chart 24Long Run Investments to Buy

1. Treasurys and other high-quality bonds.

2. Income-producing securities.

3. Food and other consumer staples.

4. Small luxuries.

5. The U.S. dollar

6. Rental apartments

7. Health care.

8. Productivity enhancers.

9. North American energy.

Chart 25

Oct-81 Oct-86 Oct-91 Oct-96 Oct-01 Oct-06 Oct-110

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25 Year Zero Coupon Bond (Oct-81=100) 23,118 or 18.9% Annual ReturnS&P 500 Total Return (July-82=100) 3,109 or 11.9% Annual Return

Comparative Stock and Bond Performances

Last Points February 2013 - Stocks: 3,109; Bonds: 23,118

Source: Bianco Research & Haver Analytics

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1947Q1 1957Q1 1967Q1 1977Q1 1987Q1 1997Q1 2007Q120%

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Dividend Payout Ratio - left axisDividend Yield - right axis

S&P 500 Dividend Yield and Payout Ratio1947 to present

Source: Standard and Poor's

Last Points 4Q 2012 - Payout Ratio: 35.6%, Dividend Yield: 2.19%

Chart 27

Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Nov-10 Aug-11 May-12 Feb-131.15

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U.S. Dollars per Euro

Source: Thomson Reuters

Last Point 03/14/13: 1.300

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2001 2003 2005 2007 2009 201169

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Homeowners - left axisRenters - right axis

U.S. Homeowner and Rentersmillions of households

Source: Census Bureau

Last Point 4Q 2012 - Owners: 75.2, Renters: 39.8

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2007-I 2008-I 2009-I 2010-I 2011-I 2012-I4.5%

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Vacancy Rate - left axisAvg. Asking Rent ($ / month) - right axis

Source: Mortgage Bankers Association / REIS

Apartment Vacancy and Rental Rates

Last Points 4Q 2012 - Vacancy: 4.5%, Rents: $1,097

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1960 1970 1980 1990 2000 20104%

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National Health Care Expendituresas a percentage of GDP

Last Point 2011: 17.9%

Source: Department of Health and Human Services

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1970 1990 2010 2030 2050 20700%

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Social SecurityMedicareMedicaid + CHIP + Exchange Subsidies

Social Security, Medicare, and Medicaidas a percent of GDP

Source: Congressional Budget Office, Social Security Administration

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2010 2011 2012 2013 2014 2015 2016 2017 2018 2019215

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Without Healthcare BillWith Healthcare Bill

Insured Nonelderly Populationwith and without health care bill

Source: Congressional Budget Office

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1949 1959 1969 1979 1989 1999 20090%

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Total Net ImportsNet Imports excluding Canada and Mexico

Net Petroleum Imports as a % of Supply

Source: EIA

Last Point 2011 - Total: 44.8, Ex. Canada & Mexico: 28.6

Chart 34Long Run Investments to Sell or Avoid

1. Big-ticket consumer purchases.

2. Credit card and other consumer lenders.

3. Conventional home builders and suppliers

4. Selected banks and similar financial institutions

5. Junk securities

6. Commodities

7. Developing country stocks and bonds.