MONEY MANAGER REVIEW

Published By MONEY MANAGER REVIEW, 12620 DUPONT ROAD,

SEBASTOPOL, CA 94109 - TEL: (415) 386-7111,
EMAIL: MoneyManagerReview@Gmail.com

TM

SPRING 2013

GUEST INTERVIEW

Arnold Van Den Berg

CEO & Co-Chief
Investment Officer

Century Management
VOLUME XLIV NO 1.

Arnold Van Den Berg

Century Management
805 Las Cimas Parkway, Suite 430 Austin,Texas 78746
Telephone: 512-329-0050 | Fax: 512-329-0816
Email:svandenberg@centman.com
Web: http://centman.com

Chief Executive Officer,

Co-Chief Investment Officer,
Portfolio Manager

March 27, 2013

Money Manager Guest Interview

Arnold, please tell us about how you got started in the money management business.
I began my investment career in 1968 at John Hancock Insurance and later moved to Capital Securities as I
wanted to help clients save for their retirement. The year 1968 also happened to be the peak of the stock
market. While the market experienced a bear market rally in 1970, its general trend during my first six years in
the business was down, finally hitting bottom in 1974. This was the worst decline since the Great Depression,
and as you can imagine, the mutual funds in which I had invested my clients money had also gone down
dramatically. It was a very painful time for me and it caused me to rethink my investment strategy. I began to
study many investment philosophies to try and gain a better understanding of why so many managers went
down so much for so long. What I discovered was that value managers, such as Benjamin Graham and
particularly his disciples, both protected their clients' capital better and provided more consistent investment
results than managers using other investment strategies. In addition, value investing resonated with me on a
personal level as it was, and still is, consistent with how I live my personal life. So in 1974, at the bottom of the
market, having finally found an investment philosophy I could believe in, I decided to start Century
Management. At that time, I figured I was either going to make a lot of money or it was going to be the end of
the world.

Please describe how Century Management has grown over the years and tell me a little about your staff.
Today, Century Management has 42 employees and roughly $2 billion in assets under management. My son
Scott, who has been with the firm for 20 years, is the company president and chief operating officer, and my
son-in-law, Jim Brilliant, who has been with the firm for 26 years, is our co-chief investment officer and chief
financial officer. I continue to hold the role of co-chief investment officer and CEO. We have a very close family,
so it has been great working with Scott and Jim over the years to build the business and manage the clients
portfolios. But we have an entire team of very dedicated people working hard each and every day that make
this company successful, and I am very proud of them all. They, too, are like family. As a matter of fact, CMs
average employee has been with the company for more than 11 years. This is an experienced team as well. Our
average employee has over 19 years of industry experience. In concert with our company policy, every
employee has the vast majority, if not all, of their taxable investable assets and 100% of their company pension
plan assets invested in the same securities as our clients. Embedded into our firms culture is the belief that we
should align our own personal investments with those of our clients. I have always felt that this goes a long way
toward removing conflicts of interest, and it keeps everyone focused on doing whats right for the client.

Please tell us more about your private management versus your mutual fund products and strategies.
Of our $2 billion in assets under management, approximately 88% of our business is conducted through the
management of individual client accounts. Our clients are typically individuals and families with joint accounts,
IRAs, and trusts; businesses with corporate accounts and retirement plans; and partnerships, foundations and
institutional accounts. The other 12% of our business is conducted through the CM Advisors Family of Funds, of
which we are the advisor.

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Our flagship private account strategy is our all-cap value strategy that we refer to as CM Value I. It dates back to
1974 and was the strategy I used when I started Century Management. However, over the years as clients
expressed different investment needs, we applied our value investment discipline to a variety of other
strategies, including two large-cap value strategies, two small-cap value strategies, three balanced strategies,
and one fixed income strategy.

Why do you believe that value investing is a better way to manage money?
Value investing does not appeal to the masses. If it did, you would never be able to buy a bargain. Stocks selling
below their intrinsic value or below what an experienced businessman knows his company is worth, bargain
stocks, are usually only found during times of great uncertainty. Because of the fear surrounding uncertainty,
many people are willing to sell stocks well below their intrinsic values and often times at bargain-basement
prices. Typically this happens because a company, an industry, or in some cases the market at-large has a
problem, which is usually temporary. Regardless, history has proven that investors who buy these bargains will
frequently be rewarded when the uncertainty clears. This is as fundamental as it gets, and you can use this
approach for any investment, whether its stocks, bonds, real estate, commodities, or a private business. As
Benjamin Graham said, Price determines return. And, as his famous disciple, Warren Buffett, stated,
Uncertainty is the friend of the long-term investor.

What is your approach to value investing?
Jim Brilliant, our co-chief investment officer, explains it best when he states that the main focus of our
investment philosophy is to recognize and capitalize on value gaps. Simply put, the value gap is the difference
between the price of a stock and the underlying value of the business. Benjamin Graham once said, In the short
run, the market is a voting machine, but in the long run its a weighing machine. Thats exactly what he was
describing. He was describing how in the short run, market gyrations move stocks all over the place, but the
underlying value of the business is what defines the price over the long run.

As an example, lets take a cyclical company with a strong balance sheet. These are some of our favorites. We
know at the bottom of the cycle, it generally loses or doesnt make much money, at the top of the cycle its
making a lot of money, and in between it is growing its earnings appropriately.

On Chart 1, I have isolated the tangible book value per share for our sample company, which is one of our
favorite 14 valuation metrics that we use to value businesses. Tangible book value, for those not familiar with it,
consists of all the assets of a company minus all the liabilities, which gives you the net worth or book value of
the company. From there, you subtract the value of goodwill, patents, and copyrights, and what you have left is
tangible book. Looking at Chart 1, you can see that while there have been ups and downs along the way over the
past 20 years, the tangible book of our sample company has grown rather steadily over time. Now its cyclical, so
there are some ups and downs. But, over 20 years, through all the economic ups and downs, the tangible book
has grown pretty nicely over time.






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Chart 1
Sample Company Tangible Book Value Per Share

Now lets look at the stock price during this same period on Chart 2. Its volatile. It has gone from $5 to $25, back
to $5, up to $10, down to $5, back up to $30, back down to $8, and so on.

Chart 2
Sample Company Stock Price

The value investor sees this volatility and says, What a great opportunity. However, the masses generally say,
This stock is way too risky, Ill pass. We are full believers in the buy low, sell high investment philosophy, so
to us this would be a great opportunity. Now its time to apply our value gap methodology, and on Chart 3 we
put Charts 1 & 2 together to compare price and value.

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Chart 3
Sample Company Price-to-Tangible Book Value

This Sample Stock
Price Reached
Tangible Book 5
Times in 22 Years

What you notice on Chart 3 is that every time the price hits tangible book, its the bottom of the stock price.
Furthermore, it doesnt stay down there very long. This also coincides with the time that the stock is the
cheapest and where the reward-to-risk is the greatest. Unfortunately, its also the time when the masses
typically become fearful of the volatility, often times selling these stocks or ignoring them altogether, and thus
give up the potential for a great opportunity.

Now that we know the stock typically hits bottom when its selling at tangible book, the final step is to convert
this into a price-to-tangible book ratio in order to see what this ratio has been at any time over the past 20
years. On the side of Chart 4, we show numbers zero through eight. The number one represents 1 times book,
the number two represents 2 times book, and so on. The Value Zone shown on the chart suggests it is a good
buying opportunity when the stock trades at 1 to 1.5 times tangible book value. Conversely, any time the stock
sells at 3 to 4 times tangible book, we would suggest the stock is in the Expensive Zone and selling is in order.













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Chart 4
Sample Company Price-to-Tangible Book Value

When we wrap everything up, we put it into our valuation structure. In this example, we would set our worst
case at 0.90 times tangible book, our buy point at 1.15 times tangible book, and our sell point at 3 times tangible
book. While we use many valuation metrics to arrive at our total valuation, as certain valuation metrics are more
relevant to certain companies and industries than others, we believe this process in valuing a business allows us
the opportunity to capture the value gap and make the volatility work in our favor.

Are there certain sectors or cap sizes that produce better value gaps than others?
Value gaps happen in all industries and all sectors. They happen in small companies as well as large. They can
occur one at a time or all at once in major market downturns. It is for this reason that I began Century
Management with an all-cap value discipline, as I did not want to be limited to any cap size or sector of the
market. I wanted to invest wherever I could find value. This all-cap value approach has been our flagship
strategy for more than 38 years.

As value investors, do you ever use macroeconomics?
Yes, we review macroeconomic factors. However, we have come to the conclusion that there are only three
primary drivers that affect stock performance. And although you wont always be right, if you concentrate on
these three things, your investment decisions, overall, will probably be very good. They are inflation, interest
rates and the fundamentals of businesses.






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How would you describe the fundamentals of business today?
There are many positive developments taking place in this country. While there are also a lot of short-term
negatives impacting the economy, the positives have, unfortunately, been lost among the negatives featured in
todays newspapers. For example, there are tremendous opportunities and financial gains taking place in the
production of natural gas. This is truly a game changer in economics, and it is truly phenomenal to see this
happen. For the first time in our countrys history, we are going to be able to create a surplus in natural gas that
will allow us to become a major exporter. Up to this point, we were only importers. We have the capacity to
produce natural gas at $4.00 to $4.50 per thousand cubic feet. We can ship it for another $4.00 to $4.50. We
can sell it as high as $16 in Japan and in Europe at $10 or $11. In addition, it is now estimated that we have a
100-year supply of natural gas, and its drilling and production is not expected to taper off for another 20 or 30
years.

Because we are becoming the low-cost producer of natural gas, there is a manufacturing resurgence taking
place in the United States. In fact, there are companies from all over the world planning to open up plants here
to be able to take advantage of this low cost energy. One example, the irony of ironies, is that Egypt is bringing
over their largest fertilizer manufacturing plant to the U.S. because they can buy the natural gas cheaper here
than in the Middle East. This is truly amazing.

Also in the manufacturing sector is 3D printing. This is one of the most exciting developments I have seen in a
long time. 3D printing now allows manufacturers of any size in almost any industry to take a computer-designed
blueprint, put it into the 3D printer, pour in a variety of liquids or other materials, and then the machine literally
produces the product just like you would print ink on a piece of paper. As a matter of fact, in the field of medical
science they have used this technology to make custom fit titanium jaws, as well as human skulls. Additionally,
Wake Forest University is experimenting with this technology with the hopes of being able to reproduce human
tissue, so that one day human organs, such as a kidney, can be reproduced.

These are phenomenal developments that are going to make us, the United States, the low cost producer and
manufacturer of many goods and services. As a matter of fact, our research shows that in order for Europe to
be competitive with America today, they would need to reduce their costs another 30%. This is in addition to the
reductions they have already made! Japan is no longer competitive with the United States; they are bringing
their automobile plants over here, and they are starting to print money again to reduce the value of the yen.
China, which used to be our main competitor, is still a competitor. However, because their wages have
increased, all of the unrest, the shipping and so forth, there are many companies that are starting to bring their
plants over here instead.

Real estate is another area of growth for the U.S. While real estate markets and prices are location specific, the
overall health of the U.S. real estate market has been improving. As the shadow inventory continues to be
worked down, new home buyers and investors enter the market; and with the help of low interest rates and the
lack of development over the past four years, real estate has become a tailwind rather than a headwind for the
economy. These items make the long-term future of America very bright indeed.


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Do you expect high inflation in the near future?
Over the last 10 years, commodities, in general, have moved up about 7%. Well, why hasnt this 7% increase in
commodities registered in the CPI, as it only shows a 2.4% increase? The reason is that the biggest cost of
inflation is human labor. In any product, labor costs between 60% and 80%. And therein lies the rub. As your
readers have probably noted in their own salaries, most have not gone up for the last five years. You will not
have wage inflation until salaries go up. And when looking at a real rate of return (inflation adjusted), salaries
arent even back to 2007 levels. For five years salaries have been stagnant. If the median income in the United
States is $50,000, and people have to pay more for gas, but they do not have any more money coming in, they
spend more for gas and spend less on food, on clothes or other things. Commodity prices will eventually
average out as people spend more on energy and less on other things. As a matter of fact, the Continuous
Commodity Futures Price Index hit a high of 700 last year, and it has been coming down just as gold has been
coming down because the effects have already started to percolate through.

So first of all, youre not going to have as much commodity inflation going forward. Second, you are not going to
have much wage inflation. Over the last year, we have averaged 180,000 new jobs a month. But there are
110,000 people coming into the labor force each month looking for jobs. So if you take 180,000 jobs and
subtract the 110,000 people that are coming into the job market, the net job creation is 70,000 per month. In
order to have a tight labor market in which people can negotiate for raises, we need the unemployment rate
down to about 6.0% to 6.5%. Thats going to take approximately 4 million jobs. If you need 4 million jobs to
have a tight labor market and wage inflation, and you are only producing a net 70,000 jobs a month, it will take
four years and nine months to get that tight labor market. It is Fed Chairman Bernankes desire to move this
money out of the banks during this time, which should be sufficient to stave off major inflation.

Now whether he does it or not, I dont know. But after reading the Fed minutes, I get a sense that there are
many people on the Federal Reserve Board concerned and that they will want to eventually pull this money out
of the banks. However, if they dont, then those people who are predicting high inflation will be right. Watch
what the Federal Reserves doing. If they start to remove those reserves, you can quit worrying about inflation
until you have a tight labor market.
Can interest rates go up even if we dont have high inflation?
Yes. Credit risk can cause a dramatic rise in interest rates if people begin to fear that they may not get their
money back. Spain, Greece, Italy and Portugal had very modest inflation a couple of years ago, running around
2.5% to 3.0%. It was a little higher in Spain and roughly 4.0% in Italy, but pretty much like the U.S. Then, in a
matter of weeks, Spains bond went from 4.5% to 7.0%. Greece went from 4.5% and 5.0% to 30%. Italy went
from 4.0% to 7.0% and Portugal went from 5.0% to 20%.

What caused their tremendous increases in interest rates if there was no inflation to speak of? They were so
heavily in debt, and since the debt kept piling up because of the recession, people started worrying about
getting their money back. So credit risk can drive up interest rates. Now I am going to give you the guidelines.
In Spain, debt-to-GDP is 90%. In Greece, its 170% to GDP. In Italy its 127%, and in Portugal its 118%. The
general thinking at the International Monetary Fund is that when a nation gets to be about 115% to 120% in
debt, people start worrying about getting their money back. Today, the U.S. is at 103%. While we are not at the

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level of these other countries (except for Spain-however, our earnings power is greater and therefore our ability
to repay our debt is greater), we are at risk when it comes to interest rates. It has nothing to do with inflation;
rather people would be worried about our governments ability to pay down that debt. I think it would take at
least five to seven years, even at the current ridiculous rates, before people would start worrying about that.
However, this is not a very long time, so we need to be thinking about it now.

If the debt-to-GDP rises over 110%, then you must consider the risk of increasing interest rates due to credit risk
as opposed to the increasing interest rate risk due to inflation. In the 1970s, the U.S. had a very low debt-to-
GDP ratio. Thats why the Fed was allowed to continue on. Today, there is so much debt in the economy that it
will weigh heavily on the U.S. if interest rates begin to rise. However, in the immediate future, I do not believe
that interest rates will increase dramatically, nor do I believe that inflation will rise dramatically.

As a value investor, how do you predict when to invest?
Most of the people who have accumulated the greatest wealth in this business have done so not by predicting
the future, but by buying companies at such attractive prices, thereby discounting the majority of the
problems people fear. And, as usually happens in life and also when buying stocks, most of our fears are never
realized. When investors own companies at prices that already reflect existing and future problems, as some
of those problems never materialize, they likely find themselves with nice profits and thereby understand and
appreciate that the greatest wealth is made in buying great values, not in trying to predict the future.

Do you think the market is cheap or expensive today?
I think Value Line Investment Surveys median P/E is a great barometer of the general market. Over the last 30
plus years, this surveys median P/E has fluctuated from about 10 at market bottoms to roughly 20 at market
peaks. It is very simple and easy to understand. In 2009, when the market was way down, it was at 10 times
earnings. Only four times in the last 30 years has it hit a median P/E of 10 +/-.


















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Chart 5
Historical Value Line Median Price Earnings Ratio

19.7

20.9
20.1

Average
Peak PE =
20.1
during
this
period

19.7

16.9

13.4

Value Zone
Average
PE = 7.6
during
this
period

13.8

3/15/13
16.6 P/E

12.7
10.6
9.0
1

10.2

2
3

10.2
4

Let me explain why this is such a good barometer to use. First, because it uses a median P/E versus an average
P/E, the distortions caused by a small group of large companies, typical of an S&P 500 average P/E, have been
removed. Second, it is made up of 1,700 companies versus 500 in the S&P 500 and only 30 in the Dow Jones
Industrial Average, and it includes a lot of mid and small-cap companies. Third, it uses two quarters of forward
earnings and two quarters of trailing earnings versus all forward-looking earnings. Therefore, I believe it gives
you a very good evaluation of the general market. As of March 15, 2013, the median P/E is 16.6. If we currently
had more normal, long-term historical growth rates, the potential upside could be from a median P/E of 16.6 to
20, which is 20%. However, I would suggest to you that because we have such slow growth in todays economy,
the median P/E probably wont get over 17 or 18. If 17 to 18 is the peak given this current rate of growth, our
opinion is that this is a fairly-valued market today with only 3% to 10% left on the upside.

How can those interested in your services find out more about Century Management?
You can learn more about our firm on our website at www.centman.com, or call us at 1-800-664-4888 and we
will be happy to send you more information.






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Disclosures
Century Management is a registered investment advisor. This interview with Money Manager ReviewTM is being provided
to you at your request and is not a solicitation to buy or sell any security. Past performance of markets, strategies,
composites, or individual securities is no guarantee of future results.
Certain statements included herein contain forward-looking statements, comments, beliefs, assumptions, and opinions
that are based on CMs current expectations, estimates, projections, assumptions and beliefs. Words such as "expects,"
"anticipates," "believes," "estimates," and any variations of such words or other similar expressions are intended to identify
such forward-looking statements.
These statements, beliefs, comments, opinions and assumptions are not guarantees of future performance and involve
certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may
differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements.
You are cautioned not to place undue reliance on these forward-looking statements, which reflect CMs judgment only as
of the date hereof. CM disclaims any responsibility to update its views, as well as any of these forward-looking statements
to reflect new information, future events or otherwise.
Factual material is obtained from sources believed to be reliable and is provided without warranties of any kind, including,
without limitation, no warranties regarding the accuracy or completeness of the material.
If you should have any questions regarding the contents of this interview, or would like to receive our Form ADV Part 2
(which includes a full description of Century Managements investment strategies and advisory fees), or receive our GIPS
compliant presentation, please contact us at 1-800-664-4888. You may also write to us at 805 Las Cimas Parkway, Suite
430, Austin, Texas 78746, or go to our website at www.centman.com where you can download a complete copy of these
reports.

This interview was originally printed in the SPRING 2013 Issue of Money Manager
Review. Money Manager Review provides essential information on the performance
and investment styles of the nation's top private money managers. This quarterly
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foundations, trusts, and individuals. For subscription information call (415) 386-7111
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Reprinted from Money Manager Review, Spring 2013, Vol. XLIV No 1.
COPYRIGHT 2013 Money Manager Review