Q: How about an example? A: Preferred Bank [PFBC], a small Southern California-based community bank with $1.5 billion in assets. It serves the Chinese-American community in Los Angeles. They've always had a strong balance sheet. I think they've run the business responsibly. The insiders own 30% of the stock, and they've been big buyers recently. But like a lot of other community banks, they got overextended in condo-construction loans, and they are working through those now. And their nonperforming assets are going up. But the balance sheet is strong enough to absorb that. And, ultimately, as the write-offs decline, that will uncover the underlying earnings power of the bank, which is 70 or 80 cents a share. The book value is 16. It is now at 5 and yields 6%. This is an example of a bank that has been beaten down, but whose long-term prospects are good. Like a lot of other community banks, they have to get through the next couple of quarters without nonperforming assets going up too much and further eroding their book value.

Q: What else? A: Wesco Financial [WSC] is a Pasadena-based holding company. They have interests in reinsurance, bank insurance and furniture rentals, and they own a steel service center, which cuts metals to order for customers. We like Wesco because at one point it was $500 a share. It got down to $200, and we figured this is a giveaway price for the underlying value of the businesses. Yes, they have some economic sensitivity for sure. But the biggest part of the business is reinsurance, which has been hurt by lower interest rates, declining portfolio values and a lot of claims from Hurricanes Ivan and Gustav. They will have difficulty raising capital because many of the stocks are trading below book value. One way to replenish capital is to raise rates. So, I think reinsurance rates are going up. It's no accident that Warren Buffett recently took a big position in Swiss Re, one of Wesco's competitors. He also owns, via Berkshire Hathaway, 80% of Wesco at a discount to book, which rarely happens because Wesco is run by Charlie Munger, Buffett's long-time associate.

Q: What else? A: First Acceptance [FAC] is a Nashville-based nonstandard auto insurer. That means they provide insurance to people who don't qualify for standard auto insurance, people who have credit problems or things of that nature. And when they hear the word nonstandard, a lot of people run in the other direction. But the company provides a useful service, because people need auto insurance. The soft economy has hurt their customer base, because if you get laid off from your job, chances are you will drive less and may let your insurance lapse. That's hurt the stock recently. However, the remaining customers that still have jobs tend to be better risks. So while the premiums have come down a bit, so have the claim costs. They are reducing their expenses and they have put rate increases through in many of their states. The insiders own a big chunk of stock and they've been buying it. It is still trading at a big discount to book and ultimately the stock, which is around 3 right now, could make 40 or 50 cents a share.

Q: I see you also have the private-equity group MVC Capital. Isn't private equity having trouble accessing capital? A: There is probably no other industry that is less loved. All those stocks are down for a couple of reasons. No. 1, a lot of them have fairly leveraged balance sheets and questionable investments. MVC Capital [MVC], however, has a pristine balance sheet, and most of its investments are holding up fairly well. Second, there is some question as to what the values of these private companies are. Clearly, valuation multiples are coming down, but MVC is very conservative in its valuations. It has a net asset value of $17 a share right now and is trading for 9. They have taken markdowns on a couple of portfolio companies. But we think most of the 40 or so companies they have in the portfolio are still doing OK. Their ability to access capital is not much of an issue since MVC is not dependent on a lot of debt.